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 ~~June 30, 2023~~March 31, 2024

☐ 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 ~~July 21, 2023,~~April 26, 2024, there were ~~249,947,996~~250,599,037 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 ~~June 30, 2023~~March 31, 2024

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)

June 30,
2023

December 31,
2022

March 31,
2024

December 31,
2023

Assets

Cash and cash equivalents

8,605

8,856

Restricted cash

Investment securities (includes available-for-sale securities of $13,221 and $11,987 reported at fair value with associated amortized cost of $13,478 and $12,167 at June 30, 2023 and December 31, 2022, respectively)

13,466

12,208

Investment securities (includes available-for-sale securities of $13,261 and $13,402 reported at fair value with associated amortized cost of $13,439 and $13,451 at March 31, 2024 and December 31, 2023, respectively)

Loan receivables

117,906

112,120

Allowance for credit losses

(8,064)

(7,374)

Net loan receivables

109,842

104,746

Premises and equipment, net

1,053

1,003

Goodwill

255

Other assets

4,822

4,597

Other assets

Total assets

138,082

131,706

Liabilities and Stockholders' Equity

Liabilities

Deposits

Interest-bearing deposit accounts

97,630

90,151

Non-interest bearing deposit accounts

1,357

1,485

Total deposits

98,987

91,636

Short-term borrowings

Long-term borrowings

20,276

20,108

Accrued expenses and other liabilities

4,963

5,618

Total liabilities

124,226

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; 570,627,982 and 569,689,007 shares issued at June 30, 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 June 30, 2023 and December 31, 2022, respectively

1,056

Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 571,594,531 and 570,837,720 shares issued at March 31, 2024 and December 31, 2023, respectively

Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Additional paid-in capital

4,508

4,468

Retained earnings

29,761

28,207

Accumulated other comprehensive loss

(470)

(339)

Treasury stock, at cost; 320,683,942 and 302,305,216 shares at June 30, 2023 and December 31, 2022, respectively

(21,005)

(19,054)

Treasury stock, at cost; 320,996,125 and 320,734,860 shares at March 31, 2024 and December 31, 2023, respectively

Total stockholders' equity

13,856

14,344

Total liabilities and stockholders' equity

138,082

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.


		June 30, 2023		December 31, 2022
	March 31, 2024					March 31, 2024	December 31, 2023
Assets	Assets
Restricted cash
Restricted cash
Restricted cash	Restricted cash	$	39	$	41
Loan receivables	Loan receivables	$	25,165	$	25,937
Allowance for credit losses allocated to securitized loan receivables	Allowance for credit losses allocated to securitized loan receivables	$	(1,109)	$	(1,152)
Other assets	Other assets	$	3	$	3
Liabilities	Liabilities
Long-term borrowings		$	11,216	$	10,259
Short- and long-term borrowings
Short- and long-term borrowings
Short- and long-term borrowings
Accrued expenses and other liabilities	Accrued expenses and other liabilities	$	16	$	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 June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
		2023		2022		2023		2022			2024	2023
Interest income	Interest income
Credit card loans
Credit card loans
Credit card loans	Credit card loans	$	3,466	$	2,424	$	6,787	$	4,692
Other loans	Other loans	606		439		1,170		867
Investment securities	Investment securities	106		33		207		69
Other interest income	Other interest income	112		19		203		23
Total interest income	Total interest income	4,290		2,915		8,367		5,651
Interest expense	Interest expense
Deposits
Deposits
Deposits	Deposits	905		174		1,661		313
Short-term borrowings	Short-term borrowings	—		—		—		1
Long-term borrowings	Long-term borrowings	208		131		397		248
Total interest expense	Total interest expense	1,113		305		2,058		562
Net interest income	Net interest income	3,177		2,610		6,309		5,089
Provision for credit losses	Provision for credit losses	1,305		549		2,407		703
Net interest income after provision for credit losses	Net interest income after provision for credit losses	1,872		2,061		3,902		4,386
Other income	Other income
Discount and interchange revenue, net	Discount and interchange revenue, net	370		379		700		688
Discount and interchange revenue, net
Discount and interchange revenue, net
Protection products revenue	Protection products revenue	44		42		87		86
Loan fee income	Loan fee income	186		142		352		282
Transaction processing revenue	Transaction processing revenue	72		61		139		118
Gains (losses) on equity investments	Gains (losses) on equity investments	1		(42)		(17)		(204)
Other income	Other income	28		21		50		45
Total other income	Total other income	701		603		1,311		1,015
Other expense	Other expense
Employee compensation and benefits
Employee compensation and benefits
Employee compensation and benefits	Employee compensation and benefits	588		515		1,213		1,015
Marketing and business development	Marketing and business development	268		254		509		446
Information processing and communications	Information processing and communications	150		121		289		246
Professional fees	Professional fees	216		189		448		366
Premises and equipment	Premises and equipment	20		24		42		48
Other expense	Other expense	162		120		286		232
Total other expense	Total other expense	1,404		1,223		2,787		2,353
Income before income taxes	Income before income taxes	1,169		1,441		2,426		3,048
Income tax expense	Income tax expense	268		338		557		712
Net income	Net income	$	901	$	1,103	$	1,869	$	2,336
Net income allocated to common stockholders	Net income allocated to common stockholders	$	895	$	1,097	$	1,826	$	2,293
Basic earnings per common share	Basic earnings per common share	$	3.54	$	3.93	$	7.09	$	8.13
Diluted earnings per common share	Diluted earnings per common share	$	3.54	$	3.93	$	7.09	$	8.12

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 June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
		2023		2022		2023		2022			2024	2023
Net income	Net income	$	901	$	1,103	$	1,869	$	2,336
Other comprehensive loss, net of tax
Unrealized losses on available-for-sale investment securities, net of tax		(151)		(41)		(59)		(162)
Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax
Unrealized (losses) gains on cash flow hedges, net of tax	Unrealized (losses) gains on cash flow hedges, net of tax	(84)		3��		(72)		5

Other comprehensive loss		(235)		(38)		(131)		(157)
Other comprehensive (loss) income
Other comprehensive (loss) income
Other comprehensive (loss) income
Comprehensive income	Comprehensive income	$	666	$	1,065	$	1,738	$	2,179

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
	Preferred Stock

								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 Three Months Ended June 30, 2022
Balance at March 31, 2022		11	$	1,056	569,504	$	6			$	4,390			$	25,596	$	(213)	$	(17,639)		$	13,196
For the Three Months Ended March 31, 2023
For the Three Months Ended March 31, 2023
For the Three Months Ended March 31, 2023
Balance at December 31, 2022
Cumulative effect of ASU No. 2022-02 adoption
Net income	Net income	—	—		—	—				—				1,103		—		—			1,103
Other comprehensive loss		—	—		—	—		—				—		(38)		—		(38)
Other comprehensive income
Purchases of treasury stock	Purchases of treasury stock	—	—		—	—		—				—		—		(601)		(601)
Common stock issued under employee benefit plans	Common stock issued under employee benefit plans	—	—		27	—		3				—		—		—		3
Common stock issued and stock-based compensation expense	Common stock issued and stock-based compensation expense	—	—		33	—		24				—		—		—		24

Dividends — common stock ($0.60 per share)	Dividends — common stock ($0.60 per share)	—	—		—	—		—				(168)		—		—		(168)

Balance at June 30, 2022		11	$	1,056	569,564	$	6	$	4,417			$	26,531	$	(251)	$	(18,240)	$	13,519
																				For the Three Months Ended June 30, 2023
Dividends — common stock ($0.60 per share)
Dividends — common stock ($0.60 per share)
Dividends — Series C preferred stock ($2,750 per share)
Dividends — Series D preferred stock ($3,062.50 per share)
Balance at March 31, 2023	Balance at March 31, 2023	11	$	1,056	570,460	$	6	$	4,493			$	29,037	$	(235)	$	(20,297)	$	14,060

For the Three Months Ended March 31, 2024
For the Three Months Ended March 31, 2024
For the Three Months Ended March 31, 2024
Balance at December 31, 2023
Cumulative effect of ASU No. 2023-02 adoption
Net income	Net income	—	—		—	—		—				901		—		—		901
Other comprehensive loss	Other comprehensive loss	—	—		—	—		—				—		(235)		—		(235)
Purchases of treasury stock	Purchases of treasury stock	—	—		—	—		—				—		—		(708)		(708)
Common stock issued under employee benefit plans	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	—	—		139	—		12				—		—		—		12

Dividends — common stock ($0.70 per share)	Dividends — common stock ($0.70 per share)	—	—		—	—		—				(177)		—		—		(177)
Dividends — common stock ($0.70 per share)
Dividends — common stock ($0.70 per share)
Dividends — Series C preferred stock ($2,750 per share)
Dividends — Series D preferred stock (3,062.50 per share)
Balance at March 31, 2024

Balance at June 30, 2023		11	$	1,056	570,628	$	6	$	4,508			$	29,761	$	(470)	$	(21,005)	$	13,856

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 Six Months Ended June 30, 2022
Balance at December 31, 2021 11 $ 1,056 568,831 $ 6 $ 4,369 $ 24,538 $ (94) $ (16,695) $ 13,180
Net income — — — — — 2,336 — — 2,336
Other comprehensive loss — — — — — — (157) — (157)
Purchases of treasury stock — — — — — — — (1,545) (1,545)
Common stock issued under employee benefit plans — — 49 — 5 — — — 5
Common stock issued and stock-based compensation expense — — 684 — 43 — — — 43
Dividends — common stock ($1.10 per share) — — — — — (312) — — (312)
Dividends — Series C preferred stock ($2,750 per share) — — — — — (16) — — (16)
Dividends — Series D preferred stock ($3,062.50 per share) — — — — — (15) — — (15)
Balance at June 30, 2022 11 $ 1,056 569,564 $ 6 $ 4,417 $ 26,531 $ (251) $ (18,240) $ 13,519
For the Six Months Ended June 30, 2023
Balance at December 31, 2022 11 $ 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 — — — — — 1,869 — — 1,869
Other comprehensive loss — — — — — — (131) — (131)
Purchases of treasury stock — — — — — — — (1,951) (1,951)
Common stock issued under employee benefit plans — — 58 — 6 — — — 6
Common stock issued and stock-based compensation expense — — 881 — 34 — — — 34
Dividends — common stock ($1.30 per share) — — — — — (336) — — (336)
Dividends — Series C preferred stock ($2,750 per share) — — — — — (16) — — (16)
Dividends — Series D preferred stock ($3,062.50 per share) — — — — — (15) — — (15)
Balance at June 30, 2023 11 $ 1,056 570,628 $ 6 $ 4,508 $ 29,761 $ (470) $ (21,005) $ 13,856

~~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 Six Months Ended June 30,				For the Three Months Ended March 31,
		2023		2022		2024	2023
Cash flows provided by operating activities	Cash flows provided by operating activities
Net income	Net income	$	1,869	$	2,336
Net income
Net income
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
Provision for credit losses	Provision for credit losses	2,407		703
Deferred income taxes	Deferred income taxes	(269)		(145)
Depreciation and amortization	Depreciation and amortization	248		279
Amortization of deferred revenues	Amortization of deferred revenues	(215)		(162)
Net losses on investments and other assets	Net losses on investments and other assets	37		226
Other, net	Other, net	51		48
Changes in assets and liabilities:	Changes in assets and liabilities:
Increase in other assets		(18)		(262)
(Decrease) increase in accrued expenses and other liabilities		(812)		323
(Increase) decrease in other assets
(Increase) decrease in other assets
(Increase) decrease in other assets
Increase (decrease) in accrued expenses and other liabilities
Net cash provided by operating activities	Net cash provided by operating activities	3,298		3,346

Cash flows provided by (used for) investing activities	Cash flows provided by (used for) investing activities
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

Maturities of available-for-sale investment securities	Maturities of available-for-sale investment securities	905		1,160
Purchases of available-for-sale investment securities	Purchases of available-for-sale investment securities	(2,163)		—
Maturities of held-to-maturity investment securities	Maturities of held-to-maturity investment securities	8		22
Purchases of held-to-maturity investment securities	Purchases of held-to-maturity investment securities	(33)		(27)
Net change in principal on loans originated for investment	Net change in principal on loans originated for investment	(7,362)		(6,290)

Proceeds from the sale of other investments	Proceeds from the sale of other investments	4		216

Proceeds from the sale of other investments

Proceeds from the sale of other investments
Purchases of other investments	Purchases of other investments	(34)		(115)

Purchases of premises and equipment	Purchases of premises and equipment	(158)		(99)
Net cash used for investing activities		(8,833)		(5,133)
Purchases of premises and equipment
Purchases of premises and equipment
Net cash provided by (used for) investing activities

Cash flows provided by (used for) financing activities	Cash flows provided by (used for) 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
Net change in short-term borrowings	Net change in short-term borrowings	—		50
Net change in deposits	Net change in deposits	7,327		4,007
Proceeds from issuance of securitized debt		2,237		2,635

Maturities and repayment of securitized debt
Maturities and repayment of securitized debt
Maturities and repayment of securitized debt	Maturities and repayment of securitized debt	(1,185)		(2,561)

Maturities and repayments of other long-term borrowings
Maturities and repayments of other long-term borrowings
Maturities and repayments of other long-term borrowings	Maturities and repayments of other long-term borrowings	(803)		(322)
Proceeds from issuance of common stock	Proceeds from issuance of common stock	6		5
Purchases of treasury stock	Purchases of treasury stock	(1,933)		(1,545)

Dividends paid on common and preferred stock	Dividends paid on common and preferred stock	(367)		(343)
Dividends paid on common and preferred stock
Dividends paid on common and preferred stock
Net cash provided by financing activities	Net cash provided by financing activities	5,282		1,926
Net (decrease) increase in cash, cash equivalents and restricted cash		(253)		139
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, at the beginning of the period	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	$	8,644	$	11,471

Reconciliation of cash, cash equivalents and restricted cash	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
Cash and cash equivalents	Cash and cash equivalents	$	8,605	$	11,439
Restricted cash	Restricted cash	39		32
Cash, cash equivalents and restricted cash, at the end of the period	Cash, cash equivalents and restricted cash, at the end of the period	$	8,644	$	11,471

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~~automated teller machines ("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.

In November 2023, the Company announced its Board of Directors had authorized management to explore the sale of its private student loan portfolio. The Company stopped accepting new applications for private student loans February 1, 2024. See "Business — Operating Model — Digital Banking — Private Student Loans" in the Company's annual report on Form 10-K for the year ended December 31, 2023.

Pending Merger with Capital One Financial Corporation

On February 19, 2024, Discover and Capital One Financial Corporation ("Capital One") jointly announced that they entered into an agreement and plan of merger (the "Merger Agreement"), under which the companies will combine in an all-stock merger, which valued Discover at $35.3 billion based on the price of Capital One common stock on the last trading day before the public announcement of the merger. Under the terms of the Merger Agreement, holders of Discover common stock will receive 1.0192 shares of Capital One common stock for each share of Discover common stock they own. Capital One shareholders will own approximately 60% of the combined company and Discover shareholders will own approximately 40% of the combined company. The Merger Agreement contains customary representations and warranties, covenants and closing conditions. The Board of Directors of the combined company will have fifteen directors, consisting of twelve Capital One Board members and three Discover Board members to be named at a later date. For more information, see Discover’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the "SEC") on February 22, 2024.

Completion of the proposed merger remains subject to approval by the Federal Reserve Board and the Office of the Comptroller of the Currency and other customary closing conditions, including the approval of both companies’ shareholders.

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~~2023 audited consolidated financial statements filed with the Company's annual report on Form 10-K for

Table of Contents

the year ended December 31, ~~2022.~~

~~Immaterial Restatement of Prior Period Financial Statements~~

~~Beginning around mid-2007, the Company incorrectly classified certain credit card accounts into its highest merchant and merchant acquirer pricing tier.~~2023. 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 thecondensed consolidated financial statements for the ~~prior periods presented in this Form 10-Q. Additionally, prior period amounts~~three months ended March 31, 2023 have been restated as disclosed in the ~~applicable notes to~~Company's report on Form 10-Q for 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.second quarter 2023.

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

In ~~March~~December 2023, the Financial Accounting Standards Board ~~(“FASB”~~("FASB") issued Accounting Standards Update ~~(“ASU”~~("ASU") No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU enhances the transparency of income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid. Entities are required to disaggregate the rate reconciliation (including percentages and reported amounts) by certain specified categories with additional disaggregation by nature and/or jurisdiction for items over a designated threshold. Income taxes paid (net of refunds received) must be disaggregated by federal, state and foreign taxes and separately by individual jurisdiction in which that amount for a particular jurisdiction is equal to or greater than five percent of total income taxes paid (net of refunds received). This annual disclosure guidance is effective for the Company for the year ending December 31, 2025 and can be adopted on either a prospective or retrospective basis. The Company expects to adopt this standard on a prospective basis. While the ASU implements further income tax disclosure requirements, it does not change how an entity determines its income tax obligation, and it will have no impact on the Company’s consolidated financial condition, results of operations or cash flows.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU requires disclosure of additional segment level information, particularly regarding significant segment expenses. Entities must disclose significant expense categories and amounts that are regularly provided to the chief operating decision maker ("CODM") and included in the reported segment measure of profit or loss. Other segment items must also be reported, which are those items that make up the difference between segment revenues less significant segment expenses and reported segment profit or loss. Additionally, entities must disclose the identity of the CODM and how they use the reported measures of segment profit or loss for decision making and assessing segment performance. The guidance is effective for the Company for the year ending December 31, 2024, and interim periods thereafter and requires retrospective application. While the ASU implements further segment disclosure requirements, it does not change how an entity identifies its operating or reportable segments, and it will have no impact on the Company’s consolidated financial condition, results of operations or cash flows.

Recently Adopted Accounting Pronouncement

In March 2023, the FASB issued 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~~expanded the use of the proportional amortization method of accounting for tax credit investments. ~~Currently,~~Under the proportional amortization method, the cost of the investment is amortized in proportion to the income tax credits and other income tax benefits received, the net effect of which is recognized as a component of income tax expense on the consolidated statements of income. Previously, the method iswas limited to Low Income Housing Tax Credit ~~investments.~~investments, however the Company historically did not elect to use this method. Under the amended guidance, use of proportional amortization ~~will be~~is available to any qualifying tax credit investments, ~~including but not limited to investments in~~which now also includes New Markets Tax Credit ~~and Renewable Energy Tax Credit programs. The~~

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~~amendments in the ASU are to be applied on a retrospective or modified retrospective basis.~~investments among others. The ASU iswas effective for the Company on January 1, 2024. ~~Management does not expect~~All of the ~~amendments~~Company's tax credit investments as of January 1, 2024 qualified and are now being accounted for under the proportional amortization method. Upon adoption, the Company recorded a $37 million charge to ~~have~~the opening balance of retained earnings to reflect the cumulative effect of adopting the proportional amortization method on a ~~material impact on~~modified-retrospective basis for the ~~Company’s consolidated financial statements.~~Company's existing tax credit investments. The offset to retained earnings was a decrease of $23 million to the book value of the investments and a $14 million decrease to the related deferred tax asset position. Recognition of proportional amortization as a component of income tax expense rather than pre-tax income will result in an increase in the Company's effective tax rate.

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2. Investments

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


	March 31, 2024					March 31, 2024	December 31, 2023

		June 30, 2023		December 31, 2022

U.S. Treasury(1) and U.S. GSE(2) securities

U.S. Treasury(1) and U.S. GSE(2) securities

U.S. Treasury(1) and U.S. GSE(2) securities	U.S. Treasury(1) and U.S. GSE(2) securities	$	12,714	$	11,423
Residential mortgage-backed securities - Agency(3)	Residential mortgage-backed securities - Agency(3)	752		785
Total investment securities	Total investment securities	$	13,466	$	12,208

(1)Includes ~~$292~~$377 million and ~~$97~~$320 million of U.S. Treasury securities pledged as swap collateral as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively.

(2)Consists of ~~a security~~securities issued by the Federal Home Loan ~~Bank.~~Bank ("FHLB").

(3)~~Consists~~Primarily 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 June 30, 2023
	Amortized Cost									Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
At March 31, 2024
Available-for-Sale Investment Securities(1)	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
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	12,947	$	5	$	(238)	$	12,714
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	531		—		(24)		507
Total available-for-sale investment securities	Total available-for-sale investment securities	$	13,478	$	5	$	(262)	$	13,221
Held-to-Maturity Investment Securities(2)	Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)	Residential mortgage-backed securities - Agency(3)	$	245	$	—	$	(21)	$	224
Residential mortgage-backed securities - Agency(3)
Residential mortgage-backed securities - Agency(3)
Total held-to-maturity investment securities	Total held-to-maturity investment securities	$	245	$	—	$	(21)	$	224

At December 31, 2022
At December 31, 2023
At December 31, 2023
At December 31, 2023
Available-for-Sale Investment Securities(1)	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
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	11,580	$	21	$	(178)	$	11,423
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	587		—		(23)		564
Total available-for-sale investment securities	Total available-for-sale investment securities	$	12,167	$	21	$	(201)	$	11,987
Held-to-Maturity Investment Securities(2)	Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)	Residential mortgage-backed securities - Agency(3)	$	221	$	—	$	(22)	$	199
Residential mortgage-backed securities - Agency(3)
Residential mortgage-backed securities - Agency(3)
Total held-to-maturity investment securities	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 primarily invests in U.S. Treasury obligations and securities issued by a U.S. government ~~agencies and~~agency ("Agency") or government-sponsored ~~enterprises of the U.S.~~enterprise ("U.S. ~~GSEs"~~GSE"), 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.

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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
At June 30, 2023
			Fair Value															Fair Value	Number of Securities in a Loss Position		Unrealized Losses	Fair Value	Unrealized Losses
At March 31, 2024
Available-for-Sale Investment Securities	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
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	183			$	8,357		$	(133)		$	3,288		$	(105)
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	32			$	415		$	(19)		$	92		$	(5)

At December 31, 2022
At December 31, 2023
At December 31, 2023
At December 31, 2023
Available-for-Sale Investment Securities	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
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	123			$	9,060		$	(175)		$	106		$	(3)
Residential mortgage-backed securities - Agency	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 six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023. See Note 8: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023.

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


At June 30, 2023		One Year or Less		After One Year Through Five Years		After Five Years Through Ten Years		After Ten Years		Total
At March 31, 2024												At March 31, 2024	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
U.S. Treasury and U.S. GSE securities
U.S. Treasury and U.S. GSE securities
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	1,875	$	10,737	$	335	$	—	$	12,947
Residential mortgage-backed securities - Agency(1)	Residential mortgage-backed securities - Agency(1)	2		78		41		410		531
Total available-for-sale investment securities	Total available-for-sale investment securities	$	1,877	$	10,815	$	376	$	410	$	13,478
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)	$	—	$	—	$	—	$	245	$	245
Residential mortgage-backed securities - Agency(1)
Residential mortgage-backed securities - Agency(1)
Total held-to-maturity investment securities	Total held-to-maturity investment securities	$	—	$	—	$	—	$	245	$	245
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
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	1,844	$	10,539	$	331	$	—	$	12,714
Residential mortgage-backed securities - Agency(1)	Residential mortgage-backed securities - Agency(1)	2		74		39		392		507
Total available-for-sale investment securities	Total available-for-sale investment securities	$	1,846	$	10,613	$	370	$	392	$	13,221
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)	$	—	$	—	$	—	$	224	$	224
Residential mortgage-backed securities - Agency(1)
Residential mortgage-backed securities - Agency(1)
Total held-to-maturity investment securities	Total held-to-maturity investment securities	$	—	$	—	$	—	$	224	$	224

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

Other Investments

As a part of the ~~Company's~~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~~assets on the Company’s condensed consolidated statements of financial condition. The ~~portion~~Company has elected to account for its qualifying investments in Low Income Housing Tax Credit and New Markets Tax Credit programs under the proportional amortization method beginning January 1, 2024 on a modified retrospective basis. As of ~~each investment's operating results allocable~~March 31, 2024, all of the Company's tax credit investments qualified for this election. Prior to 2024, these investments were accounted for using the equity method. Under the proportional amortization method, the cost of the investment is amortized in proportion to the ~~Company reduces~~income tax credits and other income tax benefits received, the ~~carrying value~~net effect of ~~the investments and~~which is ~~recorded in other~~recognized as a component of income tax expense ~~within~~on the condensed consolidated statements of ~~income. The Company further reduces~~income and within cash flows provided by operating activities on the ~~carrying value~~condensed consolidated statements of ~~the investments by recognizing any amounts that are in excess of future net tax benefits in other expense.~~cash flows. The Company earns a return primarily through tax credits allocated to the

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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. The related commitments for future investments are recorded in accrued expenses and other liabilities within the consolidated statements of financial condition for delayed equity contributions that are unconditional and legally binding. Equity contributions that are contingent upon a future event are recognized when that contingent event becomes probable. As of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the Company had outstanding

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investments in these entities of ~~$411~~$479 million and ~~$416~~$514 million, respectively, and related ~~contingent~~ liabilities for ~~unconditional and legally binding~~ delayed equity contributions of ~~$103~~$183 million and ~~$111~~$187 million, respectively. OfDuring the ~~above outstanding equity investments,~~three months ended March 31, 2024, the Company ~~had $377 million and $375~~recognized $16 million of ~~investments related to affordable housing projects as of June 30, 2023~~amortization and ~~December 31, 2022, respectively, which had $96 million and $100~~$18 million of ~~related contingent liabilities for unconditional~~income tax credits and ~~legally binding delayed equity contributions, respectively.~~other income tax benefits. Non-income tax benefits comprised only immaterial cash distributions from these investments during the three months ended March 31, 2024.

The Company holds non-controlling equity positions in several payment services entities and third-party venture capital funds which invest in such entities. Most of ~~these~~the direct investments in such entities are not subject to equity method accounting because the Company does not have significant influence over the investee. The Company's investments in third-party venture capital funds represent limited partnership interests and are accounted for under the equity method. 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 ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the carrying value of these investments, which are recorded within other assets on the Company's condensed consolidated statements of financial condition, was ~~$34 million and $39 million, respectively.~~

The Company also holds non-controlling equity positions in payment 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 June 30, 2023 and December 31, 2022, the carrying value of these investments, which are recorded within other assets on the Company's condensed consolidated statements of financial condition, was $33 million and $41 million, respectively. During the three and six months ended June 30, 2023, the Company recognized an immaterial net gain and an immaterial net loss, respectively, on the condensed consolidated statements of income related to these investments. The Company recognized net losses of $42 million and $207 million during the three and six months ended June 30, 2022, respectively.$35 million.

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):


		June 30, 2023		December 31, 2022
	March 31, 2024					March 31, 2024	December 31, 2023
Credit card loans(1)(2)	Credit card loans(1)(2)	$	93,955	$	90,113
Other loans(3)	Other loans(3)
Private student loans(4)
Private student loans(4)
Private student loans(4)	Private student loans(4)	10,241		10,308
Personal loans	Personal loans	9,106		7,998
Other loans	Other loans	4,604		3,701
Total other loans	Total other loans	23,951		22,007
Total loan receivables	Total loan receivables	117,906		112,120
Allowance for credit losses	Allowance for credit losses	(8,064)		(7,374)
Net loan receivables	Net loan receivables	$	109,842	$	104,746

(1)Amounts include carrying values of ~~$14.3~~$13.9 billion and ~~$13.5~~$14.8 billion underlying investors' interest in trust debt at ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively, and ~~$10.7~~$15.2 billion and ~~$12.2~~$15.6 billion in seller's interest at ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, 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 ~~$622~~$746 million and ~~$611~~$753 million at ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, 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 ~~$515~~$555 million, ~~$56~~$72 million and ~~$15~~$23 million, respectively, at ~~June 30, 2023~~March 31, 2024 and ~~$468~~$522 million, ~~$49~~$69 million and ~~$11~~$21 million, respectively, at December 31, ~~2022.~~2023.

(4)At ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the private student loan portfolio continued to be classified as held for investment and there were ~~$6.0~~$6.3 billion of private student loans in repayment.

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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.

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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
	March 31, 2024																																March 31, 2024																	December 31, 2023
		Credit Risk Profile by FICO Score																	660 and Above									Less than 660 or No Score								660 and Above										Less than 660 or No Score
		June 30, 2023								December 31, 2022
		660 and Above				Less than 660 or No Score				660 and Above				Less than 660 or No Score
		$		%		$		%		$		%		$		%
	$																						$				%						$					%						$						%					$				%
Credit card loans	Credit card loans	$	76,591	82	%	$	17,364	18	%	$	73,827	82	%	$	16,286	18	%	Credit card loans	$	79,207		80			80	%				$	20,268		20		20		%				$	82,238			80				80	%			$	20,021		20		20		%
Private student loans by origination year(1)(2)	Private student loans by origination year(1)(2)
2024
2024
2024
2023
2023
2023	2023	$	259	96	%	$	12	4	%									1,399			94			94	%				91			6		6	%				$	1,010			94				94		%		$	69			6		6	%
2022	2022	1,563		95	%	87		5	%	$	1,172	94	%	$	77	6	%	2022	1,445			94			94	%				88			6		6		%				1,495				95				95	%			85			5		5		%
2021	2021	1,573		95	%	83		5	%	1,668		95	%	81		5	%	2021	1,411			94			94	%				92			6		6		%				1,468				94				94	%			91			6		6		%
2020	2020	1,266		95	%	66		5	%	1,365		95	%	65		5	%	2020	1,127			94			94	%				76			6		6		%				1,180				94				94	%			75			6		6		%
2019		1,121		94	%	68		6	%	1,221		95	%	67		5	%
Prior	Prior	3,880		94	%	263		6	%	4,306		94	%	286		6	%	Prior	4,277			93			93	%				342			7		7		%				4,537				93				93	%			342			7		7		%
Total private student loans	Total private student loans	$	9,662	94	%	$	579	6	%	$	9,732	94	%	$	576	6	%	Total private student loans	$	9,788		93			93	%				$	692		7		7		%				$	9,690			94				94	%			$	662		6		6		%
Personal loans by origination year	Personal loans by origination year
2024
2024
2024
2023
2023
2023	2023	$	2,927	99	%	$	20	1	%									4,614			97			97	%				146			3		3	%				$	5,149			98				98		%		$	100			2		2	%
2022	2022	3,408		96	%	143		4	%	$	4,270	98	%	$	77	2	%	2022	2,244			92			92	%				191			8		8		%				2,604				93				93	%			187			7		7		%
2021	2021	1,464		94	%	93		6	%	1,958		96	%	91		4	%	2021	869			91			91	%				85			9		9		%				1,049				92				92	%			91			8		8		%
2020	2020	537		94	%	34		6	%	790		95	%	40		5	%	2020	285			92			92	%				25			8		8		%				355				92				92	%			29			8		8		%
2019		281		91	%	28		9	%	444		92	%	38		8	%
Prior	Prior	141		82	%	30		18	%	249		86	%	41		14	%	Prior	185			85			85	%				33			15		15		%				247				86				86	%			41			14		14		%
Total personal loans	Total personal loans	$	8,758	96	%	$	348	4	%	$	7,711	96	%	$	287	4	%	Total personal loans	$	9,622		95			95	%				$	485		5		5		%				$	9,404			95				95	%			$	448		5		5		%

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

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

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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):


		June 30, 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
	March 31, 2024															March 31, 2024			December 31, 2023
	30-89 Days Delinquent													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	$	1,420	$	1,269	$	2,689	$	1,250	$	1,028	$	2,278
Private student loans by origination year(1)	Private student loans by origination year(1)
2024
2024
2024
2023
2023
2023	2023	$	—	$	—	$	—
2022	2022	2		1		3		$	—	$	—	$	—
2021	2021	11		4		15		6		1		7
2020	2020	16		5		21		14		3		17
2019		19		6		25		19		5		24
Prior	Prior	115		39		154		128		36		164
Total private student loans	Total private student loans	$	163	$	55	$	218	$	167	$	45	$	212
Personal loans by origination year	Personal loans by origination year
2024
2024
2024
2023
2023
2023	2023	$	4	$	1	$	5
2022	2022	30		10		40		$	12	$	3	$	15
2021	2021	17		6		23		15		6		21
2020	2020	7		2		9		8		2		10
2019		5		2		7		6		2		8
Prior	Prior	4		3		7		6		3		9
Total personal loans	Total personal loans	$	67	$	24	$	91	$	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.

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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 June 30, 2023
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at March 31, 2023		$	6,135	$	872	$	622	$	62	$	7,691

		For the Three Months Ended March 31, 2024

		For the Three Months Ended March 31, 2024

		For the Three Months Ended March 31, 2024
												Credit Card Loans	Private Student Loans	Personal Loans	Other Loans	Total Loans
Balance at December 31, 2023
Additions	Additions
Provision for credit losses(1)	Provision for credit losses(1)	1,232		9		50		6		1,297
Provision for credit losses(1)
Provision for credit losses(1)
Deductions	Deductions
Charge-offs
Charge-offs
Charge-offs	Charge-offs	(1,051)		(38)		(64)		—		(1,153)
Recoveries	Recoveries	209		6		14		—		229
Net charge-offs	Net charge-offs	(842)		(32)		(50)		—		(924)

Balance at June 30, 2023		$	6,525	$	849	$	622	$	68	$	8,064
Balance at March 31, 2024
Balance at March 31, 2024
Balance at March 31, 2024

		For the Three Months Ended June 30, 2022
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at March 31, 2022		$	5,120	$	870	$	613	$	44	$	6,647
Additions
Provision for credit losses(1)		568		(11)		(20)		2		539
Deductions
Charge-offs		(587)		(33)		(39)		—		(659)
Recoveries		206		6		18		—		230
Net charge-offs		(381)		(27)		(21)		—		(429)

Balance at June 30, 2022		$	5,307	$	832	$	572	$	46	$	6,757

		For the Six Months Ended June 30, 2023
		For the Three Months Ended March 31, 2023
		For the Three Months Ended March 31, 2023
		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 December 31, 2022	Balance at December 31, 2022	$	5,883	$	839	$	595	$	57	$	7,374
Cumulative effect of ASU No. 2022-02 adoption(2)	Cumulative effect of ASU No. 2022-02 adoption(2)	(66)		—		(2)		—		(68)
Balance at January 1, 2023	Balance at January 1, 2023	5,817		839		593		57		7,306
Additions	Additions
Provision for credit losses(1)	Provision for credit losses(1)	2,234		69		118		11		2,432
Provision for credit losses(1)
Provision for credit losses(1)
Deductions	Deductions
Charge-offs
Charge-offs
Charge-offs	Charge-offs	(1,930)		(71)		(118)		—		(2,119)
Recoveries	Recoveries	404		12		29		—		445
Net charge-offs	Net charge-offs	(1,526)		(59)		(89)		—		(1,674)

Balance at June 30, 2023		$	6,525	$	849	$	622	$	68	$	8,064
Balance at March 31, 2023
Balance at March 31, 2023
Balance at March 31, 2023

		For the Six Months Ended June 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)		746		34		(50)		2		732
Deductions
Charge-offs		(1,128)		(57)		(77)		—		(1,262)
Recoveries		416		12		37		—		465
Net charge-offs		(712)		(45)		(40)		—		(797)

Balance at June 30, 2022		$	5,307	$	832	$	572	$	46	$	6,757

(1)Excludes ~~an $8~~a $34 million and ~~$10~~$33 million adjustment of the liability for expected credit losses on unfunded commitments for the three months ended ~~June 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $25 million and $29 million for the six months ended June 30, 2023 and 2022,~~ respectively, as the liability is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition.

(2)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.

The allowance for credit losses was approximately ~~$8.1~~$9.3 billion at ~~June 30, 2023,~~March 31, 2024, which reflects a ~~$373~~$25 million~~buildover March 31, 2023 and a $690 million build~~ release from December 31, ~~2022.~~2023. The~~build~~ release in the allowance for credit losses for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 was ~~primarily~~ driven by ~~loan growth.~~

~~Table of Contents~~

lower receivables and a modestly more favorable economic outlook, offset in part by higher expected delinquencies and losses.

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 ~~June 30, 2023,~~March 31, 2024, the Company used a macroeconomic forecast that projected the following weighted average amounts: (i) unemployment rate ending ~~2023~~2024 at ~~4.0%~~4.03% and, within the Company's reasonable and supportable period, peaking at ~~4.3%~~4.17% in ~~mid 2024~~the third quarter of 2025 and (ii) ~~1.56%~~2.48% growth rate in real gross domestic product in ~~2023.~~2024.

In estimating expected credit losses, the Company considered the uncertainties associated with borrower behavior and payment trends, as well as recent and expected macroeconomic conditions, ~~such as high~~including those relating to consumer price inflation and the fiscal and monetary policy responses to that inflation. The Federal Reserve raised its federal funds rate target range substantially during 2022 and the first ~~half~~three quarters of 2023 in an effort to slow economic growth and reduce inflation. ~~Most economists~~Real GDP growth and ~~financial~~labor market ~~participants expect U.S.~~conditions have exceeded most economists’ expectations, despite an inflation level that has moderated but remains above the target rate. Federal Reserve officials have suggested that the policy rate is likely at its peak for the current tightening cycle, however, the timing and magnitude of rate decreases will be dependent on trends in economic data, particularly inflation. Restrictive monetary policy typically precedes weaker consumer credit conditions caused by rising unemployment as economic growth ~~and inflation to slow gradually during 2023 as~~slows. While credit performance in the ~~economy responds to~~Company's lending portfolios has evolved in line with its expectations, the ~~lagged effects of tighter monetary policy and~~Company assessed the prospects for various macroeconomic outcomes in setting its allowance for credit ~~conditions.~~losses.

The forecast period the Company deemed to be reasonable and supportable was 18 months for all periods presented. The 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.

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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 net charge-offs for credit card loans, private student loans and personal loans increased for the three ~~and six~~ months ended ~~June 30, 2023,~~March 31, 2024, when compared to the same periods in ~~2022,~~2023, primarily due to continued credit normalization and the seasoning of vintages from the past two years. The net charge-offs for private student and personal loans increased for the three and six months ended June 30, 2023, when compared to the same periods in 2022, primarily due to continued credit normalization.driven by portfolio seasoning.

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 June 30, For the Six Months Ended June 30,
2023 2022 2023 2022
Interest and fees accrued subsequently charged-off, net of recoveries (recorded as a reduction of interest income) $ 156 $ 69 $ 284 $ 135
Fees accrued subsequently charged-off, net of recoveries (recorded as a reduction to other income) $ 46 $ 23 $ 87 $ 44

~~Table of Contents~~


	For the Three Months Ended March 31,
		2024		2023
Interest and fees accrued subsequently charged-off, net of recoveries (recorded as a reduction of interest income)		$	279	$	128
Fees accrued subsequently charged-off, net of recoveries (recorded as a reduction to other income)		$	69	$	41

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 Six Months Ended June 30, 2023
	For the Three Months Ended March 31,				For the Three Months Ended March 31,
	2024			2024		2023
Credit card loans	Credit card loans	$	1,930
Private student loans by origination year	Private student loans by origination year
2024
2024
2024
2023
2023
2023	2023	$	—
2022	2022	1
2021	2021	6
2020	2020	9
2019		11
Prior	Prior	44
Total private student loans	Total private student loans	$	71
Personal loans by origination year	Personal loans by origination year
2024
2024
2024
2023
2023
2023	2023	$	1
2022	2022	41
2021	2021	39
2020	2020	17
2019		13
Prior	Prior	7
Total personal loans	Total personal loans	$	118

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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):(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 June 30, 2023
	30-89 Days Delinquent											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, 2024
Credit card loans
Credit card loans
Credit card loans	Credit card loans	$	1,420	$	1,269	$	2,689	$	1,192	$	255
Other loans	Other loans
Private student loans
Private student loans
Private student loans	Private student loans	163		55		218		55		8
Personal loans	Personal loans	67		24		91		23		8
Other loans	Other loans	16		13		29		2		27
Total other loans	Total other loans	246		92		338		80		43
Total loan receivables	Total loan receivables	$	1,666	$	1,361	$	3,027	$	1,272	$	298

At December 31, 2022
At December 31, 2023
At December 31, 2023
At December 31, 2023
Credit card loans
Credit card loans
Credit card loans	Credit card loans	$	1,250	$	1,028	$	2,278	$	1,003	$	176
Other loans	Other loans
Private student loans
Private student loans
Private student loans	Private student loans	167		45		212		45		8
Personal loans	Personal loans	47		16		63		16		7
Other loans	Other loans	13		12		25		1		23
Total other loans	Total other loans	227		73		300		62		38
Total loan receivables	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 ~~$10~~$9 million and $5$8 million for the three months ended ~~June 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $18 million and $11 million for the six months ended June 30, 2023 and 2022,~~ 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.

~~Table of Contents~~

Loan Modifications to Borrowers Experiencing Financial Difficulty

The Company has internal loan modification programs that provide relief to credit card, private student and personal loan borrowers who are experiencing financial hardship. 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. Those programs feature interest rate reductions, payment delays, term extensions, or a 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 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.

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 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, typically continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees.

To assist private student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company ~~may offer~~has offered a payment delay (in the form of hardship forbearance or a temporary payment reduction), or a payment delay (in the form of a temporary payment reduction) combined with a temporary interest rate reduction. ~~Typically~~These programs are offered up to six consecutive months at one ~~time with~~time. Hardship forbearance is limited to a lifetime usage cap ~~most commonly,~~ of 12 months. Beginning in the fourth quarter of 2023, the lifetime usage cap of certain other programs was increased from 12 to 36 months.

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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.

In addition to the programs described above, the Company will in 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 the amount received inat settlement is recorded as 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 to provide relief to customers experiencing financial difficulties.

~~ASU No. 2022-02,~~ ~~Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and 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 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.

~~Table of Contents~~

The following table provides the period-end amortized cost basis, by modification category, of loans to borrowers experiencing financial difficulty that entered a modification program during the period (dollars in millions). Some of the loans presented in the table below may no longer be enrolled in a program at period-end:
For the Three Months Ended June 30,
For the Six Months Ended June 30,(1)
2023 2023
Credit card loans(2)(3)
Interest rate reduction $ 560 $ 1,158
Total credit card loans(4)
$ 560 $ 1,158
% of total class of financing receivables 0.60 % 1.23 %
Private student loans(2)
Payment delay(5)
$ 20 $ 22
Interest rate reduction and payment delay(5)
21 50
Total private student loans(4)
$ 41 $ 72
% of total class of financing receivables 0.40 % 0.70 %
Personal loans(2)
Payment delay(5)
$ 3 $ 4
Term extension(6)
8 16
Interest rate reduction and payment delay(5)
16 29
Interest rate reduction and term extension(6)
8 14
Total personal loans(2)
$ 35 $ 63
% of total class of financing receivables 0.38 % 0.69 %


	For the Three Months Ended March 31,
		2024			2023
Credit card loans(1)(2)
Interest rate reduction		$	920		$	632
Total credit card loans(3)		$	920		$	632
% of total class of financing receivables		0.92		%	0.70		%

Private student loans(1)
Payment delay(4)		$	1		$	3
Interest rate reduction and payment delay(4)		101			29
Total private student loans(3)		$	102		$	32
% of total class of financing receivables		0.97		%	0.04		%

Personal loans(1)
Payment delay(4)		$	4		$	2
Term extension(5)		10			8
Interest rate reduction and payment delay(4)		26			14
Interest rate reduction and term extension(5)		14			6
Total personal loans(3)		$	54		$	30
% of total class of financing receivables		0.53		%	0.36		%

(1)The current quarter-to-date enrollment figures, when aggregated with previously disclosed quarter-to-date amounts, will not equal the year-to-date amounts in this table because all year-to-date enrollments are presented using the current period-end amortized cost basis.

~~(2)~~ 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 ~~June 30,~~March 31, 2024 and 2023.

~~(3)~~(2) Accounts that entered a credit card loan modification program include ~~$113~~$185 million and ~~$231~~$118 million that were converted from revolving line-of-credit arrangements to term loans during the three ~~and six~~ months ended ~~June 30,~~March 31, 2024 and 2023, respectively.

~~(4)~~(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.

~~(5)~~(4) The Company defines a payment delay as a 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.

~~(6)~~(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 ~~June 30, 2023,~~March 31, 2024, the amount of such commitments associated with loans modified during the periods presented was immaterial.

1716

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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 June 30,			For the Six Months Ended June 30,
		2023					2023
					For the Three Months Ended March 31,
					For the Three Months Ended March 31,
					For the Three Months Ended March 31,
						2024													2024	2023
Credit card loans	Credit card loans
Weighted-average interest rate reduction
Weighted-average interest rate reduction
Weighted-average interest rate reduction	Weighted-average interest rate reduction	13.80		%			13.58		%		14.42	%				13.38	%
Principal forgiven	Principal forgiven	$	46				$	46		Principal forgiven		$	56		NM			NM
Interest and fees forgiven(1)	Interest and fees forgiven(1)	$	35				$	47

Private student loans	Private student loans
Private student loans
Private student loans
Weighted-average interest rate reduction
Weighted-average interest rate reduction
Weighted-average interest rate reduction	Weighted-average interest rate reduction	8.55		%			8.26		%		8.84	%				8.02	%
Payment delay duration (in months)(2)	Payment delay duration (in months)(2)	6 to 12					6 to 12			Payment delay duration (in months)(2)		6 to 12					6 to 12
Principal forgiven		$	—				$	—

Personal loans

Personal loans

Personal loans	Personal loans
Weighted-average interest rate reduction	Weighted-average interest rate reduction	12.01		%			11.80		%
Weighted-average interest rate reduction
Weighted-average interest rate reduction												13.20		%			11.55	%
Weighted-average term extension (in months)	Weighted-average term extension (in months)	39					38			Weighted-average term extension (in months)		40					38
Payment delay duration (in months)(2)	Payment delay duration (in months)(2)	6 to 12					6 to 12			Payment delay duration (in months)(2)		6 to 12					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 and pre-charge off settlements. Interest and fees forgiven are reversed against the respective line items in the condensed consolidated statements of income.

(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 1236 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 during the 12 months preceding each of the periods presented (dollars in millions):(1)
Current 30-89 Days
Delinquent 90 or
More Days
Delinquent
At June 30, 2023
Credit card loans $ 931 $ 115 $ 112
Private student loans 66 5 1
Personal loans 53 7 3
Total $ 1,050 $ 127 $ 116
:


	Current		30-89 Days Delinquent		90 or More Days Delinquent
At March 31, 2024
Credit card loans	$	2,118	$	257	$	217
Private student loans	207		22		8
Personal loans	126		23		4
Total	$	2,451	$	302	$	229

At December 31, 2023
Credit card loans	$	1,882	$	252	$	196
Private student loans	147		18		8
Personal loans	109		20		4
Total	$	2,138	$	290	$	208

(1) This table includes any loan that entered a modification program during the ~~period~~preceding 12 months without regard to whether it remained in a modification program as of the reporting date.

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The following table presents the defaulted amount and period-end amortized cost basis, by modification category, of ~~credit cards~~ loans that defaulted during the period and were modified ~~on or after January 1, 2023~~ to borrowers experiencing financial difficulty ~~which subsequently defaulted was~~ during the 12 months preceding default (dollars in millions):




















	For the Three Months Ended March 31, 2024
	Defaulted Amount(1)		Period-end Amortized Cost Basis
Credit card loans
Interest rate reduction	$	205	$	161
Total credit card loans	$	205	$	161

Private student loans
Payment delay	$	2	$	2
Interest rate reduction and payment delay	17		16
Total private student loans	$	19	$	18

Personal loans
Payment delay	$	1	$	1
Term extension	2		1
Interest rate reduction and payment delay	7		3
Interest rate reduction and term extension	4		3
Total personal loans	$	14	$	8

(1)~~$73 million and $84 million for the~~ ~~three and six months ended June 30, 2023, respectively.~~The period-end amortized cost basis of private student loans and personal loans modified on or after January 1, 2023 to borrowers experiencing financial difficulty which subsequently defaulted was immaterial for the three and six months ended June 30, 2023. For purposes of this disclosure, a loan is considered to be defaulted when it is 60 days or more delinquent at month end and has advanced two stages of delinquency subsequent to modification. Loans that entered a modification program in any stage of delinquency but did not experience a further payment default are included in the ~~aging~~payment status 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~~The defaulted amount 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 six months ended June 30, 2022, the Company quantified the amount by which interest and fees were reduced during the periods. During the ~~three and six months ended June 30, 2022, the Company forgave approximately~~ ~~$6 million~~ ~~and~~ ~~$13 million~~ ~~of interest and fees resulting from accounts entering into a credit card loan TDR program.~~

~~The following table provides information on loans that entered a TDR program during the period (dollars in millions):~~
For the Three Months Ended June 30, 2022 For the Six Months Ended June 30, 2022
Number of Accounts Balances Number of Accounts Balances
Accounts that entered a TDR program during the period
Credit card loans(1)
49,341 $ 313 103,852 $ 657
Private student loans 1,523 $ 29 3,278 $ 60
Personal loans 1,603 $ 22 2,762 $ 37

~~(1)~~Accounts that entered a credit card TDR program include $71 million and $146 million that were converted from revolving line-of-credit arrangements to term loans during the three and six months ended June 30, 2022, respectively.

~~The following table presents the carrying value~~period-end amortized cost basis 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 June 30, 2022 For the Six Months Ended June 30, 2022
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)
5,703 $ 28 10,238 $ 51
Private student loans(3)
161 $ 3 267 $ 5
Personal loans(2)
275 $ 4 536 $ 7

~~(1)For credit card loans that default from a temporary loan modification program, accounts revert back~~on or after January 1, 2023 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.

~~Of the account balances that~~borrowers experiencing financial difficulty which subsequently defaulted ~~as shown above~~was immaterial for the three months ended ~~June 30, 2022, approximately 62%, and~~March 31, 2023, for ~~the six months ended June 30, 2022, approximately 63%,~~all classes of the total balances were charged off at the end of the month in which they defaulted from a TDR program. For the three and six months ended June 30, 2022, for accounts that had defaulted from a TDR program and had not been subsequently charged off, the balances were included in the allowance for credit loss analysis.loan receivables.

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, ~~2022.~~2023.

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Credit Card Securitization Activities

The Company accesses the term asset securitization market through Discover Card Master Trust I ("DCMT") and 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 estimate of expected credit 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.

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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.

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):


		June 30, 2023		December 31, 2022
	March 31, 2024					March 31, 2024	December 31, 2023
Restricted cash	Restricted cash	$	31	$	33

Investors' interests held by third-party investors
Investors' interests held by third-party investors
Investors' interests held by third-party investors	Investors' interests held by third-party investors	11,275		10,200
Investors' interests held by wholly-owned subsidiaries of Discover Bank	Investors' interests held by wholly-owned subsidiaries of Discover Bank	2,997		3,341
Seller's interest	Seller's interest	10,732		12,220
Loan receivables(1)	Loan receivables(1)	25,004		25,761
Allowance for credit losses allocated to securitized loan receivables(1)	Allowance for credit losses allocated to securitized loan receivables(1)	(1,109)		(1,152)
Net loan receivables	Net loan receivables	23,895		24,609
Other assets	Other assets	2		2
Carrying value of assets of consolidated variable interest entities	Carrying value of assets of consolidated variable interest entities	$	23,928	$	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.

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 ~~June 30, 2023,~~March 31, 2024, 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.

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Private Student Loan Securitization Activities

The Company's private student loan trust receivables reported in loan receivables and the related debt issued by the trust reported in long-term borrowings were immaterial as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022.~~2023. The amounts are included, together with amounts related to the Company's credit card securitizations, in the supplemental information about assets and liabilities of consolidated variable interest entities, which is presented with the Company's condensed consolidated statements of financial condition.

5. Deposits

The Company obtains deposits from consumers directly or through affinity relationships ("direct-to-consumer deposits"). 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 deposit products include savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts. Brokered 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 June 30, 2023 and December 31, 2022, the Company had approximately $5.3 billion and $8.9 billion

Table of uninsured deposits, respectively. The decrease in uninsured deposits reported was primarily driven by leveraging technological capabilities, beginning in the first quarter of 2023, 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.Contents

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 June 30, 2023
2023		$	10,661
	At March 31, 2024			At March 31, 2024
2024	2024	15,578
2025	2025	4,097
2026	2026	2,951
2027	2027	3,871
2028
Thereafter	Thereafter	2,174
Total	Total	$	39,332

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6. Long-Term Borrowings

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


		June 30, 2023					December 31, 2022
		Maturity	Interest Rate	Weighted-Average Interest Rate	Outstanding Amount		Outstanding Amount
	March 31, 2024										March 31, 2024			December 31, 2023
	Maturity								Maturity	Interest Rate	Weighted-Average Interest Rate	Outstanding Amount	Outstanding Amount
Securitized Debt	Securitized Debt
Fixed-rate asset-backed securities(1)
Fixed-rate asset-backed securities(1)
Fixed-rate asset-backed securities(1)	Fixed-rate asset-backed securities(1)	2024-2026	0.58% - 5.03%	3.17%	$	9,917	$	8,401
Floating-rate asset-backed securities(2)	Floating-rate asset-backed securities(2)	2023-2024	5.58% - 5.79%	5.74%	1,225		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				11,142		10,175

Floating-rate asset-backed security(3)(4)	Floating-rate asset-backed security(3)(4)	2031	9.25%	9.25%	74		84
Floating-rate asset-backed security(3)(4)
Floating-rate asset-backed security(3)(4)
Total private student loan securitization trust	Total private student loan securitization trust				74		84
Total long-term borrowings - owed to securitization investors	Total long-term borrowings - owed to securitization investors				11,216		10,259

Discover Financial Services (Parent Company)	Discover Financial Services (Parent Company)
Discover Financial Services (Parent Company)
Discover Financial Services (Parent Company)
Fixed-rate senior notes
Fixed-rate senior notes
Fixed-rate senior notes	Fixed-rate senior notes	2024-2032	3.75% - 6.70%	4.68%	3,334		3,333
Fixed-rate retail notes	Fixed-rate retail notes	2023-2031	2.85% - 4.40%	3.77%	152		154
Fixed to floating-rate senior notes(5)

Discover Bank	Discover Bank
Discover Bank
Discover Bank
Fixed-rate senior bank notes(1)	Fixed-rate senior bank notes(1)	2023-2030	2.45% - 4.65%	3.68%	4,552		5,348
Fixed-rate subordinated bank notes(1)(5)		2028	4.68%	4.68%	497		489
Floating-rate Federal Home Loan Bank advance(6)		2023	5.29%	5.29%	525		525
Fixed-rate senior bank notes(1)
Fixed-rate senior bank notes(1)
Fixed-rate subordinated bank notes
Fixed-rate Federal Home Loan Bank advances
Floating-rate Federal Home Loan Bank advances(6)
Total long-term borrowings	Total long-term borrowings				$	20,276	$	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 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~~Term SOFR + ~~39 to~~0.11448% Tenor Spread Adjustment + 60 basis points as of ~~June 30, 2023.~~March 31, 2024.

(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 ~~June 30, 2023.~~March 31, 2024.

(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 ~~fixed-rate subordinated bank~~fixed to floating-rate senior notes include a rate reset on ~~August 9, 2023,~~November 2, 2033, to ~~the 5-year~~a floating rate based on compounded SOFR ~~spread-adjusted swap rate~~ + ~~173 basis points.~~3.370%.

(6)The floating-rate ~~Federal Home Loan Bank (“FHLB”) advance includes the following~~FHLB advances include interest rate ~~term:~~terms based on SOFR ~~+ 23~~plus a spread ranging from 16 to 26 basis points as of ~~June 30, 2023.~~March 31, 2024.

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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):


		June 30, 2023
2023		$	1,837
	March 31, 2024			March 31, 2024
2024	2024	3,727
2025	2025	6,098
2026	2026	4,867
2027	2027	1,000
2028
Thereafter	Thereafter	2,747
Total	Total	$	20,276

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. As of ~~June 30, 2023,~~March 31, 2024, the Company had total committed borrowing capacity of ~~$2.9~~$4.1 billion based on the amount and type of assets pledged, of which the outstanding balance was comprised ~~solely~~ of ~~a $525 million~~$1.0 billion in long-term ~~advance.~~advances. As of December 31, ~~2022,~~2023, the Company had total committed borrowing capacity of ~~$2.2~~$3.6 billion based on the amount and type of assets pledged, of which the outstanding balance was comprised ~~solely~~ of ~~a $525~~

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~~million~~$1.0 billion in long-term ~~advance.~~advances. These advances are presented as short- or long-term borrowings on the condensed consolidated statements of financial condition ~~as appropriate.~~based on the contractual maturity at origination.

Additionally, the Company has access to committed borrowing capacity through private securitizations to support the funding of its credit card loan receivables. As of ~~June 30, 2023 and December~~March 31, ~~2022,~~2024, the total commitment of secured credit facilities through private providers was $3.5 billion, none of which was drawn. As of December 31, 2023, the total commitment of secured credit facilities through private providers was $3.5 billion, $750 million of which was outstanding as a short-term advance. This advance is presented as short-term borrowings on the condensed consolidated statements of financial condition. 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 and~~ 2025. Borrowings outstanding under each facility bear interest at a margin above the 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 ~~June 30, 2023~~March 31, 2024 (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 June 30, 2023			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, 2024		Total Depositary Shares Authorized, Issued and Outstanding			Carrying Value
							June 30, 2023				December 31, 2022		June 30, 2023	December 31, 2022										March 31, 2024		December 31, 2023		March 31, 2024	December 31, 2023
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
D(2)(5)(6)	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

(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 5.500% per annum until October 30, 2027. Thereafter, dividends declared will be payable quarterly in arrears at a floating rate equal to 3-month ~~LIBOR~~Term SOFR plus a spread of ~~3.076%~~3.338% 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 5 years to a fixed annual rate equal to the 5-year Treasury plus a spread of 5.783%.

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8. Accumulated Other Comprehensive Income

Changes in each component of accumulated other comprehensive (loss) 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 June 30, 2023
Balance at March 31, 2023 $ (44) $ (2) $ (189) $ (235)
Net change (151) (84) — (235)
Balance at June 30, 2023 $ (195) $ (86) $ (189) $ (470)
For the Three Months Ended June 30, 2022
Balance at March 31, 2022 $ (7) $ (7) $ (199) $ (213)
Net change (41) 3 — (38)
Balance at June 30, 2022 $ (48) $ (4) $ (199) $ (251)
For the Six Months Ended June 30, 2023
Balance at December 31, 2022 $ (136) $ (14) $ (189) $ (339)
Net change (59) (72) — (131)
Balance at June 30, 2023 $ (195) $ (86) $ (189) $ (470)
For the Six Months Ended June 30, 2022
Balance at December 31, 2021 $ 114 $ (9) $ (199) $ (94)
Net change (162) 5 — (157)
Balance at June 30, 2022 $ (48) $ (4) $ (199) $ (251)

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










For the Three Months Ended March 31, 2024
Balance at December 31, 2023	$	(37)	$	(8)	$	(180)	$	(225)
Net change	(97)		(71)		—		(168)
Balance at March 31, 2024	$	(134)	$	(79)	$	(180)	$	(393)

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)

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							Before Tax	Tax Benefit (Expense)	Net of Tax

		Before Tax		Tax Benefit (Expense)		Net of Tax
For the Three Months Ended June 30, 2023

For the Three Months Ended March 31, 2024

For the Three Months Ended March 31, 2024

For the Three Months Ended March 31, 2024
Available-for-Sale Investment Securities	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
Net unrealized holding losses arising during the period	Net unrealized holding losses arising during the period	$	(199)	$	48	$	(151)

Net change	Net change	$	(199)	$	48	$	(151)
Net change
Net change
Cash Flow Hedges	Cash Flow Hedges
Net unrealized losses arising during the period
Net unrealized losses arising during the period
Net unrealized losses arising during the period	Net unrealized losses arising during the period	$	(127)	$	31	$	(96)
Amounts reclassified from AOCI	Amounts reclassified from AOCI	16		(4)		12
Net change	Net change	$	(111)	$	27	$	(84)

For the Three Months Ended June 30, 2022
For the Three Months Ended March 31, 2023

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 losses arising during the period		$	(53)	$	12	$	(41)
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
Available-for-Sale Investment Securities
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
Net unrealized holding gains arising during the period

Net change	Net change	$	(53)	$	12	$	(41)
Net change
Net change
Cash Flow Hedges	Cash Flow Hedges
Net unrealized gains arising during the period
Net unrealized gains arising during the period
Net unrealized gains arising during the period	Net unrealized gains arising during the period	$	3	$	(1)	$	2
Amounts reclassified from AOCI	Amounts reclassified from AOCI	1		—		1
Net change	Net change	$	4	$	(1)	$	3

For the Six Months Ended June 30, 2023
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period		$	(77)	$	18	$	(59)

Net change		$	(77)	$	18	$	(59)
Cash Flow Hedges
Net unrealized losses arising during the period		$	(117)	$	29	$	(88)
Amounts reclassified from AOCI		21		(5)		16
Net change		$	(96)	$	24	$	(72)

For the Six Months Ended June 30, 2022
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period		$	(213)	$	51	$	(162)

Net change		$	(213)	$	51	$	(162)
Cash Flow Hedges
Net unrealized gains arising during the period		$	2	$	(1)	$	1
Amounts reclassified from AOCI		2		2		4
Net change		$	4	$	1	$	5

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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 June 30,						For the Six Months Ended June 30,							For the Three Months Ended March 31,
		2023			2022			2023			2022					2024		2023
Income before income taxes	Income before income taxes	$	1,169		$	1,441		$	2,426		$	3,048
Income tax expense	Income tax expense	$	268		$	338		$	557		$	712
Effective income tax rate	Effective income tax rate	23.0		%	23.5		%	23.0		%	23.4		%	Effective income tax rate		23.7	%	23.0	%

The effective tax rate increased for the three months ended March 31, 2024, as compared to the same period in 2023, due to the adoption of the proportional amortization method for qualifying tax credit investments effective January 1, 2024, offset by the decrease in pretax income.

The Company is subject to examination by the Internal Revenue Service and tax authorities in various state, local and foreign tax jurisdictions. The Company's federal income tax filings are open to examinations for the tax years ended December 31, ~~2019~~2020 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 expected to be immaterial 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 June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
		2023		2022		2023		2022			2024	2023
Numerator	Numerator
Net income
Net income
Net income	Net income	$	901	$	1,103	$	1,869	$	2,336
Preferred stock dividends	Preferred stock dividends	—		—		(31)		(31)
Net income available to common stockholders	Net income available to common stockholders	901		1,103		1,838		2,305
Income allocated to participating securities	Income allocated to participating securities	(6)		(6)		(12)		(12)
Net income allocated to common stockholders	Net income allocated to common stockholders	$	895	$	1,097	$	1,826	$	2,293
Denominator	Denominator
Weighted-average shares of common stock outstanding	Weighted-average shares of common stock outstanding	253		279		257		282
Weighted-average shares of common stock outstanding
Weighted-average shares of common stock outstanding

Weighted-average shares of common stock outstanding and common stock equivalents
Weighted-average shares of common stock outstanding and common stock equivalents
Weighted-average shares of common stock outstanding and common stock equivalents	Weighted-average shares of common stock outstanding and common stock equivalents	253		279		257		282

Basic earnings per common share	Basic earnings per common share	$	3.54	$	3.93	$	7.09	$	8.13
Basic earnings per common share
Basic earnings per common share
Diluted earnings per common share	Diluted earnings per common share	$	3.54	$	3.93	$	7.09	$	8.12

Anti-dilutive securities were not material and had no impact on the computation of diluted EPS for the three ~~or six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023.

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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 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.

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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.

In accordance with the final rule on the impact of current expected credit losses ("CECL") on regulatory capital, the Company has elected to phase in the impact over three years beginning in 2022. Accordingly, the Company's Common Equity Tier 1 ("CET1") capital ratios 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, which ends December 31, 2024.

As of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, 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.

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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)
June 30, 2023
March 31, 2024
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Discover Financial Services
Discover Financial Services
Discover Financial Services	Discover Financial Services	$	17,215	14.3	%	$	9,659	≥8.0%	$	12,073	≥10.0%	$	17,513			13.3		13.3		%				$	10,499			≥8.0%			≥8.0%			$	13,124			≥10.0%				≥10.0%
Discover Bank	Discover Bank	$	16,444	13.8	%	$	9,532	≥8.0%	$	11,915	≥10.0%	Discover Bank		$	16,598		12.8			12.8		%				$	10,349		≥8.0%			≥8.0%				$	12,936			≥10.0%			≥10.0%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)
Discover Financial Services	Discover Financial Services	$	15,144	12.5	%	$	7,244	≥6.0%	$	7,244	≥6.0%
Discover Financial Services
Discover Financial Services														$	15,394				11.7		%				$	7,874				≥6.0%			$	7,874							≥6.0%
Discover Bank	Discover Bank	$	13,543	11.4	%	$	7,149	≥6.0%	$	9,532	≥8.0%	Discover Bank		$	13,752		10.6			10.6		%				$	7,762		≥6.0%			≥6.0%				$	10,349			≥8.0%			≥8.0%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)
Discover Financial Services
Discover Financial Services
Discover Financial Services	Discover Financial Services	$	15,144	11.1	%	$	5,458	≥4.0%	N/A		N/A	$	15,394			10.1		10.1		%				$	6,086			≥4.0%			≥4.0%									N/A
Discover Bank	Discover Bank	$	13,543	10.1	%	$	5,377	≥4.0%	$	6,722	≥5.0%	Discover Bank		$	13,752		9.2			9.2		%				$	6,004		≥4.0%			≥4.0%				$	7,505			≥5.0%			≥5.0%
Common Equity Tier 1 (to risk-weighted assets)	Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services	Discover Financial Services	$	14,088	11.7	%	$	5,433	≥4.5%	N/A		N/A
Discover Financial Services
Discover Financial Services														$	14,338				10.9		%				$	5,906				≥4.5%									N/A
Discover Bank	Discover Bank	$	13,543	11.4	%	$	5,362	≥4.5%	$	7,745	≥6.5%	Discover Bank		$	13,752		10.6			10.6		%				$	5,821		≥4.5%			≥4.5%				$	8,409			≥6.5%			≥6.5%

December 31, 2022
December 31, 2023
December 31, 2023
December 31, 2023
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)
Discover Financial Services(3)		$	18,004	15.8	%	$	9,139	≥8.0%	$	11,424	≥10.0%
Total capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Discover Financial Services
Discover Financial Services
Discover Financial Services														$	17,986				13.7		%				$	10,471				≥8.0%			$	13,088							≥10.0%
Discover Bank	Discover Bank	$	16,579	14.7	%	$	9,015	≥8.0%	$	11,268	≥10.0%	Discover Bank		$	16,856		13.0			13.0		%				$	10,352		≥8.0%			≥8.0%				$	12,939			≥10.0%			≥10.0%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)
Discover Financial Services(3)		$	16,039	14.0	%	$	6,854	≥6.0%	$	6,854	≥6.0%
Discover Financial Services
Discover Financial Services
Discover Financial Services														$	15,872				12.1		%				$	7,853				≥6.0%			$	7,853							≥6.0%
Discover Bank	Discover Bank	$	13,683	12.1	%	$	6,761	≥6.0%	$	9,015	≥8.0%	Discover Bank		$	13,910		10.8			10.8		%				$	7,764		≥6.0%			≥6.0%				$	10,352			≥8.0%			≥8.0%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)
Discover Financial Services(3)		$	16,039	12.5	%	$	5,147	≥4.0%	N/A		N/A
Discover Financial Services
Discover Financial Services
Discover Financial Services														$	15,872				10.7		%				$	5,915				≥4.0%									N/A
Discover Bank	Discover Bank	$	13,683	10.8	%	$	5,086	≥4.0%	$	6,357	≥5.0%	Discover Bank		$	13,910		9.5			9.5		%				$	5,833		≥4.0%			≥4.0%				$	7,292			≥5.0%			≥5.0%
Common Equity Tier 1 (to risk-weighted assets)	Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services(3)		$	14,983	13.1	%	$	5,141	≥4.5%	N/A		N/A
Discover Financial Services
Discover Financial Services
Discover Financial Services														$	14,816				11.3		%				$	5,890				≥4.5%									N/A
Discover Bank	Discover Bank	$	13,683	12.1	%	$	5,071	≥4.5%	$	7,324	≥6.5%	Discover Bank		$	13,910		10.8			10.8		%				$	5,823		≥4.5%			≥4.5%				$	8,411			≥6.5%			≥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.

~~(3)Capital amounts and ratios have been updated to reflect the impact~~Table of ~~the restatement described in Note 18: Immaterial Restatement of Prior Period Financial Statements~~.Contents

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 ~~June 30, 2023,~~March 31, 2024, the Company had unused credit arrangements for loans of approximately ~~$229.9~~$233.0 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, loan qualification and ~~loan qualification.~~the cost of capital. 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

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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 condensed consolidated statements of financial condition.

Contingencies

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.

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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.

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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 ~~$90~~$110 million as of ~~June 30, 2023.~~March 31, 2024.

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 ~~June 30, 2023,~~March 31, 2024, the Company had not recorded any contingent liability in the condensed consolidated statements of financial ~~statements~~condition 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 six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023.

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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 June 30, For the Six Months Ended June 30,
2023 2022 2023 2022
Aggregate sales transaction volume(1)
$ 65,850 $ 65,586 $ 126,683 $ 122,739


	For the Three Months Ended March 31,
		2024		2023
Aggregate sales transaction volume(1)		$	61,332	$	60,833

(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 ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022.~~2023. 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 ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the Company had escrow deposits and settlement withholdings of ~~$10~~$9 million and ~~$11~~$10 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.

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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~~orders with the Consumer Financial Protection Bureau ("CFPB") ~~regarding certain private student loan servicing practices,~~and FDIC, as described below. 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~~a liability for legal and regulatory matters when those matters ~~present~~create loss contingencies that are both probable and estimable. ~~Litigation~~Except as discussed below regarding the card product misclassification matter, litigation and regulatory settlement-related expenses were immaterial for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023.

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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 ~~$160~~$230 million as of ~~June 30, 2023.~~March 31, 2024. 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”~~"2015 Order"). The 2015 Order expired in July 2020. In December 2020, the Discover Subsidiaries agreed to a consent order (the ~~“2020 Order”~~"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.

~~In July~~On September 25, 2023, following the ~~Company received~~consent of the Board of Directors of Discover Bank, the FDIC issued a ~~proposed~~ consent order ~~from~~(the "2023 Order") to Discover Bank. The 2023 Order addresses shortcomings in Discover Bank’s compliance management system for consumer protection laws and related matters. It does not contain any monetary penalties or fines. As part of the 2023 Order, Discover Bank agreed to improve its consumer compliance management system and enhance related corporate governance and enterprise risk management practices, and increase the level of Board oversight of such matters. Discover Bank has been taking significant steps to strengthen the organization’s compliance management system and address the other issues identified in the 2023 Order. In addition, Discover added two new independent directors with significant banking experience to the Boards of Discover and Discover Bank in the third quarter of 2023.

Management and the Board are committed to meeting all the requirements of the 2023 Order. Discover Bank is working diligently to complete items required by the 2023 Order. This includes having retained third party consultants to conduct independent reviews and the submission of action plans to the FDIC ~~in connection~~by the required deadlines for review and feedback. The actions completed to date, taken together with ~~consumer compliance. This proposed~~actions previously undertaken to improve and enhance its compliance management system and enhance related corporate governance, address multiple consent order ~~does~~objectives, however, many provisions require longer term implementation. Depending on regulatory feedback, the timing of approvals and sustainability periods, necessary work is not ~~include the card product misclassification issue described below.~~likely to be completed until at least 2025.

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

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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 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. In August 2020, the Court granted the plaintiffs' Motion to Certify a Class. The defendants appealed the ruling, which was denied in January 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.~~and awaits rulings. 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. However, the Company will seek to defend itself vigorously against all claims asserted by the plaintiffs.

Card Product Misclassification

~~Beginning around mid-2007,~~As reported, the Company incorrectly classified certain credit card accounts into its highest merchant and merchant acquirer pricing tier. Incremental revenue resulting from this card product misclassification amounted to less than 1% of the Company's cumulative discount and interchange revenue, gross, since that time. The misclassification affected pricing for certain merchants and merchant acquirers, but not for cardholders. As of June 30, 2023, the Company’s consolidated financial statements reflectrecorded a liability of $365 million as of June 30, 2023, within accrued expenses and other liabilities, to provide refunds to merchants and merchant acquirers as a result of the card product misclassification. Management completed the reclassification of card products in November 2023. As of December 31, 2023, the balance of the liability was $375 million, reflecting an additional $11 million for the estimated effect of the prior price tiering on discount and interchange assessments recorded in each of the third and fourth quarters of 2023 and $12 million of settlement disbursements made through that date. Throughout the first quarter of 2024, the Company continued settlement discussions

~~Management is taking actions to correct the card product misclassification going forward and to prepare a program to compensate affected~~

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with large direct merchants both directly and ~~merchant acquirers. It is not possible~~indirectly as plaintiffs in putative class actions filed on behalf of all merchants, and the Company continued to ~~know~~discuss these efforts with ~~certainty~~its regulators. Another $9 million in settlement disbursements were made during the ~~final amount~~first quarter of ~~potential refunds at this time given differences in individual merchant agreements, changes in network terms~~2024. Based on its experience to date with remediation efforts, discussions through the first quarter of 2024 with its regulators, Board of Directors and ~~availability of historical data. Regulators may require refunds or~~ other ~~remediation that may result in other charges or an amount different than~~stakeholders, the ~~Company’s current estimate. An investigation into this issue~~pending merger with Capital One approved by ~~an external law firm working at the direction of the Audit Committee of~~ the Board of Directors during the quarter, and a desire to advance resolution of the matter more quickly to mitigate further risk, the Company determined it was appropriate to increase its estimate of total remediation. As a result, the Company increased its liability to $1.2 billion through a charge to other expense for the three months ended March 31, 2024, to reflect the total amount the Company now expects is ~~ongoing.~~probable to be disbursed in relation to the card product misclassification.

The Company isremains in discussions with its regulators regarding this ~~matter and corporate governance and risk management.~~matter. The Company expects these discussions will likely result in enforcement actions, which may include, among other remedies, monetary penalties, the amount of which cannot be estimated at this ~~time.~~time and could be material.

In addition, the Company and its subsidiaries have been named as defendants in various lawsuits, including a putative class action on behalf of shareholders and shareholder derivative actions. The Company also is cooperating with a Securities and Exchange Commission investigation into the card product misclassification matter. The Company believes that additional losses are probable as a result of these actions and such losses could be material but it is not able to make a reasonable estimate of the amount or range of such losses as of March 31, 2024.

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.

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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.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


		Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Balance at June 30, 2023
	Quoted Price in Active Markets for Identical Assets (Level 1)									Quoted Price in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total
Balance at March 31, 2024
Assets
Assets
Assets	Assets
Fair value - OCI	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
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	12,706	$	8	$	—	$	12,714
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	—		507		—		507
Available-for-sale investment securities	Available-for-sale investment securities	$	12,706	$	515	$	—	$	13,221

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

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)
Derivative financial instruments - cash flow hedges(1)

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

Balance at December 31, 2023

Balance at December 31, 2023

Balance at December 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
U.S. Treasury and U.S. GSE securities
Residential mortgage-backed securities - Agency
Available-for-sale investment securities

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

Fair value - Net income
Fair value - Net income
Fair value - Net income
Marketable equity securities
Marketable equity securities
Marketable equity securities	Marketable equity securities	$	33	$	—	$	—	$	33
Derivative financial instruments - fair value hedges(1)	Derivative financial instruments - fair value hedges(1)	$	—	$	2	$	—	$	2

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

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

Fair value - Net income

Marketable equity securities		$	41	$	—	$	—	$	41

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

Fair value - Net income
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 ~~June 30, 2023,~~March 31, 2024, 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 ~~$531~~$457 million, a weighted-average coupon of ~~4.07%~~4.10% and a weighted-average remaining maturity of four years.

~~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

Table of ~~which are determined based on quoted share prices for the same securities.~~Contents

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.

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 six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023.

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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 June 30, 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
Balance at March 31, 2024												Balance at March 31, 2024	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
Amortized cost	Amortized cost
Amortized cost
Amortized cost
Residential mortgage-backed securities - Agency
Residential mortgage-backed securities - Agency
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	$	—	$	224	$	—	$	224	$	245
Held-to-maturity investment securities	Held-to-maturity investment securities	$	—	$	224	$	—	$	224	$	245

Net loan receivables	Net loan receivables	$	—	$	—	$	116,379	$	116,379	$	109,842
Net loan receivables
Net loan receivables

Carrying value approximates fair value(1)	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
Cash and cash equivalents	Cash and cash equivalents	$	8,605	$	—	$	—	$	8,605	$	8,605
Restricted cash	Restricted cash	$	39	$	—	$	—	$	39	$	39

Accrued interest receivables(2)	Accrued interest receivables(2)	$	—	$	1,289	$	—	$	1,289	$	1,289
Accrued interest receivables(2)
Accrued interest receivables(2)

Liabilities	Liabilities
Liabilities
Liabilities
Amortized cost
Amortized cost
Amortized cost	Amortized cost
Time deposits(3)	Time deposits(3)	$	—	$	39,075	$	—	$	39,075	$	39,332
Time deposits(3)
Time deposits(3)

Long-term borrowings - owed to securitization investors

Long-term borrowings - owed to securitization investors

Long-term borrowings - owed to securitization investors	Long-term borrowings - owed to securitization investors	$	—	$	10,903	$	74	$	10,977	$	11,216
Other long-term borrowings	Other long-term borrowings	—		8,613		—		8,613		9,060
Long-term borrowings	Long-term borrowings	$	—	$	19,516	$	74	$	19,590	$	20,276

Carrying value approximates fair value(1)	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)
Accrued interest payables(2)	Accrued interest payables(2)	$	—	$	361	$	—	$	361	$	361

Balance at December 31, 2022
Balance at December 31, 2023

Balance at December 31, 2023

Balance at December 31, 2023
Assets
Assets
Assets	Assets
Amortized cost	Amortized cost
Amortized cost
Amortized cost
Residential mortgage-backed securities - Agency
Residential mortgage-backed securities - Agency
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	$	—	$	199	$	—	$	199	$	221
Held-to-maturity investment securities	Held-to-maturity investment securities	$	—	$	199	$	—	$	199	$	221

Net loan receivables	Net loan receivables	$	—	$	—	$	110,796	$	110,796	$	104,746
Net loan receivables
Net loan receivables

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

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

Liabilities	Liabilities
Liabilities
Liabilities
Amortized cost
Amortized cost
Amortized cost	Amortized cost
Time deposits(3)	Time deposits(3)	$	—	$	32,710	$	—	$	32,710	$	33,070
Time deposits(3)
Time deposits(3)
Short-term borrowings

Long-term borrowings - owed to securitization investors
Long-term borrowings - owed to securitization investors
Long-term borrowings - owed to securitization investors	Long-term borrowings - owed to securitization investors	$	—	$	9,862	$	84	$	9,946	$	10,259
Other long-term borrowings	Other long-term borrowings	—		9,468		—		9,468		9,849
Long-term borrowings	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)
Carrying value approximates fair value(1)
Accrued interest payables(2)
Accrued interest payables(2)
Accrued interest payables(2)	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 and accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.

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

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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 ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the Company's outstanding cash flow hedges primarily relate to interest receipts from credit card receivables and had an initial maximum period of ~~four years and three years, respectively.~~five years.

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 ~~June 30, 2023,~~March 31, 2024, 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 and certain floating-rate debt, respectively. During the next 12 months, the Company estimates it will reclassify ~~$110~~$104 million into pretax earnings related to its 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. The Company 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, and deposits attributable to changes in the respective benchmark 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 and deposits attributable to the interest-rate risk being hedged are recorded in interest ~~expense. The changes~~expense and generally provide substantial offset to one ~~another, with any difference recognized in interest expense.~~another.

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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):


		June 30, 2023							December 31, 2022						March 31, 2024			December 31, 2023
		Notional Amount		Number of Outstanding Derivative Contracts	Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities		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
Interest rate swaps—cash flow hedge	Interest rate swaps—cash flow hedge	$	8,900	15	$	2	$	—	$	5,000	$	1	$	3
Interest rate swaps—cash flow hedge
Interest rate swaps—cash flow hedge
Interest rate swaps—fair value hedge	Interest rate swaps—fair value hedge	$	7,750	9	2		—		$	4,425	—		2
Derivatives not designated as hedges	Derivatives not designated as hedges
Foreign exchange forward contracts(1)	Foreign exchange forward contracts(1)	$	26	7	—		—		$	25	—		—
Foreign exchange forward contracts(1)
Foreign exchange forward contracts(1)

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

(1)The foreign exchange forward contracts have notional amounts of EUR 6 million, GBP 6 million, SGD 1 million and INR ~~788 million and AUD 2 million~~1.5 billion as of ~~June 30, 2023,~~March 31, 2024, and notional amounts of EUR 6 million, GBP 6 million, SGD 1 million, INR ~~788 million~~1.1 billion and AUD 2 million as of December 31, ~~2022.~~2023.

(2)In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities and tax exempt single family mortgage revenue bonds as part of its community reinvestment initiatives. At ~~June 30, 2023 and December~~March 31, ~~2022,~~2024, the Company had one outstanding contract with a total notional amount of ~~$16~~$23 million and ~~$48 million, respectively, and~~an immaterial fair ~~values.~~value. At December 31, 2023, the Company had one outstanding contract with a total notional amount of $35 million and an immaterial fair value.

(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):
June 30, 2023 December 31, 2022
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 (Decreasing) the Carrying Amount of Hedged Liabilities(1)
Long-term borrowings $ 7,615 $ (100) $ 4,386 $ (3)


	March 31, 2024				December 31, 2023
	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 (Decreasing) the Carrying Amount of Hedged Liabilities(1)
Long-term borrowings	$	12,614	$	(108)	$	8,620	$	—

(1)The balance includes ~~$18~~$10 million and ~~$28~~$12 million of cumulative hedging adjustments related to discontinued hedging relationships as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively.

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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 June 30, 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 $ (208) $ 3,466 $ 28
The effects of cash flow and fair value hedging
Gains (losses) on fair value hedging relationships
Amounts reclassified from OCI into earnings $ 2 $ (18) $ —
Gains (losses) on fair value hedging relationships
Gains on hedged items $ 122 $ — $ —
Losses on interest rate swaps (149) — —
Total losses on fair value hedging relationships $ (27) $ — $ —
For the Three Months Ended June 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 $ (131) $ 2,424 $ 21
The effects of cash flow and fair value hedging
Losses on cash flow hedging relationships
Amounts reclassified from OCI into earnings $ (1) $ — $ —
Gains (losses) on fair value hedging relationships
Gains on hedged items $ 22 $ — $ —
Losses on interest rate swaps (18) — —
Total gains on fair value hedging relationships $ 4 $ — $ —
The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges $ — $ — $ 1

~~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 Six Months Ended June 30, 2023

		Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income

		Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income

		Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income
		Interest Expense
		Interest Expense
		Interest Expense
		Deposits
		Deposits
		Deposits
For the Three Months Ended March 31, 2024
For the Three Months Ended March 31, 2024
For the Three Months Ended March 31, 2024
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
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		$	(397)	$	6,787		$	50

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

The effects of cash flow and fair value hedging
Gains (losses) on cash flow hedging relationships	Gains (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
Amounts reclassified from OCI into earnings	Amounts reclassified from OCI into earnings		$	4	$	(25)		$	—

Gains (losses) on fair value hedging relationships	Gains (losses) on fair value hedging relationships

Gains (losses) on fair value hedging relationships

Gains (losses) on fair value hedging relationships
Gains on hedged items
Gains on hedged items
Gains on hedged items	Gains on hedged items		$	87	$	—		$	—
Losses on interest rate swaps	Losses on interest rate swaps		(128)		—			—
Losses on interest rate swaps
Losses on interest rate swaps
Total losses on fair value hedging relationships
Total losses on fair value hedging relationships
Total losses on fair value hedging relationships	Total losses on fair value hedging relationships		$	(41)	$	—		$	—

For the Six Months Ended June 30, 2022
For the Three Months Ended March 31, 2023

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
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		$	(248)	$	4,692		$	45

The effects of cash flow and fair value hedging	The effects of cash flow and fair value hedging
Losses on cash flow hedging relationships

The effects of cash flow and fair value hedging

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

Gains (losses) on fair value hedging relationships	Gains (losses) on fair value hedging relationships
Gains on hedged items			$	69	$	—		$	—
Losses on interest rate swaps			(50)		—			—
Total gains on fair value hedging relationships			$	19	$	—		$	—

The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges			$	—	$	—		$	1
Gains (losses) on fair value hedging relationships

Gains (losses) on fair value hedging relationships
Losses on hedged items
Losses on hedged items
Losses on hedged items
Gains on interest rate swaps
Gains on interest rate swaps
Gains on interest rate swaps
Total losses on fair value hedging relationships
Total losses on fair value hedging relationships
Total losses on fair value hedging relationships

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.

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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,~~ATM, 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~~CODM 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.~~CODM.

•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.~~CODM.

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


		Digital Banking		Payment Services		Total
For the Three Months Ended June 30, 2023
	Digital Banking							Digital Banking	Payment Services	Total
For the Three Months Ended March 31, 2024
Interest income	Interest income
Interest income
Interest income
Credit card loans
Credit card loans
Credit card loans	Credit card loans	$	3,466	$	—	$	3,466
Private student loans	Private student loans	255		—		255
Personal loans	Personal loans	278		—		278
Other loans	Other loans	73		—		73
Other interest income	Other interest income	218		—		218
Total interest income	Total interest income	4,290		—		4,290
Interest expense	Interest expense	1,113		—		1,113
Net interest income	Net interest income	3,177		—		3,177
Provision for credit losses	Provision for credit losses	1,305		—		1,305
Other income	Other income	586		115		701
Other expense	Other expense	1,359		45		1,404
Income before income taxes	Income before income taxes	$	1,099	$	70	$	1,169

For the Three Months Ended June 30, 2022
For the Three Months Ended March 31, 2023
For the Three Months Ended March 31, 2023
For the Three Months Ended March 31, 2023
Interest income	Interest income
Interest income
Interest income
Credit card loans
Credit card loans
Credit card loans	Credit card loans	$	2,424	$	—	$	2,424
Private student loans	Private student loans	196		—		196
Personal loans	Personal loans	206		—		206
Other loans	Other loans	37		—		37
Other interest income	Other interest income	52		—		52
Total interest income	Total interest income	2,915		—		2,915
Interest expense	Interest expense	305		—		305
Net interest income	Net interest income	2,610		—		2,610
Provision for credit losses	Provision for credit losses	549		—		549
Other income	Other income	546		57		603
Other expense	Other expense	1,186		37		1,223
Income before income taxes	Income before income taxes	$	1,421	$	20	$	1,441

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Digital
Banking Payment
Services Total
For the Six Months Ended June 30, 2023
Interest income
Credit card loans $ 6,787 $ — $ 6,787
Private student loans 507 — 507
Personal loans 526 — 526
Other loans 137 — 137
Other interest income 410 — 410
Total interest income 8,367 — 8,367
Interest expense 2,058 — 2,058
Net interest income 6,309 — 6,309
Provision for credit losses 2,407 — 2,407
Other income 1,108 203 1,311
Other expense 2,701 86 2,787
Income before income taxes $ 2,309 $ 117 $ 2,426
For the Six Months Ended June 30, 2022
Interest income
Credit card loans $ 4,692 $ — $ 4,692
Private student loans 386 — 386
Personal loans 412 — 412
Other loans 69 — 69
Other interest income 92 — 92
Total interest income 5,651 — 5,651
Interest expense 562 — 562
Net interest income 5,089 — 5,089
Provision for credit losses 703 — 703
Other income (loss) 1,021 (6) 1,015
Other expense 2,278 75 2,353
Income (loss) before income taxes $ 3,129 $ (81) $ 3,048

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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 June 30, 2023
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 349 $ 21 $ 370
Protection products revenue 44 — 44
Transaction processing revenue — 72 72
Other income 7 21 28
Total other income subject to ASC 606(2)
400 114 514
Other income not subject to ASC 606
Loan fee income 186 — 186
Gains on equity investments — 1 1
Total other income not subject to ASC 606 186 1 187
Total other income by operating segment $ 586 $ 115 $ 701
For the Three Months Ended June 30, 2022
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 359 $ 20 $ 379
Protection products revenue 42 — 42
Transaction processing revenue — 61 61
Other income 3 18 21
Total other income subject to ASC 606(2)
404 99 503
Other income not subject to ASC 606
Loan fee income 142 — 142
Gains (losses) on equity investments — (42) (42)
Total other income (loss) not subject to ASC 606 142 (42) 100
Total other income by operating segment $ 546 $ 57 $ 603


	Digital Banking		Payment Services		Total
For the Three Months Ended March 31, 2024
Other income subject to ASC 606
Discount and interchange revenue, net(1)	$	346	$	25	$	371
Protection products revenue	42		—		42
Transaction processing revenue	—		87		87
Other income	3		20		23
Total other income subject to ASC 606(2)	391		132		523
Other income not subject to ASC 606
Loan fee income	200		—		200

Total other income not subject to ASC 606	200		—		200
Total other income by operating segment	$	591	$	132	$	723

For the Three Months Ended March 31, 2023
Other income subject to ASC 606
Discount and interchange revenue, net(1)	$	310	$	20	$	330
Protection products revenue	43		—		43
Transaction processing revenue	—		67		67
Other income	3		19		22
Total other income subject to ASC 606(2)	356		106		462
Other income not subject to ASC 606
Loan fee income	166		—		166
Gains (losses) on equity investments	—		(18)		(18)
Total other income (loss) not subject to ASC 606	166		(18)		148
Total other income by operating segment	$	522	$	88	$	610

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Digital Banking Payment Services Total
For the Six Months Ended June 30, 2023
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 659 $ 41 $ 700
Protection products revenue 87 — 87
Transaction processing revenue — 139 139
Other income 10 40 50
Total other income subject to ASC 606(2)
$ 756 $ 220 $ 976
Other income not subject to ASC 606
Loan fee income 352 — 352
Gains (losses) on equity investments — (17) (17)
Total other income (loss) not subject to ASC 606 352 (17) 335
Total other income by operating segment $ 1,108 $ 203 $ 1,311
For the Six Months Ended June 30, 2022
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 646 $ 42 $ 688
Protection products revenue 86 — 86
Transaction processing revenue — 118 118
Other income 6 39 45
Total other income subject to ASC 606(2)
738 199 937
Other income not subject to ASC 606
Loan fee income 282 — 282
Gains (losses) on equity investments 1 (205) (204)
Total other income (loss) not subject to ASC 606 283 (205) 78
Total other income (loss) by operating segment $ 1,021 $ (6) $ 1,015

(1)Net of rewards, including Cashback Bonus rewards, of ~~$788~~$703 million and ~~$743~~$716 million for the three months ended ~~June 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $1.5 billion and $1.4 billion for the six months ended June 30, 2023 and 2022.~~ respectively.

(2)Excludes $3$2 million and ~~$10~~$6 million of deposit product fees that are reported within net interest income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2024 and 2023, respectively. ~~Deposit product fees were immaterial for the three and six months ended June 30, 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, ~~2022.~~2023.

18. ~~Immaterial Restatement of Prior Period Financial Statements~~

Beginning around mid-2007, the Company incorrectly classified certain credit card accounts into its highest merchant and merchant acquirer pricing tier. The card product classification impacts the pricing and charging of discount and interchange revenue, which is recorded within discount and interchange revenue, net, on the consolidated statements of income. 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 immaterial corrections to the recognition of discount and interchange revenue, as well as the related impacts to assets, liabilities and retained earnings in the prior periods presented in this Form 10-Q. Assets were impacted by adjustments to deferred tax assets, and liabilities were impacted by an adjustment to the liability for estimated refunds to merchants and merchant acquirers.

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~~The prior period impacts to the Company's consolidated statement of financial condition were as shown below (dollars in millions):~~
March 31, 2023 December 31, 2022
As Previously Reported Restatement Impacts As Restated As Previously Reported Restatement Impacts As Restated
Assets
Other Assets $ 4,381 $ 80 $ 4,461 $ 4,519 $ 78 $ 4,597
Total Assets $ 133,061 $ 80 $ 133,141 $ 131,628 $ 78 $ 131,706
Liabilities and Stockholders' Equity
Liabilities
Accrued Expenses and other liabilities $ 4,843 $ 335 $ 5,178 $ 5,294 $ 324 $ 5,618
Total Liabilities $ 118,746 $ 335 $ 119,081 $ 117,038 $ 324 $ 117,362
Stockholders' Equity
Retained Earnings $ 29,292 $ (255) $ 29,037 $ 28,453 $ (246) $ 28,207
Total Stockholders' Equity $ 14,315 $ (255) $ 14,060 $ 14,590 $ (246) $ 14,344
Total Liabilities and Stockholders' Equity $ 133,061 $ 80 $ 133,141 $ 131,628 $ 78 $ 131,706

~~The prior period impacts to the Company's consolidated statements of income and the related impacts to the consolidated statements of comprehensive income were as shown below (dollars in millions):~~
For the Three Months Ended March 31, 2023
As Previously Reported Restatement Impacts As Restated
Other income
Discount and interchange revenue, net $ 341 $ (11) $ 330
Total other income $ 621 $ (11) $ 610
Income before income taxes $ 1,268 $ (11) $ 1,257
Income tax expense $ 292 $ (3) $ 289
Net Income $ 976 $ (8) $ 968
Net income allocated to common stockholders $ 939 $ (8) $ 931
Basic earnings per common share $ 3.58 $ (0.03) $ 3.55
Diluted earnings per common share $ 3.58 $ (0.03) $ 3.55

For the Three Months Ended June 30, 2022 For the Six Months Ended June 30, 2022
As Previously Reported Restatement Impacts As Restated As Previously Reported Restatement Impacts As Restated
Other income
Discount and interchange revenue, net $ 390 $ (11) $ 379 $ 710 $ (22) $ 688
Total other income $ 614 $ (11) $ 603 $ 1,037 $ (22) $ 1,015
Income before income taxes $ 1,452 $ (11) $ 1,441 $ 3,070 $ (22) $ 3,048
Income tax expense $ 341 $ (3) $ 338 $ 717 $ (5) $ 712
Net Income $ 1,111 $ (8) $ 1,103 $ 2,353 $ (17) $ 2,336
Net income allocated to common stockholders $ 1,105 $ (8) $ 1,097 $ 2,309 $ (16) $ 2,293
Basic earnings per common share $ 3.96 $ (0.03) $ 3.93 $ 8.19 $ (0.06) $ 8.13
Diluted earnings per common share $ 3.96 $ (0.03) $ 3.93 $ 8.18 $ (0.06) $ 8.12

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~~The prior period impacts to the Company's consolidated statements of changes in stockholders' equity were as shown below (dollars in millions):~~
Retained Earnings Total Stockholders' Equity
As Previously Reported
For the Three Months Ended June 30, 2022
Balance at March 31, 2022 $ 25,833 $ 13,433
Net Income $ 1,111 $ 1,111
Balance at June 30, 2022 $ 26,776 $ 13,764
Restatement Impacts
For the Three Months Ended June 30, 2022
Balance at March 31, 2022 $ (237) $ (237)
Net Income $ (8) $ (8)
Balance at June 30, 2022 $ (245) $ (245)
As Restated
For the Three Months Ended June 30, 2022
Balance at March 31, 2022 $ 25,596 $ 13,196
Net Income $ 1,103 $ 1,103
Balance at June 30, 2022 $ 26,531 $ 13,519
Retained Earnings Total Stockholders' Equity
As Previously Reported
For the Six Months Ended June 30, 2022
Balance at December 31, 2021 $ 24,766 $ 13,408
Net Income $ 2,353 $ 2,353
Balance at June 30, 2022 $ 26,776 $ 13,764
Restatement Impacts
For the Six Months Ended June 30, 2022
Balance at December 31, 2021 $ (228) $ (228)
Net Income $ (17) $ (17)
Balance at June 30, 2022 $ (245) $ (245)
As Restated
For the Six Months Ended June 30, 2022
Balance at December 31, 2021 $ 24,538 $ 13,180
Net Income $ 2,336 $ 2,336
Balance at June 30, 2022 $ 26,531 $ 13,519

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~~The prior period impacts to the Company's consolidated statements of cash flows were as follows (dollars in millions):~~
For the Three Months Ended March 31, 2023 For the Six Months Ended June 30, 2022
As Previously Reported Restatement Impacts As Restated As Previously Reported Restatement Impacts As Restated
Cash flows provided by operating activities
Net Income $ 976 $ (8) $ 968 $ 2,353 $ (17) $ 2,336
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes $ (112) $ (3) $ (115) $ (140) $ (5) $ (145)
Changes in assets and liabilities:
(Decrease) increase in accrued expenses and liabilities $ (387) $ 11 $ (376) $ 301 $ 22 $ 323
Net cash provided by operating activities $ 1,791 $ — $ 1,791 $ 3,346 $ — $ 3,346

~~19.~~ Subsequent Events

The Company has evaluated events and transactions that have occurred subsequent to ~~June 30, 2023,~~March 31, 2024, and determined that there were no subsequent events that would require recognition or disclosure in the condensed consolidated financial statements.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of 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: 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; risks related to the proposed merger with Capital One including, among others, (i) failure to complete the merger with Capital One or unexpected delays related to the merger or the inability of the parties to obtain regulatory approvals or satisfy other closing conditions required to complete the merger, (ii) regulatory approvals resulting in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction, (iii) diversion of management’s attention from ongoing business operations and opportunities, (iv) cost and revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized, (v) the integration of each party’s management, personnel and operations will not be successfully achieved or may be materially delayed or will be more costly or difficult than expected, (vi) deposit attrition, customer or employee loss and/or revenue loss as a result of the announcement of the proposed merger, (vii) expenses related to the proposed merger being greater than expected, and (viii) shareholder litigation that could prevent or delay the closing of the proposed merger or otherwise negatively impact our business and operations; 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 and merchants; our ability to sustain ~~and grow~~ our ~~private student loan,~~card and personal loan ~~and home loan products;~~growth; our ability to complete the proposed sale of the Discover Student Loan portfolio; our ability to increase or sustain Discover card usage or attract new customers; 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~~compliance and ~~compliance~~legal risk and strategic risk; the availability and cost of funding and capital; access to deposit, securitization, equity, debt and credit markets; the impact of rating agency actions; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; losses in 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, 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 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 or divestitures from 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, ~~2022,~~2023, which is filed with the Securities and Exchange Commission ("SEC") and available at the SEC's internet site (https://www.sec.gov).

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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~~automated teller machines 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.

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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.

Quarter Highlights

The highlights below compare results as of and for the three months ended ~~June 30, 2023,~~March 31, 2024, against results for the same period in the prior year.

•Net income was ~~$901~~$308 million, or ~~$3.54~~$1.10 per diluted share, compared to net income of ~~$1.1~~$1.0 billion, or ~~$3.93~~$3.55 per diluted share, in the prior year.

•Total loans grew ~~$18.6~~$13.9 billion, or ~~19%~~12%, to ~~$117.9~~$126.6 billion.

•Credit card loans grew ~~$14.7~~$9.7 billion, or ~~19%~~11%, to ~~$94.0~~$99.5 billion.

•The net charge-off rate for credit card loans increased ~~167~~256 basis points to ~~3.68%~~5.66% and the delinquency rate for credit card loans over 30 days past due increased ~~110~~107 basis points to ~~2.86%~~3.83%.

•Direct-to-consumer deposits grew ~~$14.1~~$12.0 billion, or ~~22%~~16%, to ~~$77.3~~$87.3 billion.

•Payment Services transaction volume for the segment was ~~$89.3~~$100.3 billion, up 8%18%.

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. The outlook below does not incorporate the impacts of a potential sale of our student loan portfolio.

•We expect ~~continued loan growth driven by recent account growth, moderation~~a slight increase in ~~the payment rate and our current expectation of sales trends.~~total loans.

•Based on the current interest rate environment, net interest margin is expected to ~~be relatively flat~~decline modestly in comparison to ~~2022.~~2023.

•We expect the total net charge-off rate to increase, in comparison to the prior year, driven primarily by ~~continued credit normalization and~~the seasoning of recent ~~vintages.~~vintages with higher delinquencies.

•~~Total~~Excluding card misclassification and merger related costs, total expenses are expected to increase, driven by continued investments in ~~acquisition~~compliance and ~~brand,~~ risk ~~identification, governance~~management capabilities and ~~compliance management systems, technology and analytics.~~wage growth. We remain committed to managing expenses while continuing to make investments in profitable long-term growth.

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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 baseline and stressful conditions.DFS is also subject to capital buffer requirements, including the Stress Capital Buffer ("SCB"), which requires ~~maintenance of~~maintaining regulatory capital levels above a threshold 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. The Federal Reserve also revised the scope of application of its existing regulatory guidance for capital planning to align with the tailoring framework. However, the timing

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and substance of any additional changes to existing guidance or new guidance are uncertain. Moreover, following the failure of ~~two~~three domestic banks during March and April 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.

In July 2023, the Federal Reserve, the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") issued a proposal to amend the risk-based capital framework (the "Basel III rules"), which includes replacing the current "advanced approach" with a new expanded risk-based approach. In addition, the proposal introduces new standardized approaches for credit risk, operational risk and credit valuation adjustment risk, and would significantly revise risk-based capital requirements for all banking institutions with assets of $100 billion or more, including DFS. If adopted, the new requirements would be effective July 1, 2025 with a three-year transition period.

In August 2023, the Federal Reserve, the FDIC and the OCC (the "Agencies") issued a proposal that would require banking institutions in Categories II through IV of the tailoring framework, including DFS, and their insured depository institution subsidiaries with $100 billion or more in assets such as Discover Bank, to have minimum levels of outstanding long-term debt. Under the proposed rule, a covered banking institution would be required to have a minimum outstanding amount of eligible long-term debt that is at least 6% of the institution’s total risk-weighted assets, 2.5% of its total leverage exposure (if it is required to maintain a minimum supplementary leverage ratio) and 3.5% of its average total consolidated assets, whichever is greater. If adopted, banking institutions would have three years to comply with the new requirements, though the Agencies would retain the authority to accelerate or extend the transition period.

While we cannot currently predict the timing or substance of ~~any such~~the finalization of these proposals or other regulatory ~~change,~~changes, if any such change were adopted, it ~~could roll back some or all of~~would likely revise the regulatory tailoring currently applicable to DFS, or otherwise tighten the prudential regulatory requirements that would apply to ~~DFS.~~DFS and increase our expenses.

In June 2022, the Federal Reserve released results of the 2022 Comprehensive Capital Analysis and Review ("CCAR") 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 iswas effective October 1, 2022, through September 30, 2023. In accordance with the capital plan rule amendments, we elected not to participate in the 2023 supervisory stress tests. Nevertheless, on April 5, 2023, we submitted to 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. On ~~June 28,~~July 27, 2023, the Federal Reserve disclosed ~~preliminary~~that our SCB requirements to firms subject to Category IV standards that did not opt-in to this year’s stress test. While the Federal Reserve will not announce final SCB requirements until August 2023, our preliminary SCB iswas unchanged at 2.5%, effective beginning October 1, 2023 through September 30, 2024. On April 5, 2024, we submitted our 2024 capital plan to the ~~lowest possible requirement.~~

~~London Interbank Offered Rate~~

~~In July 2017,~~Federal Reserve. The Federal Reserve is expected to announce the UKresults of the 2024 supervisory stress test by June 30, 2024 and our SCB by August 31, 2024. The new SCB would be effective from October 1, 2024 through September 30, 2025. Under the Basel III rules, a firm must update and resubmit its capital plan under certain circumstances, including a material change in the firm's risk profile, financial condition or corporate structure since its last capital plan submission. On February 19, 2024, Discover and Capital One Financial ~~Conduct Authority~~Corporation ("~~FCA"~~Capital One") jointly announced that ~~it would no longer encourage or compel banks~~they entered into an agreement and plan of merger (the "Merger Agreement"), under which the companies will combine in an all-stock merger, which we determined required us 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 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.

In March 2021, the FCA announced the future cessation and loss of representativeness for all LIBOR benchmark settings. Several less frequently referenced USD LIBOR settings ceased publication immediately after December 31, 2021, while commonly referenced USD LIBOR settings ceased publication immediately after June 30, 2023, triggering fallback provisions in many financial contracts 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.

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. At the time of LIBOR publication cessation, our LIBOR exposures were limited to two instruments — variable-rate student loans and capital markets securities.

As of June 30, 2023, LIBOR-indexed variable-rate loans comprised approximately 35% of our private student loan portfolio and approximately 3% of our aggregate loan portfolio. These outstanding student loans indexed to LIBOR will convert to a SOFR index at the first benchmark determination date after June 30, 2023. 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 ("CME").

We ceased entering into new LIBOR-indexed interest rate derivatives in 2018 and have since actively 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.resubmit

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~~In June 2023,~~our capital plan. We will submit our updated capital plan by May 6, 2024. Under the capital plan rule and as a consequence of the resubmission requirement, we ~~announced~~must receive prior approval for any dividend or other capital distribution, other than a capital distribution on a newly issued capital instrument. The capital plan rule provides that, $1.8 billion of our LIBOR-based capital markets securities would transition to the corresponding tenor for CME term SOFR plus the applicable tenor spread adjustment in a manner consistent with the Adjustable Interest Rate Act ("LIBOR Act") and the Regulation Implementing the LIBOR Act issued by the Board of Governors ofunless the Federal Reserve ~~System ("Regulation ZZ"). The aforementioned transitions~~determines to extend the timeline, the Federal Reserve must provide us notice of whether our SCB will ~~occur with the first setting~~be recalculated within 75 days of the ~~interest rate for each security after June 30, 2023. Approximately $500 million~~submission of ~~Discover Bank's subordinated notes have a rate reset in August 2023~~our updated capital plan and, if applicable, must provide our updated SCB within 90 days of notifying us that ~~contain fallback provisions that may not be covered under~~ the LIBOR Act or Regulation ZZ. If Discover Bank does not exercise its option to redeem the subordinated notes, and the designated screen page for the benchmark rate is not populated and no successor page is identified, the rate for these securitiesSCB will be ~~determined by the Fiscal and Paying Agent by reference to a dealer poll, parameters of which are expected to be in accordance with the ARRC's recommended formula.~~recalculated.

Consumer Financial Services

The ~~CFPB~~Consumer Financial Protection Bureau ("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 and transparent 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.

The CFPB’s priorities have continued to focus 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. ~~The CFPB has proposed a rule to alter Regulation Z’s late fee standards that includes caps on fees for late payments which could result in increased cardholder delinquencies and credit losses.~~ Additionally, detection of repeat offenders, such as companies that violate a formal court or agency order, has also become a priority for the CFPB. Director Chopra, in March 2022, identified, as repeat offenders, several companies that have had multiple enforcement actions, including Discover. The CFPB has recently taken action against financial institutions for violating prior enforcement actions. 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.

On March 5, 2024, the CFPB issued a final rule that reduces Regulation Z’s safe harbor amount for late fees to $8 and eliminates automatic annual inflation adjustments to that safe harbor amount. While the final rule is effective May 14, 2024, and could result in increased cardholder delinquencies and credit losses, we continue to monitor legal developments that could impact the timing and outcome of the final rule.

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.

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 continue to be proposed and enacted to augment consumer data privacy standards ~~including~~and require companies to assess and/or disclose cybersecurity metrics, risks, opportunities, policies and practices. At the ~~capture~~federal level, Discover is subject to the Gramm-Leach-Bliley Act ("GLBA") and its implementing regulations and guidance, which regulate Discover's use and disclosure of ~~consumer biometrics.~~our consumers' nonpublic personal information ("NPI"). In July 2023, the SEC adopted rules on Cybersecurity Risk Management, Strategy, Governance and Incident Disclosure. For ~~example,~~more information on Discover's cybersecurity program in connection with these rules, see "Item 1C. Cybersecurity" in our annual report on Form 10-K for the year ended December 31, 2023. In April 2024, the Department of Homeland Security proposed regulations to implement the Cyber Incident Reporting for Critical Infrastructure Act of 2022 and will promulgate new cyber incident and ransom payment reporting requirements for covered entities such as financial services companies.

At the state level, the California Consumer Privacy Act ("CCPA"), 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.~~remedies. The California Privacy Rights Act, ~~("CPRA"),~~ which became effective on January 1, 2023, amends the CCPA, enhancing consumer privacy protections and creating a new California Privacy Protection Agency ("CPPA"). ~~A California court recently issued an order delaying enforcement~~The CPPA has proposed additional regulations around cybersecurity, risk assessments and automated decision-making technology that may impact Discover as the proposed regulations move forward in the formal rulemaking process. Other states continue to pass privacy legislation. So far, these laws exempt either NPI or financial institutions subject to the GLBA or state banking

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laws from their scope, so the ~~CPRA regulations from July 1, 2023, until March 29, 2024, although the CPPA may still decide to enforce the provisions~~impact of ~~the CCPA, as amended.~~these state privacy laws on several Discover businesses is limited. We continue to evaluate the impact of the CCPA, as well as other federal and state laws, on our businesses and other providers of consumer financial ~~services.~~services, including laws regulating the capture and use of consumer biometrics. For more information on the impact to Discover of data security and privacy laws on regulation, see "Business — Supervision and Regulation" and "Item 1A. Risk Factors" to our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2023.

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~~U.S. federal, state and ~~federal levels,~~international lawmakers and regulatory agencies, as well as shareholders and other stakeholders. ~~Legislation~~In recent months, there have been substantial legislative and regulatory developments on such issues, including proposed, issued or implemented legislation and rulemakings ~~have been proposed~~ concerning how companies assess and/or ~~recently issued, including those to require disclosure of~~disclose climate ~~cybersecurity~~ and other ESG ~~metrics~~information, risks, opportunities, policies and ~~risk.~~practices. For example, in March 2024, the SEC issued a final rule on climate-related disclosures and in October 2023, three climate-related disclosure bills were signed in California. The potential ~~impact~~impacts to us of these legislative and regulatory ~~developments is uncertain~~requirements are still being evaluated at this ~~time.~~time (including as a result of ongoing litigation challenging such requirements), although we expect that these and other emerging and evolving legal and regulatory requirements on ESG issues will result in additional compliance and reporting costs to us.

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

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 June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
		2023		2022		2023		2022			2024	2023
Digital Banking	Digital Banking
Interest income	Interest income
Interest income
Interest income
Credit card loans
Credit card loans
Credit card loans	Credit card loans	$	3,466	$	2,424	$	6,787	$	4,692
Private student loans	Private student loans	255		196		507		386
Personal loans	Personal loans	278		206		526		412
Other loans	Other loans	73		37		137		69
Other interest income	Other interest income	218		52		410		92
Total interest income	Total interest income	4,290		2,915		8,367		5,651
Interest expense	Interest expense	1,113		305		2,058		562
Net interest income	Net interest income	3,177		2,610		6,309		5,089
Provision for credit losses	Provision for credit losses	1,305		549		2,407		703
Other income	Other income	586		546		1,108		1,021
Other expense	Other expense	1,359		1,186		2,701		2,278
Income before income taxes	Income before income taxes	1,099		1,421		2,309		3,129
Payment Services	Payment Services

Other income (loss)		115		57		203		(6)
Other income

Other income

Other income
Other expense	Other expense	45		37		86		75
Income (loss) before income taxes		70		20		117		(81)
Income before income taxes
Total income before income taxes	Total income before income taxes	$	1,169	$	1,441	$	2,426	$	3,048

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




		For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
		2023		2022		2023		2022			2024	2023
Network Transaction Volume	Network Transaction Volume
PULSE Network
PULSE Network
PULSE Network	PULSE Network	$	69,008	$	62,992	$	134,276	$	122,828
Network Partners	Network Partners	10,408		11,532		21,036		22,215
Diners Club(1)	Diners Club(1)	9,897		8,381		19,108		15,557
Total Payment Services	Total Payment Services	89,313		82,905		174,420		160,600
Discover Network — Proprietary(2)	Discover Network — Proprietary(2)	57,099		55,838		108,925		103,967
Total Network Transaction Volume	Total Network Transaction Volume	$	146,412	$	138,743	$	283,345	$	264,567
Transactions Processed on Networks	Transactions Processed on Networks
Discover Network	Discover Network	$	940	$	916	$	1,790	$	1,747
Discover Network
Discover Network
PULSE Network	PULSE Network	1,761		1,524		3,386		2,923
Total Transaction Processed on Networks	Total Transaction Processed on Networks	$	2,701	$	2,440	$	5,176	$	4,670
Credit Card Volume	Credit Card Volume
Discover Card Volume(3)	Discover Card Volume(3)	$	58,774	$	57,384	$	112,903	$	106,763
Discover Card Volume(3)
Discover Card Volume(3)
Discover Card Sales Volume(4)	Discover Card Sales Volume(4)	$	55,229	$	53,860	$	105,817	$	100,189

(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.

Digital Banking

Our Digital Banking segment reported pretax income of ~~$1.1 billion and $2.3 billion, respectively,~~$322 million for the three ~~and six~~ months ended ~~June 30, 2023,~~March 31, 2024, as compared to ~~$1.4~~$1.2 billion ~~and $3.1 billion, respectively,~~ for the ~~three and six months ended June 30, 2022.~~same period in 2023.

Net interest income increased for the three ~~and six~~ months ended ~~June 30, 2023,~~March 31, 2024, as compared to the same ~~periods~~period in ~~2022,~~2023, primarily driven by ~~a higher yield on loans and~~ a higher average level of loan receivables and a higher yield on loans, partially offset by higher funding costs. Interest income increased ~~for the three and six months ended June 30, 2023, as~~ compared to the ~~same periods in 2022,~~prior year primarily due to ~~higher market rates and~~ a higher average level of loan ~~receivables.~~receivables and higher market rates. Interest expense increased ~~for the three and six months ended June 30, 2023, as~~ compared to the ~~same periods in 2022,~~prior year primarily due to a larger funding base and higher funding costs driven by lower coupon maturities and higher market ~~rates and a larger funding base.~~rates.

For the three ~~and six~~ months ended ~~June 30, 2023,~~March 31, 2024, the provision for credit losses increased as compared to the same ~~periods~~period in ~~2022,~~2023, primarily driven by ~~loan growth and credit normalization.~~an increase in delinquencies. 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 six~~ months ended ~~June 30, 2023,~~March 31, 2024, as compared to the same ~~periods~~period in ~~2022,~~2023, primarily due to anincreases in net discount and interchange revenue and loan fee income. The increase in ~~loan~~net discount and interchange revenue was driven primarily from favorable sales volume mix. Loan fee income ~~driven by~~increased primarily due to a higher volume of late payments.

Total other expense increased for the three ~~and six~~ months ended ~~June 30, 2023,~~March 31, 2024, as compared to the same ~~periods~~period in ~~2022,~~2023, primarily due to increases in other expense, professional fees and employee compensation and ~~benefits, professional~~benefits. Other expense increased primarily from an increase in the reserve for remediation related to the card product misclassification. For information regarding the card product misclassification, see Note 13: Litigation and Regulatory Matters to our condensed consolidated financial statements. Professional fees ~~other expense~~increased primarily due to increased consulting supporting compliance and ~~information processing and communication.~~risk management initiatives. 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. Other expense increased due to higher legal reserves. The increase in information processing and communications was driven primarily from software write-downs. The total expense increase for the six months ended June 30, 2023, was also driven by an increase in marketing and business development due primarily from growth investments in consumer banking products.average salaries.

Discover card sales volume was ~~$55.2~~$50.1 billion ~~and $105.8 billion, respectively,~~ for the three ~~and six~~ months ended ~~June 30, 2023,~~March 31, 2024, which was ~~an increase~~a decrease of ~~2.5% and 5.6%, respectively,~~0.9% as compared to the same ~~periods~~period in ~~2022.~~2023. This volume ~~growth~~decrease was primarily driven by ~~higher consumer spending.~~lower new account growth.

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Payment Services

~~Our~~Pretax income for the Payment Services segment ~~reported pretax income of $70 million and $117 million, respectively,~~increased for the three ~~and six~~ months ended ~~June 30, 2023,~~March 31, 2024, as compared to ~~pretax income of $20 million and a pretax loss of $81 million, respectively, for~~ the same ~~periods~~period in ~~2022. The increase in segment pretax income was~~2023, primarily due to ~~the losses on equity investments~~an increase in ~~the prior periods, which were the result of larger mark-to-market adjustments for equity investments measured at fair value.~~transaction processing revenue from higher debit transaction volume.

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 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 ~~$8.1~~$9.3 billion at ~~June 30, 2023,~~March 31, 2024, which reflects a ~~$373~~$25 million ~~build~~release from the amount of the allowance for credit losses at ~~March~~December 31, 2023. 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. 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, ~~2022.~~2023.

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 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 measured the impact of altering the weighting of macroeconomic scenarios used in our loss forecast. Our allowance for credit losses would increase by approximately ~~$458~~$625 million at ~~June 30, 2023~~March 31, 2024 if we applied 100% weight to the most adverse scenario in our sensitivity analysis to reflect continued inflationary pressures, including ~~persistent supply-chain disruptions~~a decline in consumer confidence and the influence of geopolitical events, as well as high interest ~~rates and reduced credit availability.~~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

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estimates for the loan portfolio and does not imply any expectation of future losses. Furthermore, the hypothetical increase in

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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 significant instability in the economic environment, 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.

Earnings Summary

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




		For the Three Months Ended June 30,				2023 vs. 2022 Increase (Decrease)				For the Six Months Ended June 30,				2023 vs. 2022 Increase (Decrease)					For the Three Months Ended March 31,	2024 vs. 2023 Increase (Decrease)
		2023		2022		$		%		2023		2022		$		%					2024			2023				$					%
Interest income	Interest income	$	4,290	$	2,915	$	1,375	47	%	$	8,367	$	5,651	$	2,716	48	%	Interest income			$	4,948	$	$	4,077	$		$	871		21			21	%
Interest expense	Interest expense	1,113		305		808		265	%	2,058		562		1,496		266	%	Interest expense			1,461		945		945		516			516		55			55	%
Net interest income	Net interest income	3,177		2,610		567		22	%	6,309		5,089		1,220		24	%	Net interest income			3,487		3,132		3,132		355			355		11			11	%
Provision for credit losses	Provision for credit losses	1,305		549		756		138	%	2,407		703		1,704		242	%	Provision for credit losses			1,497		1,102		1,102		395			395		36			36	%
Net interest income after provision for credit losses	Net interest income after provision for credit losses	1,872		2,061		(189)		(9)	%	3,902		4,386		(484)		(11)	%	Net interest income after provision for credit losses			1,990		2,030		2,030		(40)			(40)		(2)			(2)	%
Other income	Other income	701		603		98		16	%	1,311		1,015		296		29	%	Other income			723		610		610		113			113		19			19	%
Other expense	Other expense	1,404		1,223		181		15	%	2,787		2,353		434		18	%	Other expense			2,309		1,383		1,383		926			926		67			67	%
Income before income taxes	Income before income taxes	1,169		1,441		(272)		(19)	%	2,426		3,048		(622)		(20)	%	Income before income taxes			404		1,257		1,257		(853)			(853)		(68)			(68)	%
Income tax expense	Income tax expense	268		338		(70)		(21)	%	557		712		(155)		(22)	%	Income tax expense			96		289		289		(193)			(193)		(67)			(67)	%
Net income	Net income	$	901	$	1,103	$	(202)	(18)	%	$	1,869	$	2,336	$	(467)	(20)	%	Net income			$	308	$	$	968	$		$	(660)		(68)			(68)	%
Net income allocated to common stockholders	Net income allocated to common stockholders	$	895	$	1,097	$	(202)	(18)	%	$	1,826	$	2,293	$	(467)	(20)	%	Net income allocated to common stockholders			$	274	$	$	931	$		$	(657)		(71)			(71)	%

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Net Interest Income

The tables that follow this section have been provided to supplement the discussion below and provide further analysis of net interest income, net interest 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;

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•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 ~~SOFR;~~Secured Overnight Financing Rate ("SOFR"); and

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

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Average Balance Sheet Analysis

(dollars in millions)
For the Three Months Ended June 30,
2023 2022
Average Balance Yield/Rate Interest Average Balance Yield/Rate Interest
Assets
Interest-earning assets
Cash and cash equivalents $ 8,664 5.11 % $ 110 $ 8,629 0.88 % $ 19
Restricted cash 75 10.27 % 2 40 0.41 % NM
Investment securities 12,587 3.38 % 106 5,780 2.29 % 33
Loan receivables(1)
Credit card loans(2)(3)
91,825 15.14 % 3,466 75,917 12.81 % 2,424
Private student loans 10,343 9.87 % 255 10,164 7.74 % 196
Personal loans 8,744 12.72 % 278 6,981 11.84 % 206
Other 4,347 6.81 % 73 2,674 5.47 % 37
Total loan receivables 115,259 14.17 % 4,072 95,736 12.00 % 2,863
Total interest-earning assets 136,585 12.60 % 4,290 110,185 10.61 % 2,915
Allowance for credit losses (7,691) (6,644)
Other assets 6,668 5,874
Total assets(4)
$ 135,562 $ 109,415
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits $ 37,424 3.68 % $ 344 $ 20,054 1.62 % $ 81
Money market deposits 8,282 4.08 % 84 8,326 0.89 % 19
Other interest-bearing savings deposits 49,686 3.85 % 477 43,546 0.68 % 74
Total interest-bearing deposits 95,392 3.80 % 905 71,926 0.97 % 174
Borrowings
Short-term borrowings 2 5.22 % NM 141 0.95 % NM
Securitized borrowings(5)(6)(7)
10,214 4.24 % 108 8,262 1.87 % 39
Other long-term borrowings(6)(7)(8)
9,068 4.44 % 100 9,184 4.02 % 92
Total borrowings 19,284 4.33 % 208 17,587 2.99 % 131
Total interest-bearing liabilities 114,676 3.89 % 1,113 89,513 1.36 % 305
Other liabilities and stockholders' equity(9)
20,886 19,902
Total liabilities and stockholders' equity $ 135,562 $ 109,415
Net interest income $ 3,177 $ 2,610
Net interest margin(10)
11.06 % 10.94 %
Net yield on interest-earning assets(11)
9.33 % 9.50 %
Interest rate spread(12)
8.71 % 9.25 %

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		For the Six Months Ended June 30,
	For the Three Months Ended March 31,																										For the Three Months Ended March 31,
		2023						2022							2024							2023
		Average Balance		Yield/Rate		Interest		Average Balance		Yield/Rate		Interest			Average Balance		Yield/Rate			Interest				Average Balance				Yield/Rate			Interest
Assets	Assets
Interest-earning assets	Interest-earning assets
Interest-earning assets
Interest-earning assets
Cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalents	Cash and cash equivalents	$	8,007	4.90	%	$	195	$	8,574	0.54	%	$	23
Restricted cash	Restricted cash	330		5.33	%	8		405		0.04	%	NM		Restricted cash	558	7.03		7.03	%		10		588		588	4.05			4.05	%		6

Investment securities	Investment securities	12,412		3.37	%	207		6,142		2.26	%	69
Investment securities
Investment securities
Loan receivables(1)	Loan receivables(1)
Credit card loans(2)(3)
Credit card loans(2)(3)
Credit card loans(2)(3)	Credit card loans(2)(3)	90,649		15.10	%	6,787		74,487		12.70	%	4,692
Private student loans	Private student loans	10,444		9.77	%	507		10,272		7.58	%	386
Personal loans	Personal loans	8,451		12.54	%	526		6,945		11.96	%	412
Other	Other	4,119		6.73	%	137		2,517		5.53	%	69
Total loan receivables	Total loan receivables	113,663		14.12	%	7,957		94,221		11.90	%	5,559
Total interest-earning assets	Total interest-earning assets	134,412		12.55	%	8,367		109,342		10.42	%	5,651
Allowance for credit losses	Allowance for credit losses	(7,500)						(6,730)
Other assets	Other assets	6,582						6,060
Other assets
Other assets
Total assets(4)	Total assets(4)	$	133,494					$	108,672
Liabilities and Stockholders’ Equity
Total assets(4)
Total assets(4)
Liabilities and Stockholders' Equity
Liabilities and Stockholders' Equity
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing liabilities
Interest-bearing liabilities	Interest-bearing liabilities
Interest-bearing deposits	Interest-bearing deposits
Time deposits		$	35,321	3.44	%	603		$	19,989	1.57	%	156
Interest-bearing deposits
Interest-bearing deposits
Time deposits(5)
Time deposits(5)
Time deposits(5)
Money market deposits	Money market deposits	8,524		3.92	%	166		8,267		0.74	%	30
Other interest-bearing savings deposits	Other interest-bearing savings deposits	49,472		3.63	%	892		43,020		0.59	%	127
Total interest-bearing deposits	Total interest-bearing deposits	93,317		3.59	%	1,661		71,276		0.89	%	313
Borrowings	Borrowings
Short-term borrowings		1		5.22	%	NM		402		0.58	%	1
Securitized borrowings(5)(6)(7)		9,942		3.96	%	195		8,002		1.58	%	63
Other long-term borrowings(6)(7)(8)		9,219		4.42	%	202		9,307		4.01	%	185

Securitized borrowings(6)(7)(8)

Securitized borrowings(6)(7)(8)

Securitized borrowings(6)(7)(8)
Other long-term borrowings(7)(8)(9)
Total borrowings	Total borrowings	19,162		4.18	%	397		17,711		2.83	%	249
Total interest-bearing liabilities	Total interest-bearing liabilities	112,479		3.69	%	2,058		88,987		1.27	%	562
Other liabilities and stockholders’ equity(9)		21,015						19,686
Total liabilities and stockholders’ equity		$	133,494					$	108,673
Other liabilities and stockholders' equity(10)
Total liabilities and stockholders' equity
Total liabilities and stockholders' equity
Total liabilities and stockholders' equity
Net interest income	Net interest income					$	6,309					$	5,089
Net interest margin(10)				11.19	%					10.89	%
Net yield on interest-earning assets(11)				9.47	%					9.39	%
Interest rate spread(12)				8.86	%					9.15	%
Net interest income
Net interest income
Net interest margin(11)
Net yield on interest-earning assets(12)
Net yield on interest-earning assets(12)
Net yield on interest-earning assets(12)
Interest rate spread(13)
Interest rate spread(13)
Interest rate spread(13)

(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 ~~$110~~$123 million and ~~$86~~$105 million of amortization of balance transfer fees for the three months ended ~~June 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $215 million and $162 million for the six months ended June 30, 2023 and 2022,~~ 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 six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023.

(4)The return on average assets, based on net income, was ~~0.66%~~0.20% and ~~1.01%~~0.74% for the three months ended ~~June 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and 1.40% and 2.15% for the six months ended June 30, 2023 and 2022,~~ respectively.

(5)~~Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the three and six months ended June 30, 2023 and 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 six~~ months ended ~~June 30, 2023~~March 31, 2024.

(6)Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the three months ended March 31, 2024 and ~~2022.~~2023.

(7)Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding for the three months ended March 31, 2024 and 2023.

(8)Includes the impact of terminated derivatives formerly designated as fair value hedges for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023.

~~(8)~~(9)Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 and ~~2022.~~2023.

~~(9)~~(10)The return on average stockholders' equity, based on net income, was ~~26%~~8% and ~~33%~~27% for the three months ended ~~June 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and 27% and 35% for the six months ended June 30, 2023 and 2022,~~ respectively.

~~(10)~~(11)Net interest margin represents net interest income as a percentage of average total loan receivables.

~~(11)~~(12)Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.

~~(12)~~(13)Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.

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Loan Quality

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


		June 30, 2023		December 31, 2022
	March 31, 2024					March 31, 2024	December 31, 2023
Credit card loans	Credit card loans	$	93,955	$	90,113
Other loans	Other loans
Private student loans
Private student loans
Private student loans	Private student loans	10,241		10,308
Personal loans	Personal loans	9,106		7,998
Other loans	Other loans	4,604		3,701
Total other loans	Total other loans	23,951		22,007
Total loan receivables	Total loan receivables	117,906		112,120
Allowance for credit losses	Allowance for credit losses	(8,064)		(7,374)
Net loan receivables	Net loan receivables	$	109,842	$	104,746

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 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 — 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.

5949

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


		For the Three Months Ended June 30, 2023
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at March 31, 2023		$	6,135	$	872	$	622	$	62	$	7,691

		For the Three Months Ended March 31, 2024

		For the Three Months Ended March 31, 2024

		For the Three Months Ended March 31, 2024
												Credit Card Loans	Private Student Loans	Personal Loans	Other Loans	Total Loans
Balance at December 31, 2023

Additions

Additions

Additions	Additions
Provision for credit losses(1)	Provision for credit losses(1)	1,232		9		50		6		1,297
Provision for credit losses(1)
Provision for credit losses(1)
Deductions	Deductions
Charge-offs
Charge-offs
Charge-offs	Charge-offs	(1,051)		(38)		(64)		—		(1,153)
Recoveries	Recoveries	209		6		14		—		229
Net charge-offs	Net charge-offs	(842)		(32)		(50)		—		(924)

Balance at June 30, 2023		$	6,525	$	849	$	622	$	68	$	8,064
Balance at March 31, 2024
Balance at March 31, 2024
Balance at March 31, 2024

		For the Three Months Ended June 30, 2022
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at March 31, 2022		$	5,120	$	870	$	613	$	44	$	6,647
Additions
Provision for credit losses(1)		568		(11)		(20)		2		539
Deductions
Charge-offs		(587)		(33)		(39)		—		(659)
Recoveries		206		6		18		—		230
Net charge-offs		(381)		(27)		(21)		—		(429)

Balance at June 30, 2022		$	5,307	$	832	$	572	$	46	$	6,757

		For the Six Months Ended June 30, 2023
		For the Three Months Ended March 31, 2023
		For the Three Months Ended March 31, 2023
		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 December 31, 2022	Balance at December 31, 2022	$	5,883	$	839	$	595	$	57	$	7,374
Cumulative effect of ASU No. 2022-02 adoption(2)	Cumulative effect of ASU No. 2022-02 adoption(2)	(66)		—		(2)		—		(68)
Balance at January 1, 2023	Balance at January 1, 2023	5,817		839		593		57		7,306
Additions	Additions
Provision for credit losses(1)	Provision for credit losses(1)	2,234		69		118		11		2,432
Provision for credit losses(1)
Provision for credit losses(1)
Deductions	Deductions
Charge-offs
Charge-offs
Charge-offs	Charge-offs	(1,930)		(71)		(118)		—		(2,119)
Recoveries	Recoveries	404		12		29		—		445
Net charge-offs	Net charge-offs	(1,526)		(59)		(89)		—		(1,674)

Balance at June 30, 2023		$	6,525	$	849	$	622	$	68	$	8,064
Balance at March 31, 2023
Balance at March 31, 2023
Balance at March 31, 2023

		For the Six Months Ended June 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)		746		34		(50)		2		732
Deductions
Charge-offs		(1,128)		(57)		(77)		—		(1,262)
Recoveries		416		12		37		—		465
Net charge-offs		(712)		(45)		(40)		—		(797)

Balance at June 30, 2022		$	5,307	$	832	$	572	$	46	$	6,757

(1)Excludes ~~an $8~~a $34 million and ~~$10~~$33 million adjustment of the liability for expected credit losses on unfunded commitments for the three months ended ~~June 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $25 million and $29 million for the six months ended June 30, 2023 and 2022,~~ respectively, as the liability is recorded in accrued expenses and other liabilities in our condensed consolidated statements of financial condition.

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

The allowance for credit losses was approximately ~~$8.1~~$9.3 billion at ~~June 30, 2023,~~March 31, 2024, which reflects a ~~$373~~$25 million ~~build over March 31, 2023, and a $690 million build~~release from December 31, ~~2022.~~2023. The ~~build~~release in the allowance for credit losses for the three ~~and six~~ months ended ~~June 30, 2023~~March 31, 2024 was ~~primarily~~ driven by ~~loan growth.~~lower receivables and a modestly more favorable economic outlook, offset in part by higher expected delinquencies and losses.

~~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 ~~June 30, 2023,~~March 31, 2024, we used a macroeconomic forecast that projected the following weighted average amounts: (i) unemployment rate ending ~~2023~~2024 at ~~4.0%~~4.03% and, within our reasonable and supportable period, peaking at ~~4.3%~~4.17% in ~~mid 2024~~the third quarter of 2025 and (ii) ~~1.56%~~2.48% growth rate in real gross domestic product in ~~2023.~~2024.

In estimating expected credit losses, we considered the uncertainties associated with borrower behavior and payment trends, as well as recent and expected macroeconomic conditions, ~~such as high~~including those relating to consumer price inflation and the fiscal and monetary policy responses to that inflation. The Federal Reserve raised its federal funds rate target range substantially during 2022 and the first ~~half~~three quarters of 2023 in an effort to slow economic growth and reduce inflation. ~~Most economists~~Real GDP growth and ~~financial~~labor market ~~participants expect U.S.~~conditions have exceeded most economists’ expectations, despite an inflation level that has moderated but remains above the target rate. Federal Reserve officials have suggested that the policy rate is likely at its peak for the current tightening cycle, however, the timing and magnitude of rate decreases will be dependent on trends in economic data, particularly inflation. Restrictive monetary policy typically precedes weaker consumer credit conditions caused by rising unemployment as economic growth ~~and inflation to slow gradually during 2023 as~~slows. While credit performance in our lending portfolios has evolved in line with our expectations, we assessed the ~~economy responds to the lagged effects of tighter monetary policy and~~prospects for various macroeconomic outcomes in setting our allowance for credit ~~conditions.~~losses.

The forecast period we deemed to be reasonable and supportable was 18 months for all periods presented. The 18 months 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.

Table of Contents

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 six~~ months ended ~~June 30, 2023,~~March 31, 2024, the provision for credit losses increased by ~~$758~~$396 million ~~and $1.7 billion~~ compared to the same ~~periods~~period in ~~2022,~~2023, primarily driven by ~~loan growth and credit normalization.~~an increase in delinquencies.

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 June 30,								For the Six Months Ended June 30,									For the Three Months Ended March 31,
		2023				2022				2023				2022						2024	2023
		$		%		$		%		$		%		$		%						$			%			$				%
Credit card loans	Credit card loans	$	842	3.68	%	$	381	2.01	%	$	1,526	3.39	%	$	712	1.93	%	Credit card loans				$	1,411	5.66		5.66	%		$	684	3.10		3.10	%
Private student loans	Private student loans	$	32	1.25	%	$	27	1.08	%	$	59	1.15	%	$	45	0.88	%	Private student loans				$	42	1.58		1.58	%		$	27	1.04		1.04	%
Personal loans	Personal loans	$	50	2.28	%	$	21	1.21	%	$	89	2.12	%	$	40	1.17	%	Personal loans				$	100	4.02		4.02	%		$	39	1.94		1.94	%

The net charge-offs and net charge-off rate for credit card loans, increased for the three and six months ended June 30, 2023, when compared to the same periods in 2022, primarily due to continued credit normalization and the seasoning of vintages from the past two years. The net charge-offs and net charge-off rate for private student loans and personal loans increased for the three ~~and six~~ months ended ~~June 30, 2023,~~March 31, 2024, when compared to the same ~~periods~~period in ~~2022,~~2023, primarily ~~due to continued credit normalization.~~driven by portfolio seasoning.

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.

~~Table of Contents~~

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 (dollars in millions):


		June 30, 2023				December 31, 2022						March 31, 2024									December 31, 2023
		$		%		$		%				$					%						$					%
Loans 30 or more days delinquent	Loans 30 or more days delinquent
Credit card loans	Credit card loans	$	2,689	2.86	%	$	2,278	2.53	%
Private student loans		$	218	2.13	%	$	212	2.05	%
Personal loans		$	91	1.00	%	$	63	0.80	%

Total loan receivables		$	3,027	2.57	%	$	2,578	2.30	%

Loans 90 or more days delinquent
Credit card loans
Credit card loans	Credit card loans	$	1,269	1.35	%	$	1,028	1.14	%	$	3,810			3.83		3.83		%				$	3,955			3.87		3.87	%
Private student loans	Private student loans	$	55	0.54	%	$	45	0.43	%	Private student loans		$	271		2.59			2.59		%				$	271		2.62		2.62	%
Personal loans	Personal loans	$	24	0.26	%	$	16	0.21	%	Personal loans		$	147		1.46			1.46		%				$	143		1.45		1.45	%

Total loan receivables	Total loan receivables	$	1,361	1.16	%	$	1,101	0.98	%
Total loan receivables
Total loan receivables												$	4,282				3.38		%				$	4,427				3.45	%

Loans 90 or more days delinquent
Loans 90 or more days delinquent
Loans 90 or more days delinquent
Credit card loans
Credit card loans
Credit card loans												$	1,941				1.95		%				$	1,917				1.87	%
Private student loans										Private student loans		$	78				0.75		%				$	70				0.67	%
Personal loans										Personal loans		$	39				0.38		%				$	39				0.40	%

Total loan receivables
Total loan receivables
Total loan receivables												$	2,079				1.64		%				$	2,045				1.59	%

Loans not accruing interest	Loans not accruing interest	$	298	0.25	%	$	214	0.19	%
Loans not accruing interest
Loans not accruing interest												$	278				0.22		%				$	269				0.21	%

The 30-day and 90-day delinquency rates remained relatively stable for credit card loans, ~~at June 30, 2023, increased compared to December 31, 2022, primarily driven by credit normalization and the seasoning of vintages from the past two years. The 30-day and 90-day delinquency rates for~~ private student loans and personal loans at ~~June 30, 2023, increased~~March 31, 2024, compared to December 31, ~~2022, primarily driven by credit normalization.~~2023.

Table of Contents

Modified and Restructured Loans

For information regarding modified and restructured loans, see Note 3: Loan Receivables to our condensed consolidated financial statements.

Other Income

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


		For the Three Months Ended June 30,				2023 vs 2022 (Decrease) Increase					For the Six Months Ended June 30,				2023 vs. 2022 Increase
		2023		2022		$		%			2023		2022		$		%
																				For the Three Months Ended March 31,	2024 vs. 2023 Increase (Decrease)
										2024																						2024				2023		$	%
Discount and interchange revenue, net(1)	Discount and interchange revenue, net(1)	$	370	$	379	$	(9)	(2)	%		$	700	$	688	$	12	2	%	Discount and interchange revenue, net(1)			$	371	$	$	330	$		$	41			12		12	%
Protection products revenue	Protection products revenue	44		42		2		5	%		87		86		1		1	%	Protection products revenue			42		43		43		(1)			(1)			(2)		(2)	%
Loan fee income	Loan fee income	186		142		44		31	%		352		282		70		25	%	Loan fee income			200		166		166		34			34			20		20	%
Transaction processing revenue	Transaction processing revenue	72		61		11		18	%		139		118		21		18	%	Transaction processing revenue			87		67		67		20			20			30		30	%
Gains (losses) on equity investments	Gains (losses) on equity investments	1		(42)		43		(102)	%		(17)		(204)		187		(92)	%	Gains (losses) on equity investments			—		(18)		(18)		18			18			(100)		(100)	%
Other income	Other income	28		21		7		33	%		50		45		5		11	%	Other income			23		22		22		1			1			5		5	%
Total other income	Total other income	$	701	$	603	$	98	16	%		$	1,311	$	1,015	$	296	29	%	Total other income			$	723	$	$	610	$		$	113			19		19	%

Total other income increased for the three ~~and six~~ months ended ~~June 30, 2023,~~March 31, 2024, as compared to the same ~~periods~~period in ~~2022,~~2023, primarily due to ~~the losses on equity investments~~increases in ~~the prior periods~~net discount and aninterchange revenue, loan fee income and transaction processing revenue. The increase in ~~loan fee income. The losses on equity investments in the prior periods were the result of larger mark-to-market adjustments for equity investments measured at fair value.~~net discount and interchange revenue was driven primarily from favorable sales volume mix. Loan fee income increased primarily due to a higher volume of late payments.

The increase in transaction processing revenue was driven primarily by higher debit transaction volume.

~~Table of Contents~~

Other Expense

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






		For the Three Months Ended June 30,				2023 vs. 2022 Increase (Decrease)				For the Six Months Ended June 30,				2023 vs. 2022 Increase (Decrease)
		2023		2022		$		%		2023		2022		$		%
Employee compensation and benefits	Employee compensation and benefits	$	588	$	515	$	73	14	%	$	1,213	$	1,015	$	198	20	%
Employee compensation and benefits
Employee compensation and benefits
Marketing and business development
Marketing and business development
Marketing and business development	Marketing and business development	268		254		14		6	%	509		446		63		14	%
Information processing and communications	Information processing and communications	150		121		29		24	%	289		246		43		17	%
Information processing and communications
Information processing and communications
Professional fees
Professional fees
Professional fees	Professional fees	216		189		27		14	%	448		366		82		22	%
Premises and equipment	Premises and equipment	20		24		(4)		(17)	%	42		48		(6)		(13)	%
Premises and equipment
Premises and equipment
Other expense
Other expense
Other expense	Other expense	162		120		42		35	%	286		232		54		23	%
Total other expense	Total other expense	$	1,404	$	1,223	$	181	15	%	$	2,787	$	2,353	$	434	18	%
Total other expense
Total other expense

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 June 30,						For the Six Months Ended June 30,							For the Three Months Ended March 31,
		2023			2022			2023			2022					2024		2023
Income before income taxes	Income before income taxes	$	1,169		$	1,441		$	2,426		$	3,048
Income tax expense	Income tax expense	$	268		$	338		$	557		$	712
Effective income tax rate	Effective income tax rate	23.0		%	23.5		%	23.0		%	23.4		%	Effective income tax rate		23.7	%	23.0	%

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 contingency 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 contingency liquidity.

Funding Sources

Deposits

We obtain deposits from consumers directly or through affinity relationships ("direct-to-consumer deposits"). Additionally, we obtain deposits through third-party securities brokerage firms that offer our deposits to their customers ("brokered deposits"). Direct-to-consumer deposit products include savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and 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

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diverse customer base, and therefore, the majority of these deposit account balances are insured according to the ~~Federal Deposit Insurance Corporation's ("FDIC")~~FDIC's 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 deposit products include certificates of deposit and sweep accounts. In accordance with ~~the~~ FDIC ~~final rule on revisions to its brokered deposits regulation,~~guidance, we ~~no longer~~do not categorize certain retail deposit products such as affinity deposits and deposits generated through certain sweep deposit relationships as brokered for regulatory reporting purposes. At ~~June 30, 2023,~~March 31, 2024, we had ~~$77.3~~$87.3 billion of direct-to-consumer deposits and ~~$21.7~~$23.1 billion of brokered deposits, of which there are ~~$79.4~~$93.0 billion of deposit balances due in less than one year and ~~$19.6~~$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. As of March 31, 2024, there were $29.0 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization investors for the three months ended March 31, 2024. 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 ~~June 30, 2023,~~March 31, 2024, we had ~~$11.3~~$11.0 billion of outstanding public asset-backed securities and ~~$3.0~~$2.9 billion of outstanding subordinated asset-backed securities that had been issued to our wholly-owned subsidiaries.

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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 ~~June 30, 2023,~~March 31, 2024, the DiscoverSeries three-month rolling average excess spread was ~~14.45%~~14.14%. The period of ultimate repayment would be determined by the amount and timing of collections received.

Through our 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 June 30, 2023, there were $25.0 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization investors for the three and six months ended June 30, 2023. Alternatively, we could employ structured discounting, which was used effectively in 2009 to bolster excess spread and mitigate early amortization risk.

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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 subsidiaries (dollars in millions):

At June 30, 2023

Total

Less Than
One Year

One Year and Thereafter

At March 31, 2024

Total

Less Than
One Year

One Year and Thereafter

Scheduled maturities of borrowings - owed to credit card securitization investors

11,142

1,626

9,516

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. Consequently, the FHLBs benefit from consistent capital market access during nearly all macroeconomic and financial

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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 contingency 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 ~~June 30, 2023,~~March 31, 2024, we had total committed borrowing capacity of ~~$2.9~~$4.1 billion based on the amount and type of assets pledged, of which ~~$525 million~~$1.0 billion 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—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 ~~June 30, 2023~~March 31, 2024	Principal Amount Outstanding
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2024-2032	$	3,350
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing ~~2023-2031~~2025-2031	$	~~153~~140
Discover Financial Services (Parent Company) fixed to floating-rate senior notes, maturing 2034	$	1,000
Discover Bank fixed-rate senior bank notes, maturing ~~2023-2030~~2024-2030	$	~~4,550~~3,550
Discover Bank fixed-rate subordinated bank notes, maturing 2028	$	500

At ~~June 30, 2023, $649~~March 31, 2024, $717 million of interest on our fixed-rate debt is due in less than one year and ~~$1.6~~$2.0 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.

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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 ~~June 30, 2023,~~March 31, 2024, there were no outstanding balances in the federal funds market or under repurchase agreements. Additionally, we have access to short-term advance structures through privately placed asset-backed securitizations. At March 31, 2024, there were no short-term advances outstanding from private asset-backed securitizations.

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 any contingency funding needs. At ~~June 30, 2023,~~March 31, 2024, 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 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 ~~June 30, 2023,~~March 31, 2024, Discover Bank had ~~$45.9~~$41.7 billion of available borrowing capacity through the discount window based on the amount and type of assets pledged, primarily consumer loans. As of ~~June 30, 2023,~~March 31, 2024, we ~~have~~had no borrowings outstanding under the discount window and reserve this capacity as a source of contingency liquidity.

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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 ~~June 30, 2023,~~March 31, 2024, our unused credit arrangements were approximately ~~$229.9~~$233.0 billion. These arrangements, substantially all of which we can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness, loan qualification and ~~loan qualification.~~the cost of capital.

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, among other things. These contracts are legally binding and specify all significant terms, including any applicable fixed future cash payments.

As of ~~June 30, 2023,~~March 31, 2024, we have debt obligations, common stock and preferred stock ~~outstanding.~~outstanding, for which we incur servicing costs. Refer to “—"— Funding ~~Sources”~~Sources" and ~~“— Capital”~~"— 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 contingency 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 other secured borrowing or outright sales.

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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.

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The table below reflects our current credit ratings and outlooks:

Moody’s Investors Service(1)

Standard & Poor's

Fitch
Ratings

Discover Financial Services

Senior unsecured debt

Baa2

BBB-

BBB+

Outlook for Discover Financial Services senior unsecured debt

~~Stable~~Under Review

~~Stable~~Positive

Discover Bank

Senior unsecured debt

Baa1

BBB

BBB+

Outlook for Discover Bank senior unsecured debt

~~Stable~~Under Review

~~Stable~~Positive

Subordinated debt

Baa1

BBB-

BBB

Discover Card Execution Note Trust (DCENT)

Class A~~(1)~~(2)

Aaa(sf)

AAA(sf)

(1)On February 20, 2024, following the announcement of the pending merger between Discover and Capital One, Moody's Investors Service placed all long-term ratings and assessments for DFS and Discover Bank under review with direction uncertain.

(2)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 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 other secured borrowing 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

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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.~~events. 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 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 periods by comparing estimated contingency funding needs to available contingency liquidity.

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

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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 ~~June 30, 2023,~~March 31, 2024, our liquidity portfolio was 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 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.

At ~~June 30, 2023,~~March 31, 2024, our liquidity portfolio and undrawn credit facilities were ~~$72.7~~$74.0 billion, which was ~~$5.4~~$4.3 billion higher than the balance at December 31, ~~2022.~~2023. Our liquidity portfolio and undrawn credit facilities grew primarily as a result of ~~the purchase of U.S. Treasury securities~~an increase in cash and ~~additional borrowing capacity with the Federal Reserve.~~cash equivalents. During the three ~~and six~~ months ended ~~June 30,~~March 31, 2024 and December 31, 2023, the average balance of our liquidity portfolio was ~~$21.5~~$25.2 billion and ~~$20.5~~$22.1 billion, respectively. Our liquidity portfolio and undrawn facilities consist of the following (dollars in millions):


		June 30, 2023		December 31, 2022
	March 31, 2024					March 31, 2024	December 31, 2023
Liquidity portfolio	Liquidity portfolio
Cash and cash equivalents(1)	Cash and cash equivalents(1)	$	7,743	$	7,585
Cash and cash equivalents(1)
Cash and cash equivalents(1)

Investment securities(2)
Investment securities(2)
Investment securities(2)	Investment securities(2)	13,152		12,213
Total liquidity portfolio	Total liquidity portfolio	20,895		19,798
Private asset-backed securitizations(3)	Private asset-backed securitizations(3)	3,500		3,500
Federal Home Loan Bank of Chicago	Federal Home Loan Bank of Chicago	2,372		1,712
Primary liquidity sources	Primary liquidity sources	26,767		25,010
Federal Reserve discount window(3)	Federal Reserve discount window(3)	45,936		42,268
Total liquidity portfolio and undrawn credit facilities	Total liquidity portfolio and undrawn credit facilities	$	72,703	$	67,278

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

(2)Excludes ~~$292~~$377 million and ~~$97~~$320 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of ~~June 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively.

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

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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.

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

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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 or those related to the proposed revisions to the Basel Committee's December 2010 framework ("Basel III rules"), may require us to hold more capital and/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").~~rules. Under ~~the Basel III~~these rules, DFS and 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.

In accordance with the final rule on the impact of CECL on regulatory capital, we have elected to phase in the impact over three years, beginning in 2022. By electing this option, our Common Equity Tier 1 ("CET1") capital ratios are higher than they otherwise would have been. The phase-in of the CECL accounting model decreased CET1 by ~~$1.1~~$1.6 billion as of January 1, ~~2023.~~2024. 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~~rules impose 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~~We are required to assess whether ~~our~~DFS' 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 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,

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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 June 28,~~In July 2023, the Federal Reserve disclosed ~~preliminary~~ SCB requirements to firms subject to Category IV standards that did not opt-in to this year's stress test. ~~While~~Our SCB remains unchanged at 2.5%, effective beginning October 1, 2023 through September 30, 2024. On April 5, 2024, we submitted our 2024 capital plan to the Federal Reserve ~~will not announce~~and expect results of the 2024 supervisory stress test by June 30, 2024, and our final SCB ~~requirements until~~by August ~~2023,~~31, 2024. Under the Basel III rules, a firm must update and resubmit its capital plan under certain circumstances, including a material change in the firm's risk profile, financial condition or corporate structure since its last capital plan submission. On February 19, 2024, Discover and Capital One jointly announced that they entered into a Merger Agreement, under which the companies will combine in an all-stock merger, which we determined required us to resubmit our ~~preliminary~~capital plan. We will submit our updated capital plan by May 6, 2024. The capital plan rule provides that, unless the Federal Reserve determines to extend the timeline, the Federal Reserve must provide us notice of whether our SCB ~~is unchanged at 2.5%,~~will be recalculated within 75 days of the ~~lowest possible requirement.~~submission of our updated capital plan and, if applicable, must provide our updated SCB within 90 days of notifying us that the SCB will be recalculated. See "— Regulatory Environment and Developments — Banking — Capital Standards and Stress Testing" for additional information.

At ~~June 30, 2023,~~March 31, 2024, 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.

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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 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 ~~June 30, 2023,~~March 31, 2024, 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~~among different companies.

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


		June 30, 2023		December 31, 2022
	March 31, 2024					March 31, 2024	December 31, 2023
Total common stockholders' equity(1)	Total common stockholders' equity(1)	$	12,800	$	13,288
Less: goodwill	Less: goodwill	(255)		(255)

Tangible common equity	Tangible common equity	$	12,545	$	13,033
Tangible common equity
Tangible common equity

(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 ~~2023~~2024 and ~~2022:~~2023:

Declaration Date

Record Date

Payment Date

Dividend per Share

~~2023~~2024

~~July~~April 17, ~~2023~~2024

~~August 24, 2023~~May 23, 2024

~~September 07, 2023~~June 06, 2024

0.70

~~April 17, 2023~~January 16, 2024

~~May 25, 2023~~February 22, 2024

~~June 08, 2023~~March 07, 2024

0.70

~~January 17, 2023~~

~~February 23, 2023~~

~~March 09, 2023~~

~~0.60~~

Total common stock dividends

~~2.00~~1.40

~~2022~~2023

October ~~18, 2022~~16, 2023

November ~~23, 2022~~22, 2023

December ~~08, 2022~~07, 2023

~~0.60~~0.70

July ~~20, 2022~~17, 2023

August ~~25, 2022~~24, 2023

September ~~08, 2022~~07, 2023

0.70

April 17, 2023

May 25, 2023

June 08, 2023

0.70

January 17, 2023

February 23, 2023

March 09, 2023

0.60

~~April 27, 2022~~

~~May 26, 2022~~

~~June 09, 2022~~

~~0.60~~

~~January 18, 2022~~

~~February 17, 2022~~

~~March 03, 2022~~

~~0.50~~

Total common stock dividends

~~2.30~~2.70

Our Board of Directors declared the following Series C preferred stock dividends during 2024 and 2023:


Declaration Date	Record Date	Payment Date	Dividend per Depositary Share
2024
January 16, 2024	April 15, 2024	April 30, 2024	$	27.50
Total Series C preferred stock dividends			$	27.50

2023
July 17, 2023	October 13, 2023	October 30, 2023	$	27.50
January 17, 2023	April 14, 2023	May 01, 2023	27.50
Total Series C preferred stock dividends			$	55.00

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Our Board of Directors declared the following Series CD preferred stock dividends during ~~2023~~2024 and ~~2022:~~2023:

Declaration Date

Record Date

Payment Date

Dividend per Depositary Share

~~2023~~2024

~~July 17, 2023~~

~~October 13, 2023~~

~~October 30, 2023~~

~~27.50~~

January ~~17, 2023~~16, 2024

~~April 14, 2023~~March 08, 2024

~~May 01, 2023~~March 25, 2024

~~27.50~~

~~Total Series C preferred stock dividends~~

~~55.00~~

~~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~~

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

~~Declaration Date~~

~~Record Date~~

~~Payment Date~~

~~Dividend per Depositary Share~~

~~2023~~

~~July 17, 2023~~

~~September 08, 2023~~

~~September 25, 2023~~

30.625

~~January 17, 2023~~

~~March 08, 2023~~

~~March 23, 2023~~

~~30.625~~

Total Series D preferred stock dividends

~~61.250~~

~~2022~~

~~July 20, 2022~~

~~September 08, 2022~~

~~September 23, 2022~~

30.625

~~January 18, 2022~~

~~March 08, 2022~~2023

~~March 23, 2022~~July 17, 2023

September 08, 2023

September 25, 2023

30.625

January 17, 2023

March 08, 2023

March 23, 2023

30.625

Total Series D preferred stock dividends

61.250

Our Board of Directors approved a new share repurchase program in April 2023. The new program authorizes up to $2.7 billion of share repurchases through June 30, 2024, and replaced the prior $4.2 billion share repurchase 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 June 30, 2023, we repurchased approximately 6.8 million shares for approximately $700 million. During the six months ended June 30, 2023, we repurchased approximately 18.1 million shares for approximately $1.9 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. ~~We have decided to pause~~Under the Merger Agreement, quarterly cash dividends on our common stock may not exceed $0.70 per share ~~repurchases while an internal review~~without the prior written consent of ~~compliance, risk management and corporate governance is pending. See Note 13: Litigation and Regulatory Matters for~~Capital One. For additional information on the ~~card product misclassification.~~merger, see Note 1: Background and Basis of Presentation — Pending Merger with Capital One Financial Corporation to our condensed consolidated financial statements. The declaration and payment of future dividends and the amount thereof are otherwise 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, such as those that propose to alter the Basel III standards, 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.

Our Board of Directors approved a new share repurchase program in April 2023. The new program authorized up to $2.7 billion of share repurchases through June 30, 2024, and replaced the prior $4.2 billion share repurchase 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. There were no share repurchases during the three months ended March 31, 2024. In accordance with the Merger Agreement with Capital One, we have paused share repurchases through the completion of the merger.

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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 ~~June 30, 2023,~~March 31, 2024, 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 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. Our view of market conditions utilizes the implied forward interest rate projection at the beginning of our analysis horizon. This view serves as the base for interest rate risk simulations. We apply rate shocks to the base implied forward curve to measure our overall interest rate sensitivity position. Our view of balance sheet composition and growth utilizes our corporate forecast. On at least a quarterly basis, we create a corporate forecast that incorporates receivable growth and seasonality. The appropriate level of funding is projected and utilizes a diverse mix of instruments with issuance based on expected market conditions. At the same time, optimal levels of liquidity are maintained in accordance with internal guidelines. The degree by which our deposit rates change when benchmark interest rates change,

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our deposit ~~“beta,”~~"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 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 and we~~We have taken actions to bring our net interest income sensitivity closer to neutral as the Federal Reserve has slowed its 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~~liabilities. These numbers do not include a sale of the private student loan portfolio (dollars in millions):


		At June 30, 2023				At December 31, 2022
	At March 31, 2024															At March 31, 2024						At December 31, 2023
Basis point change	Basis point change	$		%		$		%		Basis point change	$			%				$					%
+100	+100	$	139	1.05	%	$	183	1.40	%	+100	$	92	0.67		0.67		%		$	161	1.17			1.17	%
-100	-100	$	(137)	(1.03)	%	$	(190)	(1.45)	%	-100	$	(83)	(0.61)		(0.61)		%		$	(153)	(1.11)			(1.11)	%

Given the nature of our loan portfolio, the impact to our net interest income is far more linear across various rate increase or decrease scenarios that would be true for a financial institution with significant rate-sensitive prepayment risk from the exposure to mortgages.

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.

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Glossary of Acronyms

•ALCO: Asset and Liability Management Committee

•AOCI: Accumulated Other Comprehensive Income (Loss)

•~~ARRC: Alternative Reference Rates Committee~~

•ASC: Accounting Standards Codification

•ASU: Accounting Standards Update

•ATM: Automated Teller Machine

•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

•~~CME~~CODM: ~~Chicago Mercantile Exchange~~Chief Operating Decision Maker

•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: Environmental, Social and Governance

•EWI: Early Warning Indicator

•FASB: Financial Accounting Standards Board

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

•FDIC: Federal Deposit Insurance Corporation

•FHLB: Federal Home Loan Bank

•GAAP: Accounting Principles Generally Accepted in the United States

•~~LIBOR~~GLBA: ~~London Interbank Offered Rate~~Gramm-Leach-Bliley Act

•NPI: Nonpublic Personal Information

•OCC: Office of the Comptroller of the Currency

•OCI: Other Comprehensive Income (Loss)

•RMBS: Residential Mortgage-Backed Securities

•SCB: Stress Capital Buffer

•SEC: Securities and Exchange Commission

•SOFR: Secured Overnight Financing Rate

•~~TDR: Troubled Debt Restructuring~~

•UDAAP: Unfair, Deceptive or Abusive Acts or Practices

•U.S.: United States of America

•~~USD~~:~~United States Dollar~~

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

•VIE: Variable Interest Entity

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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, ~~2022.~~2023.

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(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)
April 1 - 30, 2023
Repurchase program(1)
3,322,300 $ 100.39 3,322,300 $ 2,591,568,919
Employee transactions(2)
— $ — N/A N/A
May 1 - 31, 2023
Repurchase program(1)
1,898,752 $ 98.15 1,898,752 $ 2,405,197,363
Employee transactions(2)
9,314 $ 99.48 N/A N/A
June 1 - 30, 2023
Repurchase program(1)
1,595,280 $ 112.90 1,595,280 $ 2,225,091,655
Employee transactions(2)
695 $ 113.41 N/A N/A
Total
Repurchase program(1)
6,816,332 $ 102.69 6,816,332 $ 2,225,091,655
Employee transactions(2)
10,009 $ 100.45 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)(4)	Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs(1)(4)
January 1 - 31, 2024
Repurchase program(1)(4)	—	$	—	—	$	2,225,091,655
Employee transactions(2)	3,476	$	107.51	N/A	N/A
February 1 - 29, 2024
Repurchase program(1)(4)	—	$	—	—	$	2,225,091,655
Employee transactions(2)	252,279	$	106.89	N/A	N/A
March 1 - 31, 2024
Repurchase program(1)(4)	—	$	—	—	$	2,225,091,655
Employee transactions(2)	5,510	$	130.54	N/A	N/A

Total
Repurchase program(1)(4)	—	$	—	—	$	2,225,091,655
Employee transactions(2)	261,265	$	107.39	N/A	N/A

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

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

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

(4)In accordance with the Merger Agreement with Capital One, share repurchases have been paused through the completion of the merger. See "— Liquidity and Capital Resources — Capital" for additional information.

~~Table of Contents~~

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

Insider Trading Arrangements

During the period covered by this report, none of the Company’s directors or executive officers has adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (each as defined in Item 408 of Regulation S-K under the Securities Exchange Act of 1934, as amended).

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Item 6. Exhibits

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

Exhibit Index


Exhibit Number		Description



















10.1		Special Award Certificate for Restricted Stock Units under the Discover Financial Services 2023 Omnibus Incentive Plan for John B. Owen granted on January 31, 2024.

10 .2		Special Award Certificate for Restricted Stock Units under the Discover Financial Services 2023 Omnibus Incentive Plan for Michael G. Rhodes granted on February 1, 2024.

10.3		Special Award Certificate for Restricted Stock Units under the Discover Financial Services 2023 Omnibus Incentive Plan for John T. Greene granted on February 22, 2024.

10 .4		Letter Agreement with Michael G. Rhodes, dated as of March 27, 2024 between Discover Financial Services and Michael G. Rhodes (filed as ~~Annex B~~Exhibit 10.1 to Discover Financial ~~Services' Definitive Proxy Statement~~Services’ Current Report on ~~Schedule 14A~~Form 8-K filed on March ~~17, 2023~~27, 2024, and incorporated herein by reference thereto).

~~10.2~~10 .5		Letter Agreement with J. Michael Shepherd, dated as of March 27, 2024 between Discover Financial Services and J. Michael Shepherd (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on March 27, 2024, and incorporated herein by reference thereto).

10 .6	~~Form 2023~~	Special Award Certificate for Restricted Stock Units under the Discover Financial Services 2023 Omnibus Incentive ~~Plan.~~

~~10.3~~		~~Discover Financial Services Severance Plan.~~Plan for J. Michael Shepherd granted on April 1, 2024.

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.

7666

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Signature

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on 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: ~~July 28, 2023~~May 1, 2024

7767


Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4839
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7262
Item 4.	Controls and Procedures	7363
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	7565
Item 1A.	Risk Factors	7565
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7565
Item 3.	Defaults Upon Senior Securities	7665
Item 4.	Mine Safety Disclosures	7665
Item 5.	Other Information	7665
Item 6.	Exhibits	7666


	For the Three Months Ended June 30,			For the Six Months Ended June 30,(1)
	2023				2023
Credit card loans(2)(3)
Interest rate reduction	$	560			$	1,158
Total credit card loans(4)	$	560			$	1,158
% of total class of financing receivables	0.60		%		1.23		%

Private student loans(2)
Payment delay(5)	$	20			$	22
Interest rate reduction and payment delay(5)	21				50
Total private student loans(4)	$	41			$	72
% of total class of financing receivables	0.40		%		0.70		%

Personal loans(2)
Payment delay(5)	$	3			$	4
Term extension(6)	8				16
Interest rate reduction and payment delay(5)	16				29
Interest rate reduction and term extension(6)	8				14
Total personal loans(2)	$	35			$	63
% of total class of financing receivables	0.38		%		0.69		%


	For the Three Months Ended June 30, 2022			For the Six Months Ended June 30, 2022
	Number of Accounts	Balances		Number of Accounts	Balances
Accounts that entered a TDR program during the period
Credit card loans(1)	49,341	$	313	103,852	$	657
Private student loans	1,523	$	29	3,278	$	60
Personal loans	1,603	$	22	2,762	$	37


	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 June 30, 2023
Balance at March 31, 2023	$	(44)	$	(2)	$	(189)	$	(235)
Net change	(151)		(84)		—		(235)
Balance at June 30, 2023	$	(195)	$	(86)	$	(189)	$	(470)

For the Three Months Ended June 30, 2022
Balance at March 31, 2022	$	(7)	$	(7)	$	(199)	$	(213)
Net change	(41)		3		—		(38)
Balance at June 30, 2022	$	(48)	$	(4)	$	(199)	$	(251)

For the Six Months Ended June 30, 2023
Balance at December 31, 2022	$	(136)	$	(14)	$	(189)	$	(339)
Net change	(59)		(72)		—		(131)
Balance at June 30, 2023	$	(195)	$	(86)	$	(189)	$	(470)

For the Six Months Ended June 30, 2022
Balance at December 31, 2021	$	114	$	(9)	$	(199)	$	(94)
Net change	(162)		5		—		(157)
Balance at June 30, 2022	$	(48)	$	(4)	$	(199)	$	(251)


	March 31, 2023						December 31, 2022
	As Previously Reported		Restatement Impacts		As Restated		As Previously Reported		Restatement Impacts		As Restated
Assets
Other Assets	$	4,381	$	80	$	4,461	$	4,519	$	78	$	4,597
Total Assets	$	133,061	$	80	$	133,141	$	131,628	$	78	$	131,706

Liabilities and Stockholders' Equity
Liabilities
Accrued Expenses and other liabilities	$	4,843	$	335	$	5,178	$	5,294	$	324	$	5,618
Total Liabilities	$	118,746	$	335	$	119,081	$	117,038	$	324	$	117,362

Stockholders' Equity
Retained Earnings	$	29,292	$	(255)	$	29,037	$	28,453	$	(246)	$	28,207
Total Stockholders' Equity	$	14,315	$	(255)	$	14,060	$	14,590	$	(246)	$	14,344
Total Liabilities and Stockholders' Equity	$	133,061	$	80	$	133,141	$	131,628	$	78	$	131,706