UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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
☐
Smaller Reporting Company
☐
Non-accelerated Filer
☐
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 has filed a report on and attestation of the effectiveness of its internal control over financial reporting under Section 404(b) of Sarbanes-Oxley
Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error
to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common equity held by non-affiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter was
approximately $32,797,348,407.
As of February 14, 2025, there were 251,604,129 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
DISCOVER FINANCIAL SERVICES
Annual Report on Form 10-K for the year ended December 31, 2024
TABLE OF CONTENTS
Part I
Item 1.
Business
1
Item 1A.
Risk Factors
28
Item 1B.
Unresolved Staff Comments
48
Item 1C.
Cybersecurity
48
Item 2.
Properties
50
Item 3.
Legal Proceedings
50
Item 4.
Mine Safety Disclosures
50
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
51
Item 6.
Reserved
52
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
53
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
78
Item 8.
Financial Statements and Supplementary Data
80
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
145
Item 9A.
Controls and Procedures
145
Item 9B.
Other Information
146
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
146
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
147
Item 11.
Executive Compensation
147
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
147
Item 13.
Certain Relationships and Related Transactions, and Director Independence
147
Item 14.
Principal Accounting Fees and Services
147
Part IV
Item 15.
Exhibits, Financial Statement Schedules
148
Item 16.
Form 10-K Summary
153
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 “Item 8 — Financial Statements and Supplementary Data — Glossary of Acronyms” for terms and abbreviations used throughout the annual
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 , and Diners Club International . All other trademarks, trade names and service marks included in this
annual report on Form 10-K are the property of their respective owners.
®
®
®
®
®
®
®
Table of Contents
Part I.
Part I | Item 1. Business
Introduction
Discover Financial Services (the “Company”) is a digital banking and payment services company. We were incorporated in Delaware in 1960.
We are a bank holding company under the Bank Holding Company Act of 1956 as well as a financial holding company under the Gramm-Leach-Bliley
Act (“GLBA”) and therefore are subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the “FRB”
or “Federal Reserve”). We provide digital banking products and services and payment services through our subsidiaries. We offer our customers credit
card loans, personal loans, home loans and deposit products. We had $121.1 billion in loan receivables and $90.6 billion in deposits issued through
direct-to-consumer channels at December 31, 2024. 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 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 charge cards and/or provide card acceptance
services.
During the fourth quarter of 2024, we completed the sale of our private student loan portfolio. See “— Operating Model” for more information.
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.
Completion of the proposed merger remains subject to approval by the Federal Reserve Board and the Office of the Comptroller of the Currency
(“OCC”) and other customary closing conditions.
Available Information
We make available, free of charge through the investor relations page of our internet site www.discover.com, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of our directors and executive
officers, and any amendments to those documents filed with or furnished to the SEC pursuant to the Securities Exchange Act of 1934. These filings
are available as soon as reasonably practicable after they are filed with or furnished to the SEC.
In addition, the following information is available on the investor relations page of our internet site: (i) our Corporate Governance Guidelines;
(ii) our Code of Conduct and Business Ethics; and (iii) the charters of the Audit, Compensation and Human Capital, Nominating, Governance and
Public Responsibility and Risk Oversight Committees of our Board of Directors. These documents are also available in print without charge to any
person who requests them by writing or telephoning our principal executive offices: Discover Financial Services, Office of the Corporate Secretary,
2500 Lake Cook Road, Riverwoods, Illinois 60015, United States of America, telephone number (224) 405-0900.
-1-
Table of Contents
Operating Model
We manage our business activities in two segments: Digital Banking and Payment Services. Our Digital Banking segment includes consumer
banking and lending products, specifically Discover-branded credit cards issued to individuals on the Discover Network and other consumer banking
products and services, including personal loans, home loans and deposit products. Our Payment Services segment includes PULSE, Diners Club and
our Network Partners business, which provides payment transaction processing and settlement, merchant acquisition, ATM access and related
payments services on the Discover Global Network.
On November 29, 2023, we announced our Board of Directors had authorized management to explore the sale of the private student loan
portfolio and transfer servicing of these loans to a third-party servicer. We stopped accepting new applications for private student loans February 1,
2024. On July 17, 2024, we entered into a purchase agreement to sell our private student loan portfolio and transfer servicing of the portfolio to a third-
party servicer. The sale of the private student loan portfolio was completed during the fourth quarter of 2024.
We are principally engaged in providing products and services to customers in the U.S. However, we also receive revenue from sources outside
of the U.S., including royalty and licensee revenue from our Diners Club licensees and network assessment, discount and interchange fees from our
network-to-network partners (“Network Alliances”). For quantitative information concerning our geographic distribution, see Note 4: Loan Receivables
to our consolidated financial statements.
Below are descriptions of the principal products and services of each of our reportable segments. For additional financial information relating to
our business and our operating segments, see Note 22: Segment Disclosures to our consolidated financial statements.
Digital Banking
Set forth below are descriptions of the credit cards, personal loans, home loans and deposit products issued by our bank subsidiary, Discover
Bank.
Credit Cards
We currently offer and issue credit cards to consumers. Our credit card customers are permitted to “revolve” their balances and repay their
obligations over a period of time and at an interest rate set forth in their cardmember agreements, which may be either fixed or variable. The interest
that we earned on revolving credit card balances comprised approximately 80% of our total interest income for the year ended December 31, 2024.
We also charge customers other fees as specified in the cardmember agreements. These may include fees for late payments, returned checks,
balance transfer transactions and cash advance transactions.
Our credit card customers’ transactions in the U.S. are processed over the Discover Network. We receive discount and fee revenue from
merchants with whom we have a direct relationship. Where we do not have a direct relationship with a merchant, we receive interchange and
assessment fees from acquirers.
All of our cards offer rewards programs, the costs of which are generally recorded as a reduction of discount and interchange revenue. See “—
Marketing — Rewards / Cashback Bonus” for further discussion of our programs offered.
-2-
Table of Contents
The following chart shows the Discover card transaction cycle as processed on the Discover Network:
For information on how we market our credit card loans, see “— Credit Risk Management — Account Acquisition (New Customers)” and “—
Marketing.”
Personal Loans
Our personal loans are primarily intended to help customers consolidate existing debt, although they can be used for other purposes. These
loans are unsecured with fixed interest rates, terms and payments, and have zero origination fees. The repayment period for personal loans is 3 to 7
years and there is no penalty for prepaying any portion of a personal loan balance. Customers may be subject to late fees if they have not made a
minimum payment by the contractual due date.
We market personal loans primarily through direct mail, digital channels and email. Prospective applicants can obtain information regarding
Discover Personal Loans and complete an application either online or by telephone.
Home Loans
Our home loans are intended for multiple purposes, including mortgage refinance, debt consolidation, home improvement and other major
expenses. These loans are single family, owner occupied, closed-end with fixed interest rates, terms and payments, and are secured by a first or
second lien. These loans require monthly payment over a 10 to 30-year term. Customers may elect to make larger than minimum payments without
being subject to a prepayment penalty. Customers do not pay origination fees or third-party costs during the application process or at closing.
Customers may be subject to late fees and returned payment charges.
We market home loans primarily through direct mail, digital channels and email. Prospective applicants can obtain information and apply online
or by telephone.
Deposits
We obtain deposits from consumers directly (“direct-to-consumer deposits”) and through third-party securities brokerage firms that offer our
deposits to their customers (“brokered deposits”). Our direct-to-consumer deposit products include savings accounts, certificates of deposit, money
market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts, while our brokered deposit products include certificates of
deposit and sweep accounts. All our deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum permitted by law.
We do not pay interest on checking account balances and instead offer cashback rewards for certain debit card purchases. Certificates of deposit are
offered on a range of tenors from three months through ten years with
*
-3-
Table of Contents
interest rates that are fixed for the full period. There are no minimum balance requirements to open any direct-to-consumer deposit account. There are
penalties for early withdrawals from certificates of deposit. Interest rates on money market accounts and savings accounts are subject to change at
any time. Service charges apply to outgoing wire transfers only and availability of funds varies based on type and method of deposit and other factors.
We market our direct-to-consumer deposit products through the use of digital channels, direct mail, print materials, email and arrangements with
third parties. Customers can generally apply for deposit accounts online or by telephone. Cashback Debit checking account applications can only be
initiated online. For more information regarding our deposit products, see “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Liquidity and Capital Resources — Funding Sources — Deposits.”
Payment Services
Set forth below are descriptions of PULSE, Diners Club and our Network Partners business, which provides payment transaction processing and
settlement services, among other services.
PULSE
Our PULSE network is a leader in debit payments, cash access and account transfers. PULSE links cardholders served by financial institutions
to ATMs and point-of-sale (“POS”) terminals located throughout the U.S., including cardholders at financial institutions with which PULSE has direct
relationships and through agreements PULSE has with other debit networks. PULSE also provides cash access at ATMs internationally for cards
enabled for acceptance on the Discover Network and Diners Club. Cards enabled for acceptance on the PULSE network have international
acceptance in Canada, Mexico and the Caribbean.
PULSE’s primary source of revenue is transaction fees charged for switching and settling ATM and debit transactions initiated through the use of
debit cards issued by participating financial institutions. In addition, PULSE offers a variety of optional products and services that produce income for
the network, including signature debit transaction processing, debit card fraud detection and risk mitigation services and connections to other regional
and national electronic funds transfer networks.
When a financial institution joins the PULSE network, debit cards issued by that institution are eligible to be used at all of the ATMs and POS
debit terminals that participate in the PULSE network and the PULSE mark can be used on that institution’s debit cards and ATMs. In addition, financial
institution participants may sponsor merchants, direct processors and independent sales organizations to participate in the PULSE POS and ATM debit
service. A participating financial institution assumes liability for transactions initiated through the use of debit cards issued by that institution, as well as
for ensuring compliance with PULSE’s operating rules and policies applicable to that institution’s debit cards, ATMs and, if applicable, sponsored
merchants, direct processors and independent sales organizations.
When PULSE enters into a network-to-network agreement with another debit network, the other network’s participating financial institutions’ debit
cards can be used at terminals in the PULSE network. PULSE does not have a direct relationship with these financial institutions and the other
network bears the financial responsibility for transactions of those financial institutions’ cardholders and for ensuring compliance with PULSE’s
operating rules.
Diners Club
Our Diners Club business maintains a global acceptance network through its relationships with licensees. We do not directly issue Diners Club
cards to consumers, but grant our licensees the right to issue Diners Club cards and/or provide card acceptance services. In general, our licensees
pay us royalties for the right to use the Diners Club brand, which is our primary source of Diners Club revenues. We also earn revenue from providing
various support services to our Diners Club licensees, including processing and settlement of cross-border transactions. We also provide a centralized
service center and technological services to our licensees.
When Diners Club cardholders use their cards outside the host country or territory of the issuing licensee, transactions are routed and settled
over the Diners Club network through its centralized service center. In order to increase merchant acceptance in certain targeted countries and
territories, we work with merchant acquirers to offer Diners Club and Discover acceptance to their merchants. These acquirers are granted licenses to
market the Diners Club and Discover brands to existing and new merchants. Diners Club cardholders with cards issued by licensees use their cards
on the Discover Network and on the PULSE and Diners Club networks in their card-issuing territory and abroad.
-4-
Table of Contents
Network Partners Business
We have agreements with a number of financial institutions, financial technology firms, networks, Network Alliances and other commercial
service providers (collectively, “Network Partners”) for the provision of card issuing, payments processing and related services on the Discover Global
Network. We may earn merchant discount and acquirer assessments net of issuer fees paid, in addition to other fees, for processing transactions for
Network Partners. We also leverage our payments infrastructure in other ways, such as business-to-business payment processing.
The following chart shows an example of a Network Partners transaction cycle:
* * *
The discussion below provides additional detail concerning the supporting functions of our two segments. The credit card, personal loan, home
loan and deposit products issued through our Digital Banking segment require significant investments in consumer portfolio risk management,
marketing, customer service and related technology. The operation of our Payment Services segment requires that we invest in the technology to
manage risk and service Network Partners, merchants and merchant acquirer relationships. We also make strategic investments in payment services
entities to support our Payment Services segment.
Credit Risk Management
Credit risk refers to the risk of loss arising from borrower default when borrowers are unable or unwilling to meet their financial obligations to us.
For all loan types, we have established a credit policy and limits that are designed to manage our exposure to credit risk. Our credit risk arising from
consumer lending products is generally highly diversified across millions of accounts without significant individual exposures. We manage credit risk
primarily based on customer segments and product types. See “— Risk Management” for more information regarding how we define and manage our
credit and other risks.
Account Acquisition (New Customers)
We acquire new credit card customers through direct mail, internet, media advertising, merchant or partner relationships, or through unsolicited
individual applications. We also acquire new personal loan and home loan customers through similar channels. In all cases we have a rigorous
process for screening applicants.
Our credit risk management and marketing teams use proprietary analytical tools to match our product offerings with customer needs and
identify creditworthy prospective customers. We consider the prospective customer’s financial condition and stability, as well as ability and willingness
to pay.
*
-5-
Table of Contents
We assess the creditworthiness of each consumer loan applicant by evaluating an applicant’s credit information provided by credit bureaus and
information from other sources. The assessment is performed using our credit scoring systems, both externally developed and proprietary. For our
unsecured lending products, we also use experienced credit underwriters to supplement our automated decision-making processes. For our home
loan products, experienced credit underwriters must review and approve each application.
Upon approval of a customer’s application for one of our lending products, we assign a specific annual percentage rate using an analytically
driven pricing framework that simultaneously provides competitive pricing for customers and seeks to maximize revenue on a risk-adjusted basis. For
our credit card loans, we also assign a credit line based on risk level and expected return.
Portfolio Management (Existing Customers)
The revolving nature of our credit card loans requires that we regularly assess the credit risk exposure of such accounts. This assessment uses
the individual’s Discover account performance information as well as information from credit bureaus. We utilize statistical evaluation models to
support the measurement and management of credit risk. At the individual customer level, we use custom risk models together with more generally
available industry models as an integral part of the credit decision-making process. Depending on the duration of the customer’s account, risk profile
and other performance metrics, the account may be subject to a range of account management treatments, including transaction authorization limits
and increases or decreases on credit limits.
Customer Assistance
We provide our customers with a variety of tools to proactively manage their accounts, including email, text message, push reminders and
publicly accessible web pages dedicated to customer education, as further discussed under the heading “— Customer Service.” These tools are
designed to limit a customer’s risk of becoming delinquent. When a customer’s account becomes delinquent or is at risk of becoming delinquent, we
employ a variety of strategies to assist customers in preventing delinquency or returning delinquent accounts to current status.
All monthly billing statements of accounts with past due amounts include a request for payment of such amounts. Customer assistance
personnel generally initiate contact with customers within 30 days after any portion of their balance becomes past due. The nature and the timing of
the initial contact are determined by a review of the customer’s prior account activity and payment habits.
We reevaluate our collection efforts and consider the implementation of other techniques as a customer becomes increasingly delinquent. We
limit our exposure to delinquencies through controls within our process for authorizing transactions and credit limits and criteria-based account
suspension and revocation. In situations involving customers with financial difficulties, we may enter into arrangements to extend or otherwise change
payment schedules, lower interest rates and/or waive fees to aid customers in returning to current status on their obligations to us. For more
information see Note 4: Loan Receivables to our consolidated financial statements.
Marketing
Our marketing group works closely with credit risk management to provide key functions to acquire new customers and enhance our
relationships with existing customers. These key functions include product development, Cashback Bonus and other rewards programs management,
protection product management, and brand and advertising management.
Product Development
To attract and retain customers and merchants, we continue to develop new programs, features and benefits and market them through various
channels, including television, radio, mail and digital. Marketing efforts may promote various features including, but not limited to, no annual fee,
Cashback Bonus and promotional offers, as well as various free benefits such as Online Privacy Protection, FICO Credit Score, Freeze it, Spend
Analyzer and Social Security Number Alerts. By developing an extensive prospect database, using credit bureau data and using a customer contact
strategy and management system, we continuously develop our modeling and customer engagement capabilities that help optimize the product,
pricing and channel selection.
-6-
Table of Contents
Rewards / Cashback Bonus
We offer several card products, all with no annual fee, that allow our cardmembers to earn their rewards based on their purchases, which can be
redeemed in any amount at any time, in general as set forth below.
•
Discover it card offers a 5% Cashback Bonus in categories that change each quarter, which customers must activate each quarter, up to a
quarterly maximum and a 1% Cashback Bonus on all other purchases.
•
Discover it Chrome card offers a 2% Cashback Bonus at gas stations and restaurants on up to $1,000 in combined purchases each quarter
and a 1% Cashback Bonus on all other purchases.
•
Discover it Miles card offers 1.5 miles for every dollar spent on purchases.
Protection Products
We currently sell Identity Theft Protection and we service and maintain existing enrollments of the Payment and Wallet Protection products
detailed below for our credit card customers.
•
Identity Theft Protection includes an initial credit report, credit bureau report monitoring at the three major credit bureaus, notification of
changes to financial accounts, personal information on the dark web and additional elements of the customer’s choosing, identity theft
insurance of up to $1,000,000 to cover certain expenses due to identity theft and access to fraud resolution specialists who can help resolve
issues.
•
Payment Protection allows customers to suspend their minimum payments due for up to two years, depending on the qualifying event and
product level, when certain qualifying life events occur. While on this benefit, customers have no minimum monthly payment and are not
charged interest, late fees or product fees. This product covers various events, such as unemployment, disability, Federal or State disasters
and other life events, such as marriage or the birth of a child. Depending on the product level and availability under state laws, outstanding
balances up to $10,000 or $25,000, are cancelled in the event of death.
•
Wallet Protection offers convenience if a customer’s wallet is lost or stolen, including requesting cancellation and replacement of the
customer’s credit and debit cards, monitoring the customer’s credit bureau reports at the three major credit bureaus for 180 days and
alerting them to key changes to their credit files, and providing $100 to replace the customer’s wallet or purse.
Brand and Advertising Management
We maintain a full-service marketing department charged with delivering integrated mass and direct communications to foster customer
engagement with our products and services. We also leverage strategic partnerships and sponsorship properties such as the NHL and the Big Ten
Conference to help drive loan growth. Our brand team utilizes consumer insights and market intelligence to define our mass communication strategy,
create multi-channel advertising messages and develop marketing partnerships with sponsorship properties. This work is performed in-house as well
as with a variety of external agencies and vendors.
Customer Service
Our credit card customers have the option to manage their accounts online via Discover.com, through Discover Mobile applications and by
calling our U.S.-based customer service personnel. Our digital solutions offer a range of benefits, which includes, but is not limited to, the following:
•
Access to overall credit health tools such as Credit Scorecard, Freeze it, Social Security Number Alerts and New Account Alerts;
•
Customer service via multiple communication channels, including messaging and 24/7 telephone customer service; and
•
Proactive notifications via email, text messaging and in-app messaging for monitoring transaction activity and account security.
Our personal loan, home loan and deposit product customers can utilize our online account services to manage their accounts and to use
interactive tools and calculators. Additionally, our card, personal loan and deposit product customers have access to Discover’s Mobile application.
Card and deposit product customers that use the mobile application have access to benefits, including Online Privacy Protection. This benefit helps
customers to have more
-7-
Table of Contents
control over their personal information online by regularly helping to remove it from select people-search sites that could sell their data.
Processing Services
Our processing services cover four functional areas: card personalization, print/mail, remittance processing and item processing. Card
personalization is responsible for the mailing of credit and debit cards for new accounts, replacements and reissues. Print/mail specializes in statement
and letter printing and mailing. Remittance processing handles account payments and physical check processing. Item processing handles hard-copy
forms and electronic documents, including bank deposits, credit disputes and general correspondence, among other items.
Fraud Prevention
We monitor our customers’ accounts to help prevent, detect, investigate and resolve fraud. Our fraud prevention processes are designed to
protect the security of cards, applications and accounts in a manner consistent with our customers’ needs to easily acquire and use our products.
Prevention systems monitor the authorization of application information, verification of customer identity, sales, processing of convenience and balance
transfer checks and electronic transactions.
Each credit and debit card transaction is subject to screening, authorization and approval through externally developed and proprietary POS
decision systems. We use a variety of techniques that help identify and halt fraudulent transactions, including machine-learning models, rules-based
decision-making logic, report analysis, data integrity checks and manual account reviews. We manage accounts identified by the fraud detection
system through technology that integrates fraud prevention and customer service. Strategies are subject to regular review and enhancement to enable
us to respond quickly to changing conditions as well as to protect our customers and our business from emerging fraud activity.
Discover Global Network Operations
We support our merchants through a merchant acquiring model that includes direct relationships with large merchants in the U.S. as well as
arrangements with third-party merchant acquirers. Additionally, Discover Network cards are widely accepted, and acceptance continues to grow in a
number of countries around the world on the Diners Club network.
We maintain direct relationships with many of our large Discover Network merchant accounts, at times entering into joint marketing programs or
opportunities. The terms of Discover Network’s direct merchant relationships are set forth in merchant services agreements, which are governed by
our operating regulations and related program documents. To enable ongoing improvements in our network’s functionality and in accordance with
industry convention, we publish updates to our program documents on a semi-annual basis or more frequently as needed.
Discover Global Network services other merchant portfolios via its relationships with third-party merchant acquirers, many of whom offer
comprehensive suites of payments processing, onboarding, due diligence and/or other merchant services. Merchants also can apply to our merchant
acquirer partners directly to accept Discover Global Network cards through the acquirers’ integrated payments solutions. Merchant acquirers may
provide merchants with consolidated servicing for Discover, Visa and MasterCard transactions, resulting in streamlined statements and customer
service for merchants and reduced costs for us.
The Discover Global Network operates systems and processes that seek to ensure data integrity, prevent fraud and ensure compliance with our
operating regulations. Our systems evaluate incoming transaction activity to identify abnormalities that require investigation and fraud mitigation.
Designated Discover Global Network personnel are responsible for validating compliance with laws and with our operating regulations, including
enforcing our data security standards and prohibitions against illegal or otherwise unacceptable activities. Discover Global Network is a founding and
current member of the Payment Card Industry Security Standards Council, LLC (the “Council”) and is working to expand the adoption of the Council’s
security standards globally for merchants and service providers that store, transmit or process cardholder data.
Technology
We provide technology systems processing through a combination of owned and hosted data centers and the use of third-party vendors. These
data centers support our payment networks, provide customers with access to their
-8-
Table of Contents
accounts and manage transaction authorization and settlement, among other functions. The Discover Global Network works with a number of vendors
to maintain our connectivity in support of POS authorizations. This connectivity also enables merchants to receive timely payment for their Discover
Global Network card transactions.
Our approach to technology development and management involves both third-party and in-house resources. We use third-party vendors for
technology services (e.g., cloud, telecommunications, hardware and operating systems) as well as for processing and other services for our digital
banking and payment services businesses. We subject each vendor to a formal approval process, which includes, among other things, a security
assessment, to ensure that the vendor can assist us in maintaining a cost-effective, reliable and secure technology platform. We use our in-house
resources to build, maintain and oversee some of our technology systems. We believe this approach enhances our operations and improves cost
efficiencies.
Seasonality
In our credit card business, we experience fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal
consumer spending and payment patterns around the winter holidays, summer vacations and back-to-school periods. Historically, in our private
student loan business, our loan disbursements peaked at the beginning of a school’s academic semester or quarter; we stopped accepting new
applications for private student loans February 1, 2024, and completed the sale of our private student loan portfolio in the fourth quarter of 2024.
Seasonal trends have not caused significant fluctuations in our results of operations or credit quality metrics between quarterly and annual periods.
Revenues in our Diners Club business are generally higher in the first half of the year as a result of Diners Club’s tiered pricing system where
licensees qualify for lower royalty rate tiers as cumulative volume grows during the course of the year.
Competition
The consumer financial services business is highly competitive. We compete with other consumer financial services providers, including
payments networks and non-traditional providers such as financial technology firms, across many dimensions including brand, reputation, customer
service, product and service offerings, incentives, pricing, e-commerce and digital wallet participation, and other terms. Our credit card business also
competes on the basis of reward programs and merchant acceptance. We compete for accounts and utilization with cards issued by other financial
institutions (including American Express, Bank of America, JPMorgan Chase, Capital One and Citibank) and, to a lesser extent, businesses that issue
their own private label cards or otherwise extend credit to their customers. In comparison to our largest credit card competitors, our strengths include
no annual fees, cash rewards, conservative portfolio management and strong, 100% U.S.-based customer service. Competition based on rewards and
other card features and benefits continues to be strong. Our personal loan product competes for customers primarily with financial institutions
(including Citibank and American Express) and non-traditional lenders (including SoFi and Lending Club). Our home loan product faces competition
primarily from national and regional mortgage lenders.
Our credit card receivables continue to represent a majority of our receivables. The credit card business is highly competitive. Some of our
competitors offer a wider variety of financial products than we do, which may position them better among customers who prefer to use a single
financial institution to meet all of their financial needs. Some of our competitors enjoy greater financial resources, diversification and scale than we do
and are therefore able to invest more in initiatives and technology to attract and retain customers, such as advertising, targeted marketing, account
acquisitions and pricing offerings in interest rates, annual fees, reward programs and low-priced balance transfer programs. In addition, some of our
competitors have assets such as branch locations and co-brand relationships that may help them compete more effectively. Another competitive factor
in the credit card business is the increasing use of debit cards as an alternative to credit cards for purchases.
Merchant acceptance of the Discover card has reached near parity with competing cards in the U.S. for both the number of merchants enabled
for acceptance and the number of merchants actively accepting Discover. However, the legacy perception of lower acceptance still presents limitations
in attracting new cardholders and debit card issuers. Most domestically-issued credit cards are issued on the Visa and MasterCard networks, thus
most other card issuers benefit from the dominant market share of Visa and MasterCard. We continue to make investments in expanding Discover and
Diners Club acceptance in key international markets where an acceptance gap exists.
In our payment services business, we compete with other networks for transaction volume and to attract Network Partners to issue credit, debit
and prepaid cards on the Discover, PULSE and Diners Club networks. We generally
-9-
Table of Contents
compete on the basis of customization of services and various pricing strategies, including incentives and rebates. We also compete on the basis of
issuer fees, fees paid to networks (including switch fees), merchant acceptance, network functionality, customer perception of service quality, brand
image, reputation and market share. The Discover and Diners Club networks’ primary competitors are Visa, MasterCard and American Express.
PULSE’s network competitors include Visa’s Interlink, MasterCard’s Maestro and First Data’s STAR. American Express is a particularly strong
competitor to Diners Club as both cards target international business travelers. As the payments industry continues to evolve, we are also facing
ongoing competition from financial technology firms and alternative payment solutions, which leverage new technologies and a customer’s existing
deposit and credit card accounts and bank relationships to create payment or other fee-based solutions.
In our direct-to-consumer deposits business, we have acquisition and servicing capabilities similar to other large banks, including Ally, American
Express, Barclays, Capital One, Goldman Sachs, Synchrony and USAA. We compete with banks and credit unions that source deposits through
branch locations and direct channels. We seek to differentiate our deposit product offerings on the basis of brand reputation, digital experience,
customer service and value.
For more information regarding the nature of the risks we face in connection with the competitive environment for our products and services, see
“Risk Factors — Strategic Business Risk.”
Intellectual Property
We use a variety of methods, such as trademarks, patents, copyrights and trade secrets, to protect our intellectual property. We also place
appropriate restrictions on our proprietary information to control access and prevent unauthorized disclosures. Our Discover, PULSE and Diners Club
brands are important assets and we take steps to protect the value of these assets and our reputation.
Human Capital
The success of our business is highly dependent on attracting, retaining and developing employees with the necessary skills and experience to
support our customers, our business and our strategy. We employed approximately 21,000 individuals as of December 31, 2024, which consisted
primarily of full-time employees in the U.S. Additionally, we employ 100% of our customer service agents within the U.S., which we believe offers a
distinct competitive advantage.
Our purpose-driven, people-first culture and human capital management strategy is built on a foundational set of core values and the Discover
Behaviors, and powered by significant investments in employee learning and development, market-competitive compensation and benefits and
inclusion and belonging. One place we see the results from our human capital strategy is in our consistently high levels of employee engagement,
which we measure through employee surveys.
Employee Learning and Development
Career and skill development are important components of our talent management and development system. In addition to on-the-job coaching
and training, we provide a range of professional and leadership development programs that help our employees build better teams, develop the skills
to advance their careers and support them during leadership transitions. For example, employees can access continuing education courses that cover
a variety of subjects through our training and development platform. Additionally, we support our employees’ educational goals through programs and
certifications that can reimburse up to 100% of tuition at certain schools.
Market-Competitive Compensation and Benefits
We offer a market-competitive compensation and benefits package to attract, retain and motivate highly qualified talent. We designed our
compensation and benefits package using a pay-for-performance philosophy to reward the achievement of our financial and strategic performance
goals as well as individual performance. Our total compensation and benefits package for U.S. employees includes competitive holiday and flexible
paid-time-off; a 401(k) retirement savings plan with matching and company contributions that can total up to 8% of an employee’s wages per year;
subsidized medical, dental, vision, disability and supplemental life insurance; paid parental and caregiver leave; adoption and surrogacy assistance;
and an employee assistance program, among other benefits.
-10-
Table of Contents
Inclusion and Belonging
We believe that an all-inclusive range of backgrounds, identities, perspectives and experiences make Discover stronger and better able to
support our customers, employees and communities to achieve brighter financial futures. Our commitment to our employees is to ensure fair
treatment, access and advancement for all, while also creating a culture where all employees feel seen, heard, valued and have a sense of belonging.
Pay Equity
We seek to pay our employees fairly for their work and we regularly monitor our performance and pay equity. We benchmark roles and
compensation data and partner with an independent, third-party consultant to conduct a company-wide pay equity analysis. We use this analysis to
identify potential pay discrepancies, understand the underlying drivers and implement best practices.
Employee Engagement
Discover continues to be an award-winning workplace, recognized for our inclusive and collaborative culture. Recent recognition includes: 2024
Fortune 100 Best Companies to Work For ; 2024 Top Workplaces USA; 2024 Forbes World’s Best Employer; and 2024 Disability Equality Index’s Best
Places to Work for Disability Inclusion. Employee engagement and satisfaction is core to our talent attraction and retention strategy, which supports
our business success. We consistently leverage employee listening to drive continuous improvement throughout our company. In our most recent
employee survey conducted in the fourth quarter of 2024, 77% of employees recommended Discover as a great place to work, with overall scores that
exceed global and financial services benchmarks as surveyed by Glint.
Risk Management
We manage risks that affect our customers, financial performance and ability to meet stakeholder and regulatory expectations. We use an
enterprise risk management (“ERM”) framework to identify, measure, manage, monitor and report these risks. We have made changes throughout
2024 to better ensure compliance with our risk management framework and supporting governance structure. Operationalization and sustained
execution of enhanced and newly implemented processes in 2024 will further demonstrate strong risk management discipline.
Enterprise Risk Management Framework
Our management of risk across the enterprise is executed through a framework that is based on industry standards for managing risk and
controls. While the detailed activities vary by risk type, there are common process elements that apply across risk types. We seek to apply these
elements consistently in the interest of effective and efficient risk management. This framework seeks to link risk processes and infrastructure with the
appropriate risk oversight to create a risk management structure that raises risk awareness, reduces impact of potential risk events, improves business
decision-making and increases operational efficiency.
Our ERM framework incorporates certain components that guide our approach to risk management: Governance and Oversight, Business
Strategy, Risk Infrastructure and Risk Culture.
Governance and Oversight
Our governance structure supports effective oversight of the ERM framework and company-wide risk management through clearly defined roles
for the Board of Directors and its committees; the Management Risk Committee and related sub-committees; and Executive Management.
Our risk appetite framework ensures that the level of risk that the Company is willing to take in pursuit of its business objectives is defined,
measured, monitored, reported regularly and is commensurate with the risk profile of the Company.
Business Strategy
Each year, the Board of Directors reviews and approves the strategic plan. This plan is facilitated by corporate strategy, developed by senior
management and reviewed by the Executive Management Committee.
®
-11-
Table of Contents
The strategic plan serves as a roadmap to achieve our long-term objectives, ensuring that initiatives are aligned with our ability to manage risk
effectively. This alignment allows us to proactively address challenges and seize opportunities.
Throughout the annual strategic plan process, the Board of Directors provides feedback and input to the Executive Management Committee.
Additionally, Corporate Risk Management (“CRM”) offers the Board of Directors an independent assessment and opinion of the plan.
Risk Infrastructure
Being risk-aware requires a supporting infrastructure to capture risk-related information and produce risk-related reporting. Risk infrastructure is
inclusive of the people, processes and technology that support risk management.
Risk Culture
Our people are responsible for promoting a strong risk culture, which means they are empowered, and expected, to take accountability for
identifying and addressing risks inherent in their business and its processes. We have strengthened risk management and risk identification programs
to ensure the necessary communications, training, tools and guidance are provided.
We operate within a risk appetite framework approved by our Board of Directors, which guides an acceptable level of risk-taking relative to
desired financial returns, strategic goals and other stakeholder objectives. To that end, limits and escalation thresholds are set consistent with the risk
appetite approved by our Board of Directors.
The following is a more detailed description of our three lines of defense for managing risk, as described in our Enterprise Risk Management
Policy.
First Line of Defense
The first line of defense includes business areas performing activities designed to generate revenue, provide operational support for delivery of
products and services or provide technology services to first line business areas. The first line of defense is accountable for owning and managing
risks associated with its business processes and for performing its risk management activities in accordance with the ERM framework.
Additionally, business areas that are not considered first line of defense may perform certain activities where they are responsible for owning
risks. In these instances, first line of defense responsibilities outline above must be followed.
Second Line of Defense
The second line of defense, led by our Chief Risk Officer (“CRO”), is comprised of CRM functions, which are independent of the first line of
defense and provide oversight and expert advice to the first line of defense.
Third Line of Defense
The third line of defense, led by our Chief Audit Executive, is comprised of the Internal Audit function, which provides independent, objective and
reliable assurances that the first and second lines of defense have systems of internal controls, operational processes, risk management activities and
governance that are well designed and working as intended, and the ERM framework is appropriate for our size, complexity and risk profile.
Corporate Functions
Corporate functions such as Legal, Human Resources and Finance advise business units to enable prudent risk management. These corporate
functions also have responsibility to be risk-aware and to manage risk in their own activities.
Risk Types
We are exposed to a broad set of risks in the course of our business activities due to both internal and external factors, which we segment into
seven major risk categories: credit (consumer and counterparty), market, liquidity, operational, compliance, reputational and strategic risk. We have
established various policies and standards to help govern these risks.
-12-
Table of Contents
Credit Risk
Our credit risk arises from the potential that a borrower or counterparty will fail to perform on an obligation. Our credit risk includes consumer
credit risk and counterparty credit risk. Consumer credit risk is primarily incurred by Discover Bank through the issuance of (i) unsecured credit
including credit cards and personal loans and (ii) secured credit including deposit secured credit cards and home equity loans. Counterparty credit risk
is incurred through a number of business-facing activities including payment network settlement, certain marketing and incentive programs,
asset/liability management, guarantor and insurance relationships and strategic investments.
Market Risk
Market risk is the risk to our financial condition resulting from adverse movements in market rates or prices, such as interest rates, foreign
exchange rates, credit spreads or equity prices. Given the nature of our business activities, we are exposed to various types of market risk; in
particular interest rate risk, foreign exchange risk and other risks that arise through the management of our investment portfolio. Interest rate risk is
more significant relative to other market risk exposures and results from potential mismatches in the repricing term of assets and liabilities (yield curve
risk) and volatility in reference rates used to reprice floating-rate instruments (basis risk). Foreign exchange risk is primarily incurred through exposure
to currency movements across a variety of business activities and is derived, specifically, from the timing differences between transaction
authorizations and settlement.
Liquidity Risk
Liquidity risk is the risk that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain
adequate funding, or an inability to easily unwind or offset specific exposures without significantly lowering market prices because of inadequate
market depth or market disruptions.
Operational Risk
Operational risk is defined as the potential for loss resulting from the failure of internal processes, systems, people or external events. This
includes risks such as internal fraud, external fraud, cybersecurity breaches, system failures, human errors or misconduct, internal business processes
and external events including natural disasters and lawsuits or adverse judgments that may disrupt or otherwise negatively affect our operations or
condition. Operational risk is inherent in all our businesses and can impact the Company’s financial performance, reputation and regulatory
compliance.
One of our key operational risks is information security, which includes cybersecurity. Our information security program is led by our Chief
Information Security Officer (“CISO”) and overseen by our Technology and Information Risk Committee (“TIRC”). The program is designed to
safeguard the confidentiality, integrity and availability of information assets. We continuously monitor the cyber threat landscape, internal threats and
technological changes to ensure controls are in place to mitigate risks to the organization and our customers. In concert with our lines of business and
corporate functions, our enterprise-wide incident management framework enables us to manage risk mitigation activities that stem from incidents;
these include governance structure and organization, an incident management program, incident management and escalation principles, requirements
for testing and exercising the program, risk management principles and external reporting guidance. For additional information on cybersecurity, see
“Item 1C. Cybersecurity.”
Compliance Risk
Compliance risk is the risk of material financial loss, damage to reputation or negative impact on business strategies that Discover Financial
Services and its subsidiaries may suffer as a result of its failure to comply with laws, regulations, rules and key internal policies applicable to the
activities of our Company. Compliance risk exposures are actively and primarily managed by our business units in conjunction with our compliance
department. Our compliance program governs the management of compliance risk and includes oversight by our Management Risk Committee and
Compliance and Ethics Committee. Our Compliance Management System is in place to ensure we are responding in a timely manner to existing and
changing laws, regulations and rules.
Reputational Risk
Reputational risk is defined as the potential for loss resulting from damage to the Company’s reputation due to various factors such as negative
public perception, adverse media coverage, regulatory actions or unethical behavior.
-13-
Table of Contents
This includes risks such as negative publicity, customer dissatisfaction, regulatory fines and loss of stakeholder trust. Reputational risk is inherent in all
our businesses and can impact the Company’s financial performance, customer loyalty and regulatory compliance.
Strategic Risk
Strategic risk is the risk that the Company’s earnings, capital, franchise and/or enterprise value is impacted due to failure to exploit its
competitive position, inability to adapt to evolving forces in the industry or operating environment, inadequate strategic planning or poor execution of
strategic decisions. Strategic risk is inherent in our business and is influenced by internal and external factors including the development of our
strategic plan and the approaches therein contained, the execution of activities defined by the strategic plan and the activities of competitors, including
legacy institutions and new entrants.
Our Management Risk Committee actively manages strategic risk by monitoring our risk appetite and key risk indicators (“KRIs”), identifying and
providing oversight of key risks associated with our business strategies, and working with our Risk Oversight Committee and Board of Directors to
manage material strategic risks. Our business units take on and are accountable for managing strategic risk in pursuit of their objectives.
Enterprise Risk Management Activities
Risk Identification
We seek to identify potential exposures that could adversely affect our ability to successfully implement strategies and achieve objectives. To
ensure that the full scale and scope of risk exposures from enterprise-wide activities are identified, we seek to identify risk exposures based on (i)
significant enterprise-level risks that are strategic, systemic, or emerging in nature, including Company-specific risks that span across multiple lines of
business; (ii) granular risk exposures from on-balance sheet and off-balance sheet positions, including concentrations; and (iii) risk exposures from
initiatives focused on new, expanded, customized, or modified products, services and processes.
Risk exposures identified through these three approaches are consolidated to create a comprehensive risk inventory. This inventory is leveraged
by a number of processes within our Company including stress scenario design and stress testing, capital planning, risk appetite setting and risk
modeling. The risk inventory is reviewed and approved at least annually by the Management Risk Committee while sub-committees review the risks
mapped to the relevant risk categories for transparency and comprehensive coverage of risk exposures.
Risk Measurement
Our risk measurement process seeks to ensure that the identified risk exposures are appropriately assessed. Risk measurement techniques
appropriate to the risk category, including econometric modeling, statistical analysis, peer benchmarking and qualitative assessments, are employed to
measure our material risk exposures.
Risk Management
We have policies and a defined governance structure in place to manage risks. In the event of a risk exposure exceeding established limits,
management determines appropriate response actions. Responses, which may be taken by the Board of Directors, the Risk Oversight Committee, the
Audit Committee, the Management Risk Committee, sub-committees or the CRO, or business units, may include (i) actions to directly mitigate or
resolve risk; (ii) actions to terminate any activities resulting in an undesired or unintended risk position; or (iii) actions to prevent, avoid, modify, share or
accept a risk position (or activity prior to its occurrence).
Risk Monitoring
Our risks are monitored through an integrated monitoring framework consisting of risk appetite metrics and KRIs. These metrics are established
to monitor changes in our risk exposures and external environment. Risk appetite metrics are used to monitor the overall risk profile of our Company
by setting risk boundaries and expectations through quantitative limits and qualitative expressions. We use KRIs to monitor our risk profile through
direct or indirect alignment with the risk appetite limits.
These metrics enable monitoring of risk by business management and by measuring risk and performance data against established risk appetite
limits and KRI limits that are updated periodically. Procedures are in place to notify the
-14-
Table of Contents
appropriate governance committees in the event of any actual risk limit breaches or potential upcoming breaches. In addition to metrics, independent
CRM testing also informs us how well risks are managed.
Risk Reporting
As the constituents primarily responsible for proactively managing the risks to which they are exposed, our business units and risk and control
functions periodically report to the governance committees. The CRM function is responsible for independent reporting on risk matters to various
constituencies across our Company on a regular basis. The CRM department periodically provides risk management reporting to the Management
Risk Committee, the Audit Committee, the Risk Oversight Committee and the Board of Directors.
Stress Testing
We use stress testing to better understand the range of potential risks, their impacts and the extent to which our Company is exposed. A stress
testing framework is employed to provide a comprehensive, integrated and forward-looking assessment of material risks and vulnerabilities. Stress test
results provide information for business strategy, risk appetite setting and decisions related to capital actions, contingency capital plans, liquidity buffer,
contingency funding plans and balance sheet positioning. Our stress testing framework utilizes a risk taxonomy, which covers our risk exposures
across our defined risk categories and includes management’s view of material risk exposure.
Risk Appetite and Strategic Limit Structure
Risk appetite is defined as the aggregate level and the type of risks we are willing to accept or avoid in order to achieve our strategic objectives.
Risk appetite statements are consistent with our aspirations, mission statement and core values and also serve as tools to preclude business activities
that could have a negative impact on our reputation.
Risk appetite is expressed through both quantitative limits and qualitative statements to recognize a range of possible outcomes and to help set
boundaries for proactive management of risks. Risk appetite measures take into account the risk profile of the businesses, the external
macroeconomic environment and stakeholder views, including those of shareholders, regulators, ratings agencies and customers. These limits and
statements are revised at least annually or as warranted by changes in business strategy, risk profile and external environment.
Management and our CRM department monitor approved limits and escalation triggers to ensure that the business is operating within the
approved risk appetite. Risk limits are monitored and reported to various risk sub-committees, the Management Risk Committee and our Board of
Directors, as appropriate. Through ongoing monitoring of risk exposures, management seeks to be able to identify appropriate risk response and
mitigation strategies in order to react dynamically to changing conditions.
Capital Planning
Risk exposures across risk categories and risk types are consolidated to create a comprehensive risk taxonomy. This taxonomy is leveraged
within our Company to identify risks that inform stress scenario design, capital planning, risk appetite setting and risk modeling. Our capital planning
and management framework encompasses forecasting capital levels, establishing capital targets, monitoring capital adequacy against targets,
maintaining appropriate contingency capital plans and identifying strategic options to deploy excess capital.
Risk Management Review of Compensation
Our compensation program is grounded in a pay-for-performance philosophy, which considers performance across our Company, business
segments and individual performance, as appropriate, as well as the long-term interests of our shareholders and the safety and soundness of our
Company. We strive to deliver compensation that is competitive relative to our peers and have designed our program to attract, retain and motivate our
employees. In addition to being competitive in the markets that we compete for talent and encouraging employees to achieve objectives set out by our
management, our compensation programs are designed to balance an appropriate mix of compensation components to align the interests of
employees with the long-term interests of shareholders and the safety and soundness of our business.
The design and administration of our compensation program provides incentives that seek to appropriately balance risk and financial results in a
manner that does not incentivize employees to take imprudent risks, is compatible with effective controls and enterprise-wide risk management and is
supported by strong corporate governance,
-15-
Table of Contents
including oversight by our Board of Directors and the Compensation and Human Capital Committee (“CHCC”) of our Board of Directors. At least
annually, the CHCC meets with the CRO to review and discuss the results of the assessment of whether our compensation plans encourage imprudent
risk-taking that could threaten the value of, or have a material adverse effect on, our Company or result in a failure to comply with regulatory
requirements.
Enterprise Risk Management Governance Structure
Our governance structure is based on the principle that each line of business is responsible for managing risks inherent in its business with
appropriate oversight from our senior management and Board of Directors. Various committees are in place to oversee the management of risks
across our business. We seek to apply operating principles consistently to each committee. These operating principles are detailed in each
committee’s charter, which is approved by its parent committee. Our bank subsidiary has its own risk governance, compliance, auditing and other
requirements. Our risk governance framework is designed such that bank-level risk governance requirements are satisfied as well.
Board Committee Structure
Board of Directors
Our Board of Directors (i) reviews and approves certain risk management policies; (ii) reviews and approves our capital targets and goals; (iii)
reviews and approves our risk appetite framework; (iv) monitors and approves our strategic plan, as appropriate; (v) appoints our CRO and other risk
governance function leaders, as appropriate; (vi) receives and reviews reports on any exceptions to the Enterprise Risk Management Policy; and (vii)
receives and reviews regulatory examination reports. The Board of Directors receives reports from the Governance and Controls Committee on risks
associated with significant regulatory remediation activities, including consent orders, the Audit Committee and Risk Oversight Committee on risk
management matters and the CHCC on risks associated with compensation and leadership development.
Governance and Controls Committee of our Board of Directors
Our Governance and Controls Committee assists the Board in fulfilling its respective oversight responsibilities with regard to significant
regulatory remediation activities, including consent orders. The Committee is responsible for overseeing and monitoring the establishment and timely
implementation by management of remediation actions to address specific corrective actions required by the Company’s regulators. It is responsible
for overseeing the mandate of the Company’s Office of Remediation, approving the head of the Office of Remediation and reviewing that individual’s
performance. The Committee is also responsible for reviewing and approving, or recommending for Board approval, any material amendments to
action plans, and reviewing and approving any submissions to the Company’s regulators related to compliance with consent orders.
Risk Oversight Committee of our Board of Directors
Our Risk Oversight Committee is responsible for overseeing our risk management policies and the operations of our enterprise-wide risk
management framework and our capital planning and liquidity risk management activities. The Committee is responsible for, among other things, (i)
periodically reviewing and approving our global risk management policies; (ii) overseeing the operation of our policies and procedures for establishing
our risk management governance, risk management procedures, risk appetite metrics and key risk indicators and risk-control infrastructure; (iii)
overseeing
-16-
Table of Contents
the operation of processes and systems for implementing and monitoring compliance with such policies and procedures; (iv) receiving and reviewing
regular reports from management on items related to operational risk; (v) reviewing and making recommendations to the Board of Directors, as
appropriate, regarding our risk management framework, key risk management policies and our risk appetite and tolerance; (vi) receiving and reviewing
regular reports from management and our CRO on risk management deficiencies and emerging risks, the status of and changes to risk exposures and
the steps management has taken to monitor and control risk exposures; (vii) receiving reports on compliance with our risk appetite and limit structure
and risk management policies, procedures and controls; and (viii) sharing information, liaising and meeting in joint session with the Audit Committee
(which it may do through the chairs of the committees) as necessary or desirable to help ensure that the committees have received the information
necessary to permit them to fulfill their duties and responsibilities with respect to oversight of risk management matters.
Audit Committee of our Board of Directors
With respect to the enterprise risk management framework, our Audit Committee’s responsibilities include the following: (i) discussing policies
with respect to risk assessment and management; (ii) receiving and reviewing reports from our CRO and other members of management as the
committee deems appropriate on the guidelines and policies for assessing and managing our exposure to risks, the Company’s major financial risk
exposures and the steps management has taken to monitor and control such exposures; (iii) receiving and reviewing reports from management with
respect to the Company’s compliance with applicable legal and regulatory requirements; and (iv) sharing information and liaising with the Risk
Oversight Committee as necessary or desirable to help ensure that the committees have received the information necessary to permit them to fulfill
their duties and responsibilities with respect to oversight of risk management matters.
Compensation and Human Capital Committee of our Board of Directors
Our CHCC is responsible for overseeing risk management associated with our compensation program and practices and certain human capital
matters. The Committee reviews regular reporting on our compensation program and practices, and obtains input from our CRO, to ensure they are
effective and do not encourage imprudent risk-taking. The Committee approves the compensation of the executive officers based on its evaluation of
their performance against pre-established goals and objectives. In addition, the Committee reviews the Company’s human capital strategies and plans
and evaluates risks, including those associated with management succession planning.
Nominating, Governance and Public Responsibility Committee of our Board of Directors
Our Nominating, Governance and Public Responsibility Committee is responsible for overseeing risk management with respect to many of the
Company’s governing documents and Board composition. The Committee is responsible for, among other things, (i) evaluating whether the skills
necessary for overseeing management and the Company are present on the Board and consistent with the Company’s Corporate Governance
Guidelines; (ii) facilitating the Board’s self-evaluation process to ensure the right individuals are on the Board; (iii) overseeing the Company’s
engagement efforts with institutional shareholders, which can highlight current and future risks; (iv) overseeing the Company’s commitment to
environmental, social and governance (“ESG”) matters and its ESG strategies; and (v) receiving reports from management with respect to ESG risks
and reporting.
-17-
Table of Contents
Management Risk Committee and Sub-committees Structure
Management Risk Committee
Our Management Risk Committee is an executive management-level committee that establishes and oversees a comprehensive enterprise risk
management program, which includes (i) providing a regular forum for representatives of our different functional groups to identify and discuss key risk
issues and to recommend to senior management actions that should be taken to manage the level of risk taken by the business lines; (ii) establishing
and overseeing an enterprise-wide approach to risk management through the development of our Enterprise Risk Management Policy and the
associated oversight framework for the identification, measurement, monitoring, management and reporting of enterprise risk; (iii) communicating our
risk appetite and philosophy, including establishing limits and thresholds for managing enterprise-wide risks; and (iv) reviewing, on a periodic basis, our
aggregate enterprise-wide risk exposures and the effectiveness of risk identification, measurement, monitoring, management and reporting policies
and procedures and related controls within the lines of business.
Our Management Risk Committee has formed and designated a number of sub-committees to assist it in carrying out its responsibilities. These
sub-committees, made up of representatives from senior levels of management, escalate issues to our Management Risk Committee. As of December
31, 2024, the sub-committees consisted of the following (except where otherwise indicated, all sub-committees cover both the Company and all of its
subsidiaries):
•
Asset and Liability Committee assists in the oversight of the liquidity, funding and market risk management, as well as the execution of
strategies to maintain capital adequacy.
•
Capital Planning Committee provides oversight of capital management and the development of capital plans for the Company and Discover
Bank.
•
Compliance and Ethics Committee oversees compliance risk management with respect to the business and activities of the Company and its
subsidiaries through the Company’s Compliance Management System.
•
Consumer Banking Business Risk Committee was formed in 2024 to assist in the oversight and governance of risks applicable to Consumer
Banking products and services and support and oversee the execution of the ERM framework and related risk programs.
•
Counterparty Credit Committee oversees enterprise-wide counterparty credit risk at the Company and its subsidiaries, establishing an
enterprise-wide approach to counterparty risk management through development of the Counterparty Credit Risk Management Policy.
•
Credit Committee oversees lending activities for Discover Bank, providing a regular forum for business units to bring forth and discuss key
issues.
-18-
Table of Contents
•
Decisions and Analytics Business Risk Committee was formed in 2024 to assist in the oversight and governance of risks applicable to the
Company’s products and services and support and oversee the execution of the ERM framework and related risk programs.
•
Human Resources Business Risk Committee assists in the oversight of the Human Resources programs, providing a forum for leaders
across the Company’s business areas to evaluate key risks associated with Human Resources programs and employment practices.
•
Model Risk Management Committee was formed in 2024 to review and assess model risk and oversee and monitor the effectiveness of the
activities designed to mitigate model risk throughout the Company.
•
Network Operating Rules and Pricing Committee was formed in 2024 to assist in the oversight of Network operating rules and pricing matters
for the Payment Services segment.
•
Non-financial Risk Committee oversees non-financial risk management with respect to the business and activities of the Company and its
subsidiaries. Non-financial risk includes operational, strategic and reputational risk.
•
Payment Services Business Risk Committee was formed in 2024 to assist in the oversight and governance of risk for the Payment Services
segment.
Supervision and Regulation
General
Our operations are subject to extensive regulation, supervision and examination under U.S. federal and state laws and regulations, and under
the legal or regulatory frameworks of certain foreign jurisdictions. As a bank holding company under the Bank Holding Company Act of 1956 and a
financial holding company under the GLBA, we are subject to supervision, examination and regulation by the Federal Reserve. As a large provider of
consumer financial services, we are subject to supervision, examination and regulation of the Consumer Financial Protection Bureau (“CFPB”).
Our bank subsidiary, Discover Bank, is located in the U.S. and is chartered and regulated by the Office of the Delaware State Bank
Commissioner (“Delaware Commissioner”) and is also regulated by the FDIC, which insures its deposits up to applicable limits and serves as the
bank’s primary federal banking regulator. Discover Bank is also a member of the Federal Home Loan Bank (“FHLB”) of Chicago. Discover Bank offers
credit card loans, personal loans and home loans as well as certificates of deposit, savings and checking accounts and other types of deposit
accounts.
Bank Holding Company Regulation
Permissible activities for a bank holding company include owning a bank as well as those activities that are so closely related to banking as to be
a proper incident thereto, such as consumer lending and other activities that have been approved by the Federal Reserve by regulation or order.
Certain servicing activities are also permissible for a bank holding company if conducted for or on behalf of the bank holding company or any of its
affiliates. Impermissible activities for bank holding companies include non-financial activities that are related to commerce such as manufacturing or
retail sales of non-financial products.
A financial holding company and the non-bank companies under its control are permitted to engage in activities considered financial in nature,
incidental to financial activities, or complementary to financial activities, if the Federal Reserve determines that such activities pose no risk to the safety
or soundness of depository institutions or the financial system in general. Being a financial holding company under the GLBA requires that the
depository institution we control meets certain criteria, including capital, management and Community Reinvestment Act requirements. In addition,
under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) we are required to meet certain capital and management
criteria to maintain our status as a financial holding company. Failure to meet the criteria for financial holding company status results in restrictions on
new financial activities or acquisitions and could require discontinuance of existing activities that are not otherwise generally permissible for bank
holding companies.
Federal Reserve regulations and the Federal Deposit Insurance Act (“FDIA”) require a bank holding company to serve as a source of strength to
its subsidiary bank(s) and commit resources to support each subsidiary bank. This support may be required at times when a bank holding company
may not be able to provide such support without adversely affecting its ability to meet other obligations.
-19-
Table of Contents
The Dodd-Frank Act, as amended, provides the Federal Reserve with the authority to impose certain enhanced prudential standards on bank
holding companies with total consolidated assets between $100 billion and $250 billion, including DFS, only after issuing a new regulation or order
based on a risk-based determination. In October 2019, the federal banking agencies issued final rules that tailored the regulatory requirements in
effect at that time related to capital, liquidity and enhanced prudential standards to align with the risk and complexity profiles of banking institutions with
total consolidated assets of $100 billion or more. Under the final rules, which became effective in December 2019, DFS is considered a Category IV
institution and therefore subject to the least stringent category of enhanced prudential standards for bank holding companies with at least $100 billion
in total assets. Among other things, DFS is required to submit to supervisory stress tests every other year rather than annually, is no longer subject to
regulations requiring DFS to submit the results of company-run capital stress tests and is no longer subject to the liquidity coverage ratio. However,
DFS is still required to submit annual capital plans to the Federal Reserve and remains subject to other core components of enhanced prudential
standards, such as risk-management and risk committee requirements and liquidity risk management regulations.
In January 2021, the Federal Reserve finalized regulatory amendments that made targeted changes to the capital planning, regulatory reporting
and stress capital buffer (“SCB”) requirements for firms subject to Category IV standards, including DFS, to be consistent with the Federal Reserve’s
regulatory tailoring framework that became effective in December 2019. Among other things, the amended rules provide Category IV institutions with
the option to submit to supervisory stress tests during off years if they wish for the Federal Reserve to reset the stress test portion of their SCB
requirement.
In accordance with the capital plan rule amendments, we elected not to participate in the 2023 supervisory stress tests, but did submit to the
Federal Reserve a capital plan based on a forward-looking assessment of income and capital under baseline and stressful conditions. In July 2023,
the Federal Reserve disclosed that Discover’s SCB was unchanged at 2.5%, beginning October 1, 2023 through September 30, 2024. On April 5,
2024, we submitted our 2024 capital plan to the Federal Reserve. On June 26, 2024, the Federal Reserve announced results of the 2024
Comprehensive Capital Analysis and Review (“CCAR”) exercise, followed by the release of the final large bank capital requirements on August 28,
2024. Our new SCB requirement increased to 3.1% and is effective from October 1, 2024, through September 30, 2025, subject to potential
recalculation, as discussed in the next paragraph.
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. We determined our entry into the Merger Agreement with
Capital One required us to resubmit our capital plan. We resubmitted our capital plan in May 2024, and the resubmission process is ongoing. Under
the capital plan rule and as a consequence of the resubmission, we must receive prior approval for any dividend or other capital distribution, other than
a capital distribution on a newly issued capital instrument, and the Federal Reserve may recalculate our SCB.
DFS is subject to the Federal Reserve’s supervisory rating system for large financial institutions (“LFI Rating System”). The LFI Rating System is
intended to align more closely with the Federal Reserve’s current supervisory programs for large financial institutions, enhance the clarity and
consistency of supervisory assessments and provide greater transparency regarding the consequences of a given rating. Under the LFI Rating
System, the Federal Reserve does not provide an institution with an overall composite rating but instead evaluates and assigns ratings for each of the
following three components: capital planning and positions; liquidity risk management and positions; and governance and controls. An institution
subject to the LFI Rating System, such as DFS, will not be considered “well managed” under applicable regulations if it is assigned a deficient rating in
any one component, which would typically be a barrier for seeking the Federal Reserve’s approval to engage in new or expansionary activities.
Regulatory and supervisory developments, findings and ratings have in the past negatively impacted and could in the future negatively impact
our business strategies or require us to limit or change our business practices, restructure our products in ways that we may not currently anticipate,
limit our product offerings, invest more management time and resources in compliance efforts, limit the fees we can charge for services or limit our
ability to pursue certain business opportunities and obtain related required regulatory approvals. For additional information regarding bank regulatory
limitations on acquisitions and investments, see “— Acquisitions and Investments.” See Note 19: Litigation and Regulatory Matters to our consolidated
financial statements for more information on recent matters affecting us. Regulatory developments could also influence our strategies, impact the value
of our assets, or otherwise adversely affect our businesses. For more information regarding the regulatory environment and developments under the
Dodd-Frank Act, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Environment and
Developments” and “Risk Factors.”
-20-
Table of Contents
Capital, Dividends and Share Repurchases
DFS and Discover Bank are subject to capital rules adopted by federal banking regulators, which include maintaining minimum capital and
leverage ratios for capital adequacy and higher ratios to be deemed “well-capitalized” for other regulatory purposes. DFS and Discover Bank are
required to maintain Tier 1 and total capital equal to at least 6% and 8% of our total risk-weighted assets, respectively. DFS and Discover Bank are
also required to maintain a minimum “leverage ratio” (Tier 1 capital to adjusted total assets) of 4% and a common equity Tier 1 capital ratio (common
equity Tier 1 capital to total risk-weighted assets) of 4.5%. Further, under the Federal Reserve’s current capital plan requirements, DFS is required to
demonstrate that under stress scenarios we will maintain each of the minimum capital ratios on a pro-forma basis throughout the nine-quarter planning
horizon. The capital rules also require DFS and Discover Bank to maintain a buffer, consisting solely of CET1 capital, in addition to the minimum risk-
based requirements. Failure to satisfy the buffer requirement in full results in graduated constraints on capital distributions and discretionary executive
compensation. The severity of the constraints depends on the amount of the shortfall and the Company’s eligible retained income, defined as the
greater of (i) net income for the four preceding quarters net of distributions and associated tax effects not reflected in net income and (ii) the average of
net income over the preceding four quarters.
In addition to the supervisory minimum levels of capital described above, Federal Reserve rules applicable to DFS require maintenance of the
following minimum capital ratios to be considered “well-capitalized” for certain purposes under Regulation Y (12 CFR 225): (i) a Tier 1 risk-based
capital ratio of 6% and (ii) a total risk-based capital ratio of 10%. Our bank subsidiary is required by the FDIC’s Prompt Corrective Action rules to
maintain the following minimum capital ratios to be considered “well-capitalized”: (i) a common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 risk-based
capital ratio of 8%; (iii) a total risk-based capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%. Under the Prompt Corrective Actions rules, an
institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an
unsafe or unsound condition or if it receives an unsatisfactory examination rating for certain matters. A bank’s capital category is determined solely for
the purpose of applying Prompt Corrective Action regulations, and the capital category may not constitute an accurate representation of the bank’s
overall financial condition or prospects for other purposes. At December 31, 2024, DFS met all requirements to be deemed “well-capitalized” pursuant
to the applicable regulations. For related information regarding our bank subsidiary see “— FDIA” below.
There are various federal and state law limitations on the extent to which our bank subsidiary can provide funds to us through dividends, loans or
otherwise. These limitations include minimum regulatory capital requirements, federal and state banking law requirements concerning the payment of
dividends out of net profits or surplus, affiliate transaction limits and general federal and state regulatory oversight to prevent unsafe or unsound
practices. In general, federal and applicable state banking laws prohibit, without first obtaining regulatory approval, insured depository institutions
(“IDIs”), such as Discover Bank, from making dividend distributions if such distributions are not paid out of available earnings or would cause the
institution to fail to meet applicable capital adequacy standards. Limitations on our ability to receive dividends from our bank subsidiary could have a
material adverse effect on our liquidity, including our ability to pay dividends on our stock or interest and principal on our debt. For more information,
see “— FDIA” below.
Additionally, we are subject to regulatory requirements relative to capital distributions, including common stock dividends and repurchases,
imposed by the Federal Reserve as part of its stress testing framework and CCAR program.
For more information on capital planning, including additional conditions and limits on our ability to pay dividends and repurchase our stock, see
“— Bank Holding Company Regulation,” “Risk Factors — Operational and Other Risk — We may be limited in our ability to pay dividends on and
repurchase our stock,” “Risk Factors — Operational and Other Risk — We are a holding company and depend on payments from our subsidiaries,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Environment and Developments,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital” and Note 17:
Capital Adequacy to our consolidated financial statements.
FDIA
The FDIA imposes various requirements on IDIs. For example, the FDIA requires, among other things, the federal banking regulators to take
“prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five
capital categories: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The
federal banking regulators must take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with
-21-
Table of Contents
respect to institutions which are undercapitalized, significantly undercapitalized or critically undercapitalized. A depository institution’s capital category
will depend on how its capital levels compare to various relevant capital measures and certain other factors that are established by regulation. At
December 31, 2024, Discover Bank met all applicable requirements to be deemed “well-capitalized.”
The FDIA also prohibits any depository institution from making any capital distributions (including payment of a dividend) or paying any
management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are
subject to growth limitations and are required to submit a capital restoration plan to its appropriate federal banking regulator. For a capital restoration
plan to be acceptable, among other things, the depository institution’s parent holding company must guarantee that the institution will comply with the
capital restoration plan.
If a depository institution fails to submit an acceptable capital restoration plan, or fails to implement an approved plan, it is treated as if it is
“significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The FDIA prohibits insured banks from accepting brokered deposits or offering interest rates on any deposits significantly higher than the
prevailing rate in the bank’s normal market area or nationally (depending upon where the deposits are solicited), unless it is “well-capitalized,” or it is
“adequately capitalized” and receives a waiver from the FDIC. Under current FDIC regulations, a bank that is less than “well-capitalized” is generally
prohibited from soliciting deposits by offering an interest rate that exceeds 75 basis points over the national market average or 120 percent of the
current yield on a similar maturity U.S. Treasury obligation plus 75 basis points, whichever is higher. There are no such restrictions under the FDIA on
a bank that is “well-capitalized.” As of December 31, 2024, Discover Bank met the FDIC’s definition of a “well-capitalized” institution for purposes of
accepting brokered deposits. An inability to accept brokered deposits in the future could materially adversely impact our funding costs and liquidity. For
more information, see “Risk Factors — Credit, Market and Liquidity Risk — An inability to accept or maintain deposits in the future could materially
adversely affect our liquidity position and our ability to fund our business.”
The FDIA also affords IDIs, such as Discover Bank, the ability to “export” interest rates permitted under the laws of the state where the bank is
located. Discover Bank is located in Delaware and, therefore, can charge interest on loans to out-of-state borrowers at rates permitted under Delaware
law, regardless of the usury limitations imposed by the state laws of the borrower’s residence. Delaware law does not limit the amount of interest that
may be charged on loans of the type offered by Discover Bank. This flexibility facilitates the current nationwide lending activities of Discover Bank.
The FDIA subjects Discover Bank to deposit insurance assessments. In an effort to bolster the reserves of the Deposit Insurance Fund, the
Dodd-Frank Act raised the statutory minimum reserve ratio for the Fund to 1.35% and removed the statutory cap for the designated reserve ratio
(“DRR”). The FDIA requires the FDIC to designate and publish a DRR annually. For 2024, the DRR was 2.00%. The FDIC also recently amended its
deposit insurance regulations to increase initial base deposit insurance assessment rate schedules, beginning with the first quarterly assessment
period of 2023, which will raise Discover Bank’s cost of deposit insurance. Further increases may occur in the future. In November 2023, the FDIC
approved a final rule to implement a special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured
depositors following the failure of two domestic banks in March 2023. The assessment base for the special assessment is equal to an IDI’s estimated
uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion. The special assessment will be collected at an annual
rate of approximately 13.4 basis points for an anticipated total of eight quarterly assessment periods, beginning with the first quarterly assessment
period of 2024 (i.e., January 1 through March 31, 2024). Due to the increased estimate of losses, in June 2024, the FDIC announced that it projects
that the special assessment will be collected for an additional two quarters beyond the initial eight-quarter collection period, at a lower rate.
Discover Bank is subject to the FDIC’s final rule requiring periodic submission of a resolution plan to the FDIC. In June 2024, the FDIC approved
a final rule to strengthen resolution planning for IDIs with at least $50 billion in total assets. IDIs with $100 billion or more in average total assets, such
as Discover Bank, are now required to submit full resolution plans (“Full Plans”) on a triennial basis, with informational supplement filings (“Interim
Supplements”) due in years a Full Plan is not required. The rule also includes updated and new informational requirements. It also, among other
things, revises the required contents of a resolution plan for an IDI with $100 billion or more in total assets and addresses the IDI’s capabilities to
produce valuations that the FDIC could use to conduct the statutorily required least-cost analysis in the event of the IDI’s failure. The final rule became
effective October 1, 2024 and Discover Bank’s first
-22-
Table of Contents
Full Plan under the updated rule is due on or before July 1, 2026, with our first Interim Supplement due on or before July 1, 2025.
Acquisitions and Investments
Since we are a bank holding company, and Discover Bank is an IDI, we are subject to banking laws and regulations that limit the types of
mergers, acquisitions and investments that we can make. In addition, certain permitted mergers, acquisitions and investments that we seek to make
are subject to the prior review and approval of our banking regulators, including the Federal Reserve and the FDIC. Our banking regulators have broad
discretion on whether to approve proposed mergers, acquisitions and investments. In deciding whether to approve a proposed acquisition, federal
banking regulators will consider, among other factors, the effect of the acquisition on competition; our financial condition and our future prospects,
including current and projected capital ratios and levels; the competence, experience and integrity of our management and our record of compliance
with laws and regulations, especially consumer protection laws; the convenience and needs of the communities to be served, including our record of
compliance under the Community Reinvestment Act; and our effectiveness in combating money laundering. Therefore, results of supervisory activities
of the banking regulators, including examination results and ratings, can impact whether regulators approve proposed acquisitions and investments.
For more information on recent matters affecting us, see Note 19: Litigation and Regulatory Matters to our consolidated financial statements. For
information on the regulatory environment, see “Risk Factors.”
In addition, certain acquisitions of our voting stock may be subject to regulatory approval or notice under federal or Delaware state law. Investors
are responsible for ensuring that they do not, directly or indirectly, acquire shares of our stock in excess of the amount that can be acquired without
regulatory approval under the Change in Bank Control Act, the Bank Holding Company Act and the Delaware Change in Bank Control provisions,
which prohibit any person or company from acquiring control of us without, in most cases, the prior written approval of each of the FDIC, the Federal
Reserve and the Delaware Commissioner.
Consumer Financial Services
The relationship between us and our U.S. customers is regulated extensively under federal and state consumer protection laws. Federal laws
include the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the GLBA, the Credit Card Accountability
Responsibility and Disclosure Act, the Servicemembers Civil Relief Act, the Military Lending Act, the Truth in Savings Act, the Electronic Fund Transfer
Act and the Dodd-Frank Act. These and other federal laws, among other things, prohibit “unfair, deceptive or abusive” practices, require disclosures of
the cost of credit and other terms of credit and deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions,
regulate the use of credit report information, provide privacy protections, require safe and sound banking operations, restrict our ability to raise interest
rates on credit cards, protect customers serving in the military and their dependents and subject us to substantial regulatory oversight. The CFPB has
rulemaking and interpretive authority under the Dodd-Frank Act and other federal consumer financial services laws, as well as broad supervisory,
examination and enforcement authority over large providers of consumer financial products and services, such as DFS. In October 2024, the CFPB
issued a final rule requiring providers of payment accounts or products, such as Discover Bank, to make data available to consumers upon request
regarding the products or services they obtain from the provider, and to third parties, with the consumer’s express authorization, for the purpose of
such third parties providing the consumer with financial products or services requested by the consumer. Data required to be made available under the
rule includes transaction information, account balance, account and routing numbers, terms and conditions, upcoming bill information and certain
account verification data. For banks with at least $10 billion and less than $250 billion in total assets, compliance with the rule is required by April 1,
2027. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Environment
and Developments — Consumer Financial Services.” State and, in some cases, local laws also may regulate in these areas, as well as in the areas of
collection practices, and may provide other additional consumer protections.
Violations of applicable consumer protection laws can result in significant potential liability in litigation by customers, including civil monetary
penalties, actual damages, restitution and attorneys’ fees. Federal banking regulators, as well as state attorneys general and other state and local
consumer protection agencies, also may seek to enforce consumer protection requirements and obtain these and other remedies. Further violations
may cause federal banking regulators to deny, or delay approval of, potential acquisitions and investments. See “— Acquisitions and Investments.”
-23-
Table of Contents
We are subject to additional laws and regulations affecting mortgage lenders. Federal, state and, in some instances, local laws apply to
mortgage lending activities. These laws generally regulate the manner that mortgage lending and lending-related activities are conducted, including
advertising and other consumer disclosures, payments for services and recordkeeping requirements. These laws include the Real Estate Settlement
Procedures Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage
Disclosure Act and various state laws. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Regulatory Environment and Developments — Consumer Financial Services.”
Payment Networks
Our payment networks deliver switching and settlement services to financial institutions and other program participants for a variety of ATM,
payment and other electronic banking transactions. These operations are regulated by certain federal and state laws, including banking, privacy and
data security laws. Moreover, the Discover and PULSE networks are subject to examination under the oversight of the Federal Financial Institutions
Examination Council, an interagency body composed of the federal banking regulators and the National Credit Union Administration. In addition, as our
payments business has expanded globally, we are subject to government regulation, both directly and indirectly through regulation affecting network
licenses, in countries in which our networks operate or our cards are used. Changes in existing federal, state or international regulation could increase
the cost or risk of providing network services, change the competitive environment, or otherwise materially adversely affect our operations. The legal
environment regarding privacy and data security is particularly dynamic and any unpermitted handling or disclosure of confidential customer
information could have a material adverse impact on our business, including loss of consumer confidence.
The Dodd-Frank Act contains several provisions that are relevant to the business practices, network transaction volume, revenue and prospects
for future growth of our debit card network business. The Dodd-Frank Act requires that merchants control the routing of debit transactions and that
interchange fees received by certain payment card issuers on debit card transactions be “reasonable and proportional” to the issuer’s cost in
connection with such transactions, as determined by the Federal Reserve. The Dodd-Frank Act also requires the Federal Reserve to restrict debit card
networks and issuers from requiring debit card transactions to be processed solely on a single payment network or two or more affiliated networks, or
from requiring that transactions be routed over certain networks.
Money Laundering & Terrorist Financing Prevention Program
Federal laws and regulations impose obligations on U.S. financial institutions to implement policies, procedures and controls which are
reasonably designed to prevent, detect and report instances of money laundering and the financing of terrorism and to verify the identity of their
customers. Federal banking regulators consider a financial institution’s anti-money laundering activities when reviewing bank mergers and bank
holding company acquisitions. Failure of a financial institution to maintain and implement adequate anti-money laundering programs and terrorist
financing could have legal and reputational consequences for the institution, including the denial by federal regulators of proposed merger, acquisition,
restructuring or other expansionary activity.
We maintain an enterprise-wide program designed to comply with all applicable anti-money laundering and anti-terrorism laws and regulations,
including the Anti-Money Laundering Act, the Bank Secrecy Act and the USA PATRIOT Act of 2001. This program includes policies, procedures,
training and other internal controls designed to mitigate the risk of money laundering or terrorist financing posed by our products, services, customers
and geographic locale. These controls include procedures and processes to detect and report suspicious transactions, perform customer due diligence
and meet all recordkeeping and reporting requirements related to particular transactions involving currency or monetary instruments. The program is
coordinated by our anti-money laundering compliance and sanctions officer and undergoes regular independent audits to assess its effectiveness. Our
program is typically reviewed on an annual basis by federal banking regulators. For additional information regarding bank regulatory limitations on
acquisitions and investments, see “— Acquisitions and Investments.”
Sanctions Programs
We have a program designed to comply with applicable economic and trade sanctions programs, including those administered and enforced by
the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). These sanctions are usually targeted against foreign countries,
terrorists, international narcotics traffickers and those believed to be involved in the proliferation of weapons of mass destruction, among others. These
regulations generally
-24-
Table of Contents
require either the blocking of accounts or other property of specified entities or individuals, but they may also require the rejection of certain
transactions involving specified entities or individuals. Blocked assets cannot be paid out, withdrawn, set off or transferred in any manner without a
license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences, including denial by federal
regulators of proposed merger, acquisition, restructuring or other expansionary activity. We maintain policies, procedures and other internal controls
designed to comply with these sanctions programs.
Information About Our Executive Officers
Set forth below is information concerning our executive officers, each of whom is a member of our Executive Management Committee.
Name
Age
Position
J. Michael Shepherd
69
Director, Interim Chief Executive Officer and President
John T. Greene
59
Executive Vice President, Chief Financial Officer
Carolyn D. Blair
57
Executive Vice President, Chief Human Resources Officer
Daniel P. Capozzi
53
Executive Vice President, President - Consumer Banking
Jason P. Hanson
46
Executive Vice President, President - Payment Services
Amy Hellen
45
Executive Vice President, Chief Risk Officer
Jason J. Strle
48
Executive Vice President, Chief Information Officer
Keith E. Toney
53
Executive Vice President, President - Credit and Decision Management
Kelly R. Welsh
72
Executive Vice President, Interim Chief Legal Officer, General Counsel and Head of Corporate and Public
Affairs
Karl W. Werwath
62
Executive Vice President, Chief Transformation Officer
J. Michael Shepherd is our Director, Interim CEO and President, effective in April 2024. He is the former Chairman and CEO of BancWest
Corporation and its subsidiary, Bank of the West, the US retail arm of BNP Paribas Group (prior to the Bank of the West’s acquisition by BMO Financial
Group in February 2023). He held positions of increasing responsibility after joining Bank of the West in 2004, including general counsel, president and
chairman & CEO. Additionally, he served as the chairman of BNP Paribas USA, Inc. from 2016 to 2019 and as a director from 2016 to February 2023.
Before joining Bank of the West, Mr. Shepherd served as general counsel of the Bank of New York Company, Inc. and of Shawmut National
Corporation. He previously served as Senior Deputy Comptroller of the Currency, Associate Counsel to the President of the United States and Deputy
Assistant Attorney General. He serves on the board of directors of Pacific Mutual Holdings Inc. Mr. Shepherd is a graduate of Stanford University and
the University of Michigan Law School.
John T. Greene is our Executive Vice President, Chief Financial Officer (“CFO”). He has held this role since September 2019. Prior to joining
Discover, Mr. Greene served as executive vice president, chief financial officer and treasurer at Bioverativ, a global biopharmaceutical company. From
2014 to 2016, he was chief financial officer for Willis Group Holdings, which was preceded by more than eight years at HSBC Holdings where he held
CFO positions for several divisions, including retail bank and wealth management, insurance and consumer and mortgage lending. He also held
various CFO roles in his 12-year tenure with General Electric from 1993 to 2005. Mr. Greene holds a bachelor’s degree in accounting from the State
University of New York and an MBA from the Kellogg School of Management at Northwestern University.
-25-
Table of Contents
Carolyn D. Blair is our Executive Vice President, Chief Human Resources Officer. She has held this role since March 2024. She brings three
decades of experience in large, complex multinational financial services organizations and is known as a highly effective leader who has helped
companies transform, scale and grow. Prior to joining Discover, Ms. Blair served as president and founder of Tayside Group, a boutique human
resources consulting firm, from 2021 to 2024, as well as executive vice president and chief human resources officer at Allstate Insurance Company
from 2019 to 2021 and Sun Life Financial from 2012 to 2018. She also worked at TD Bank Group for over 20 years, where she held several senior
human resources leaderships positions, including executive vice president, human resources, TD Bank N.A. Ms. Blair earned an honours bachelor of
arts from McMaster University and completed the Human Resources Executive Program at the University of Michigan.
Daniel P. Capozzi is our Executive Vice President, President - Consumer Banking. He has held this role since July 2023. In his current role, Mr.
Capozzi oversees enterprise marketing, consumer products (US Cards, Lending and Deposits) and customer care operations. Prior to this role, he
served as president – US Cards from December 2020 to 2023. In October 2018, he was appointed to the role of executive vice president, president -
Credit Operations and Decision Management, and also previously served as senior vice president, Credit and Decision Management beginning in
June 2017. Mr. Capozzi has also held leadership positions in the Deposits business and Corporate Finance at Discover. Prior to joining Discover, he
held various leadership positions in Finance at Citibank and Bank of America. Mr. Capozzi holds a bachelor’s degree in business administration from
Northeastern University.
Jason P. Hanson is our Executive Vice President, President – Payment Services. He has held this role since July 2023, with responsibility for
Discover Network, PULSE and Diners Club International. Since joining Discover in 2019, Mr. Hanson has held various leadership positions across
Payment Services. Prior to joining Discover, he held roles as a senior vice president at FIS/WorldPay, as a partner at McKinsey & Company and as an
officer in the U.S. Army. Mr. Hanson holds a bachelor’s degree in economics from the United States Military Academy, West Point and an MBA from
the University of Chicago Booth School of Business.
Amy Hellen was named Executive Vice President, CRO in April 2024 and oversees all aspects of the corporate risk management function. Prior
to then, she served as senior vice president, chief compliance officer from December 2021 to April 2024, and as both the CRO and chief compliance
officer from April to June 2024. Before joining Discover, Ms. Hellen spent 15 years with TD Bank where she led consumer compliance and held a
variety of senior roles in risk management including anti-money laundering compliance and retail banking. Prior to that, she worked in retail banking for
Chase, PNC and Fifth Third Bank. Ms. Hellen achieved her undergraduate degree from Pennsylvania State University and her MBA from Syracuse
University.
Jason J. Strle is our Executive Vice President, Chief Information Officer (“CIO”). He has held this role since July 2023. Prior to joining Discover,
Mr. Strle served as executive vice president and group CIO for Corporate Functions at Wells Fargo from 2022 to 2023, and Consumer Banking,
Payments and Digital from 2017 to 2022. Prior to Wells Fargo, he spent almost 13 years with JPMorgan Chase in roles of increasing scope,
culminating as CIO of Consumer and Small Business Banking. Mr. Strle holds a bachelor’s degree in computer science from Ohio University in Athens,
Ohio.
Keith E. Toney is our Executive Vice President, President – Credit and Decision Management. He has held this role since July 2023 and
previously served as executive vice president, president – data and analytics from October 2020 to July 2023. Prior to that, Mr. Toney served as senior
vice president, chief data officer beginning in December 2019. From 2017 to 2019, Mr. Toney held leadership positions with The Hartford Financial
Services Group, where he last served as senior vice president – product, data science and analytics. Mr. Toney, who also served as chief data scientist
at Connexion Point from 2015 to 2017, has more than 20 years of information technology and risk management experience in financial services and
analytics. He holds a bachelor’s degree and a master’s degree in mathematics from Ohio State University.
Kelly R. Welsh was named Executive Vice President, Interim Chief Legal Officer, General Counsel and Head of Corporate and Public Affairs in
December 2024. Prior to Discover, he was president of the Civic Committee of the Commercial Club of Chicago from 2017 to 2022 and served on the
board of directors of Bank of the West and of BancWest Holdings Inc. from 2018 to 2023. Mr. Welsh previously served as general counsel of the
United States Department of Commerce and as executive vice president, general counsel and a member of the management committee of Northern
Trust and Ameritech. He also was corporation counsel of the City of Chicago and a partner at the law firm of Mayer Brown. Mr. Welsh received an A.B.
from Harvard College, an M.A. from the University of Sussex and a J.D. from Harvard Law School, where he was an editor of the Harvard Law Review.
-26-
Table of Contents
Karl W. Werwath is our Executive Vice President, Chief Transformation Officer after joining Discover in April 2024. In this role, he leads the
Company’s integration management office for the pending merger with Capital One and oversees broader enterprise project and program
management initiatives. Prior to joining Discover, from 2020 to 2023, he served as chief operating officer at Bank of the West/BNP Paribas USA, Inc.
and BMO Financial Group following its integration with Bank of the West in 2023. Mr. Werwath also served as Bank of the West’s head of technology,
operations, security and transformation from 2018 to 2020. Prior to that, he spent 19 years at Capital One where he held a variety of roles, including
head of commercial bank client service and digital solutions, head of retail and direct bank digital transformation and head of U.S. credit card customer
operations. Prior to Capital One, he held a variety of positions at Motorola including two joint ventures and three international start-ups. Mr. Werwath
holds a bachelor’s degree in manufacturing engineering from the University of Illinois, a master’s degree of engineering management from
Northwestern University and an MBA, with a concentration in marketing and finance, from the University of Chicago.
-27-
Table of Contents
Item 1A. Risk Factors
You should carefully consider each of the following risks described below and all of the other information in this annual report on Form 10-K in
evaluating us. Our business, financial condition, cash flows and/or results of operations could be materially adversely affected by any of these risks.
The trading price of our common stock could decline due to any of these risks. This annual report on Form 10-K also contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including the risks faced by us described below and elsewhere in this annual report on Form 10-K. See “Special Note
Regarding Forward-Looking Statements,” which immediately follows the risks below.
Summary
The following is a summary of the most important risks that could materially adversely affect our business, financial condition, cash flows and/or
results of operations, and should be read together with the more detailed description of risks that follow:
•
Merger Related Risks: The merger is subject to a number of risks, including that the required regulatory approvals may not be obtained in a
timely manner, if at all, that the merger may be terminated or abandoned by the parties and that it may be more difficult, costly or time
consuming than expected to realize, or that the combined company will fail to realize, the anticipated synergies and benefits of the merger.
•
Economic, Regulatory, Enforcement and Litigation: As a consumer financial services and payment services company, we are subject to risks
stemming from laws and regulations, compliance therewith and related litigation and an uncertain economic environment.
•
Strategic: We must successfully compete against firms that are larger than we are and have more resources than we do as well as firms that
are smaller and potentially disruptive to our industry as we manage the unique risks associated with each of our product offerings.
•
Credit, Market and Liquidity: We must effectively manage our desire to grow our loan portfolio against the risk that those loans will not be
repaid, while ensuring that we manage the underlying cost of the funds we use to make those loans and sources of funding we rely on to
fund those loans.
•
Operational and Other Risks: We must remain operationally effective and manage operational and reputational risks such as fraud and
cybersecurity, while continuing to monitor and effectively respond to an external environment that may negatively impact the utilization or
desirability of our products and services.
Merger Related Risks
Failure to complete the merger with Capital One could negatively affect our stock price and our future business and financial results.
If our pending merger with Capital One is not completed for any reason, our ongoing business may be adversely affected and, without realizing
any of the benefits of having completed the merger, we would be subject to a number of risks, including the following:
•
we may experience negative reactions from the financial markets, including negative effects on our stock price;
•
we may experience negative reactions from our customers and vendors;
•
we will have incurred substantial expenses and will be required to pay certain costs relating to the merger, including legal, accounting, and
other fees, whether or not the merger is completed; and
•
our management team will have devoted substantial time and resources to matters relating to the merger, and would otherwise have devoted
their time and resources to other opportunities that may have been beneficial to us, which could cause us to lag competitor advances.
In addition, if the Merger Agreement is terminated and we seek another merger or business combination, the market price of our common stock
could decline, which could make it more difficult to find a party willing to offer equivalent or more attractive consideration than the consideration Capital
One has agreed to provide in the merger.
-28-
Table of Contents
We will be subject to business uncertainties and contractual restrictions while the merger with Capital One is pending.
Uncertainty about the effect of the merger on our employees and customers may have an adverse effect on us. These uncertainties may impair
our ability to attract, retain and motivate key personnel until the merger is completed and could cause customers and others that deal with us to seek
to change existing business relationships with us. In addition, subject to certain exceptions, we have agreed to operate our business in the ordinary
course in all material respects and to refrain from taking certain actions that may adversely affect our ability to consummate the transactions
contemplated by the Merger Agreement on a timely basis without the consent of Capital One. These restrictions may prevent us from pursuing
attractive business opportunities that may arise prior to the completion of the merger. Employee retention may be particularly challenging during the
pendency of the merger, as employees may experience uncertainty about their roles with the surviving corporation following the merger. All of these
risks may be exacerbated if the timing to closing is longer than expected.
Shareholder litigation could prevent or delay the closing of our pending merger with Capital One or otherwise negatively affect our business
and operations.
We may incur additional costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with our pending
merger with Capital One. Such litigation could have an adverse effect on our financial condition and results of operations and could prevent or delay
the consummation of the merger.
We have incurred and are expected to incur substantial costs related to the merger.
We have incurred and expect to incur a number of non-recurring costs associated with the merger. These costs include, or will include, legal,
financial advisory, accounting, consulting and other advisory fees, retention, severance and employee benefit-related costs, public company filings fees
and other regulatory fees, financial printing and other printing costs. Some of these costs are payable by us regardless of whether or not the merger is
completed.
Because the market price of Capital One common stock may fluctuate, our stockholders cannot be certain of the precise value of the
merger consideration they may receive in our pending merger with Capital One.
At the time our pending merger with Capital One is completed, each issued and outstanding share of our common stock (other than certain
shares held by us or Capital One) will be converted into the right to receive 1.0192 shares of Capital One common stock. There will be a time lapse
between each of the date of the proxy statement/prospectus for the stockholders’ meeting to approve the merger, the date on which our stockholders
vote to approve the merger, and the date on which Discover stockholders entitled to receive shares of Capital One common stock actually receive
such shares. The market value of Capital One common stock may fluctuate during these periods as a result of a variety of factors, including general
market and economic conditions, changes in our and Capital One’s businesses, operations and prospects, and regulatory considerations. Many of
these factors are outside of our and Capital One’s control. The actual value of the shares of Capital One common stock received by our shareholders
will depend on the market value of shares of Capital One common stock at the time the merger is completed. This market value may be less or more
than the value used to determine the exchange ratio stated in the Merger Agreement and the proxy statement/prospectus.
Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or
that could have an adverse effect on the combined company following the proposed merger with Capital One.
Before the merger with Capital One and the subsequent merger of Capital One, National Association and Discover Bank (the “bank merger”)
may be completed, various approvals, consents and non-objections that have not yet been obtained must be obtained, including from the FRB and the
OCC. In determining whether to grant these approvals, such regulatory authorities consider a variety of factors, including the regulatory standing of
each party. These approvals could be delayed or not obtained at all, including due to an adverse development in either party’s regulatory standing or in
any other factors considered by regulators when granting such approvals; governmental, political or community group inquiries, investigations or
opposition; or changes in legislation or the political environment generally.
The approvals that are granted may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of the
combined company’s business or require changes to the terms of the transactions contemplated by the Merger Agreement. There can be no
assurance that regulators will not impose any such conditions,
-29-
Table of Contents
limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion
of any of the transactions contemplated by the Merger Agreement, imposing additional material costs on or materially limiting the revenues of the
combined company following the merger or otherwise reducing the anticipated benefits of the merger if the merger were consummated successfully
within the expected timeframe. In addition, there can be no assurance that any such conditions, terms, obligations or restrictions will not result in the
delay or abandonment of the merger. Additionally, the completion of the merger is conditioned on the absence of certain orders, injunctions or decrees
by any court or regulatory agency of competent jurisdiction that would prohibit or make illegal the completion of any of the transactions contemplated
by the Merger Agreement.
In addition, despite the parties’ commitments to using their reasonable best efforts to comply with conditions imposed by regulators, under the
terms of the Merger Agreement, neither us nor Capital One, nor any of their respective subsidiaries, is required to take any action, or commit to take
any action, or agree to any condition or restriction, in connection with obtaining the required permits, consents, approvals and authorizations of
governmental entities that would reasonably be expected to have a material adverse effect on the combined company and its subsidiaries, taken as a
whole, after giving effect to the merger and the bank merger.
The Merger Agreement between us and Capital One may be terminated in accordance with its terms and the merger may not be completed.
The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include,
among other things: (i) approval by each of our shareholders and Capital One’s shareholders of certain matters relating to the merger, which was
obtained on February 18, 2025; (ii) the receipt of required regulatory approvals, including the approval of the FRB and the OCC; and (iii) the absence
of any order, injunction, decree or other legal restraint preventing the completion of the merger, the bank merger or any of the other transactions
contemplated by the Merger Agreement or making the completion of the merger, the bank merger or any of the other transactions contemplated by the
merger agreement illegal. Each party’s obligation to complete the merger is also subject to certain additional customary conditions, including (a)
subject to applicable materiality standards, the accuracy of the representations and warranties of the other party, (b) the performance in all material
respects by the other party of its obligations under the Merger Agreement and (c) the receipt by each party of an opinion from its counsel to the effect
that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986.
These conditions to the closing may not be fulfilled in a timely manner or at all, and, accordingly, the merger may not be completed. In addition,
the parties can mutually decide to terminate the Merger Agreement at any time, before or after the requisite shareholder approvals, or we or Capital
One may elect to terminate the Merger Agreement in certain other circumstances.
Combining us and Capital One may be more difficult, costly or time-consuming than expected, and the combined company may fail to
realize the anticipated benefits of the merger.
The success of the merger will depend, in part, on the ability to realize the anticipated revenue and cost synergies from combining the
businesses of us and Capital One. To realize the anticipated revenue and cost synergies from the merger, we and Capital One must successfully
integrate and combine businesses in a manner that permits those revenue and cost synergies to be realized without adversely affecting current
revenues and future growth. If we and Capital One are not able to successfully achieve these objectives, the anticipated benefits of the merger may
not be realized fully or at all or may take longer to realize than expected. In addition, the revenue and cost synergies of the merger could be less than
anticipated, and integration may result in additional and unforeseen expenses.
An inability to realize the full extent of the anticipated benefits of the merger and the other transactions contemplated by the Merger Agreement,
as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, levels of expenses and operating
results of the combined company following the completion of the merger, which may adversely affect the value of the common stock of the combined
company following the completion of the merger.
We and Capital One have operated and, until the completion of the merger, must continue to operate, independently. It is possible that the
integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards,
controls, procedures and policies that adversely affect the companies’ ability to maintain relationships with merchants, merchant acquirers, clients,
customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. Integration efforts between the
-30-
Table of Contents
companies may also divert management attention and resources. These integration matters could have an adverse effect on us during this transition
period and for an undetermined period after completion of the merger on the combined company.
The combined company may be unable to retain our and/or Capital One personnel successfully after the merger is completed.
The success of the merger will depend in part on the combined company’s ability to retain the talent and dedication of key employees currently
employed by us and Capital One. It is possible that these employees may decide not to remain with us or Capital One, as applicable, while the merger
is pending or with the combined company after the merger is consummated. If we and Capital One are unable to retain key employees, including
management, who are critical to the successful integration and future operations of the companies, we and Capital One could face disruptions in
operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs. In addition,
following the merger, if key employees terminate their employment, the combined company’s business activities may be adversely affected, and
management’s attention may be diverted from successfully hiring suitable replacements, all of which may cause the combined company’s business to
suffer. We and Capital One also may not be able to locate or retain suitable replacements for any key employees who leave either company.
Current Economic and Regulatory Environment
Economic conditions could have a material adverse effect on our business, results of operations and financial condition.
As a provider of consumer financial services, our business, results of operations and financial condition are subject to the U.S. and global
economic environment. A customer’s ability and willingness to repay us can be impacted by not only economic conditions but also a customer’s other
payment obligations.
Economic conditions also can reduce the usage of credit cards in general and the average purchase amount of transactions industry-wide,
including our cards, which reduces interest income and transaction fees. We rely heavily on interest income from our credit card business to generate
earnings. Our interest income from credit card loans was $16.1 billion for the year ended December 31, 2024, which was 90% of net revenues (defined
as net interest income plus other income), compared to $14.4 billion for the year ended December 31, 2023, which was 91% of net revenues.
Economic conditions combined with a competitive marketplace could slow loan growth, resulting in reduced revenue growth from our core digital
banking business.
Financial regulatory developments have had an impact and will continue to significantly impact the environment for the financial services
industry, which could adversely impact our business, results of operations and financial condition.
Under the enhanced prudential standards that apply to bank holding companies, DFS is considered a Category IV institution and therefore
subject to the least stringent category of these standards for domestic bank holding companies with at least $100 billion in total assets. However, many
of the core components of the regulations implementing enhanced prudential standards continue to apply to DFS. Since 2020, DFS has been subject
to slightly more tailored requirements for capital stress testing, liquidity risk management and resolution planning. In addition, the Federal Reserve has
indicated that it intends to work with federal banking regulators on a revised proposal for changes to the regulatory capital rules issued by the federal
banking regulators under the Basel Committee's December 2010 framework (the "Basel III rules"), however any future rulemaking with respect to the
Basel III rules remain uncertain. The ultimate impact of any such rulemaking will depend on a number of factors, including the content of the final
rulemaking, future minimum regulatory requirements and management decisions regarding our product constructs, capital distributions and target
capital levels, and such rulemaking could result in significantly higher regulatory capital requirements for us.
The impact of the evolving regulatory environment on our business and operations depends upon a number of factors, including (i) the legislative
priorities of the U.S. Congress and the presidential administration, (ii) priorities and actions of the Federal Reserve, FDIC and CFPB, (iii) implications
resulting from our competitors and other marketplace participants and (iv) changing consumer behavior. Although the new U.S. presidential
administration may deemphasize the focus on financial regulation, state regulators, including attorneys general, may seek to fill a perceived void. For
additional information regarding bank regulatory matters impacting us, see “Business — Supervision and Regulation.”
-31-
Table of Contents
Regulatory and legislative developments, findings and actions have had and could continue to have a negative impact on our business
strategies or require us to: limit, exit or modify our business practices and product offerings; restructure our products in unanticipated ways; invest
more management time and resources in compliance efforts; limit the fees we charge for services; impact the value of our assets; or limit our ability to
pursue certain innovations and business opportunities and obtain related required regulatory approvals. For additional information regarding bank
regulatory limitations on acquisitions and investments, see “Business — Supervision and Regulation — Acquisitions and Investments.” Furthermore,
see Note 19: Litigation and Regulatory Matters to our consolidated financial statements for more information on recent matters affecting us. It is
possible that any new regulatory measures or legislation may disproportionately affect us due to our size, structure or product offerings, among other
things.
For example, both regulators and legislators have shown an increased focus on credit card fees. In March 2024, the CFPB issued a rule related
to late fees for credit card payments. However, the Fifth Circuit stayed the rule in June 2024. In June 2024, Illinois passed the Interchange Fee
Prohibition Act, which will prevent credit card issuers from collecting interchange fees on taxes and gratuities beginning in July 2025. In December
2024, a federal judge issued a preliminary injunction against the enforcement of the new law against national banks and federal savings associations,
but declined to prevent the enforcement of the law against other credit card issuers such as state banks, including Discover Bank and credit unions.
Compliance expectations and expenditures have steadily and significantly increased for us, and the same is true for other financial services
firms, as regulators have escalated their focus on the adequacy of controls to support business operations. We may have to invest further in risk
management, compliance and other functions in response to possible regulatory feedback. We may face compliance and regulatory risks if we
introduce new or changed products and services or enter into new business arrangements with third-party service providers, alternative payment
providers, or other industry participants. Heightened regulatory expectations and increased volume of regulatory changes may generate additional
expenses or require significant time and resources to maintain compliance.
For more information regarding the regulatory environment and developments potentially impacting us, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Regulatory Environment and Developments.”
Strategic Business Risk
We face competition in the credit card market from other consumer financial services providers and we may not be able to compete
effectively, which could result in fewer customers and lower account balances and could materially adversely affect our financial condition,
cash flows and results of operations.
The consumer financial services business is highly competitive. We compete with other consumer financial services providers, including non-
traditional providers of financing and payment services such as financial technology firms, based on several factors, including brand, reputation,
customer service, product offerings, incentives, pricing, digital payments and other terms. Competition in credit cards is also based on merchant
acceptance and the value provided to the customer by rewards programs and other innovations. Many credit card issuers have instituted rewards
programs that are similar to ours and, in some cases, could be viewed as more attractive to customers than our programs. These competitive factors
affect our ability to attract and retain customers, increase usage of our products and maximize the revenue generated by our products. In addition,
because most domestically-issued credit cards, other than those issued by American Express, are issued on the Visa and MasterCard networks, most
other card issuers benefit from the dominant position and marketing and pricing power of Visa and MasterCard. The competitive marketplace could
result in slower loan growth, resulting in reduced revenue growth from our core digital banking business. If we are unable to compete successfully, or if
competing successfully requires us to take aggressive actions in response to competitors’ actions, our financial condition, cash flows and results of
operations could be materially adversely affected.
We incur considerable costs in competing with other consumer financial services providers and many of our competitors have greater
financial resources than we do, which may place us at a competitive disadvantage and negatively affect our financial results.
We incur considerable costs in competing with other consumer financial services providers to attract and retain customers and increase usage of
our products. A substantial portion of this cost relates to marketing expenditures and rewards programs. We expect the competitive intensity in the
rewards space to continue, which could result in a continued increase in the cost of our rewards programs as a percentage of Discover Card sales
volume. Our consumer financial services products compete primarily based on pricing, terms and service. Because of the highly competitive
-32-
Table of Contents
nature of the credit card-issuing business, a primary method of competition among credit card issuers, including us, has been to offer rewards
programs, low introductory interest rates, attractive standard purchase rates and balance transfer programs that offer a favorable annual percentage
rate or other financial incentives for a specified length of time on account balances transferred from another credit card. This competitive environment
may be further complicated by the increased regulatory focus on rewards programs.
Competition is intense in the credit card industry and customers may have multiple credit cards, frequently switch credit cards or transfer their
balances to another card. We expect to continue to invest in initiatives to remain competitive in the consumer financial services industry, including the
launch of new cards and features, brand awareness initiatives, targeted marketing, online and mobile enhancements, e-wallet participation, customer
service improvements, credit risk management and operations enhancements and infrastructure efficiencies. However, there can be no assurance that
any of the costs we incur or incentives we offer to attempt to acquire and maintain accounts and increase usage of our products will be effective. In
addition, to the extent that we offer new products, features or services to remain competitive, we may be subject to increased operational or other
risks.
Furthermore, many of our competitors are larger than we are, have greater financial resources than we do, have more breadth in banking
products, have lower funding costs than we have and expect to have and have assets, such as branch locations and co-brand relationships, that may
be appealing to certain customers. For example, larger credit card issuers, which have greater resources than we do, may be better positioned to fund
appealing rewards, marketing and advertising programs. We may be at a competitive disadvantage as a result of the greater financial resources,
diversification and scale of many of our competitors.
Our costs directly affect our earnings results. Many factors can influence the amount of our costs, as well as how quickly it may increase. Our
ongoing investments in infrastructure, including technology such as generative artificial intelligence (“AI”), which may be necessary to maintain a
competitive business, integrate newly-acquired businesses and establish scalable operations, increase our costs. In addition, as our business
develops, changes or expands, additional costs can arise as a result of a reevaluation of business strategies, management of outsourced services,
asset purchases, structural reorganization, compliance with new laws or regulations or the acquisition of new businesses. If we are unable to manage
our costs successfully, our financial results will be negatively affected.
The inability to compete against other operators of payment networks and alternative payment providers could result in reduced transaction
volume, limited merchant acceptance of our cards, limited issuance of cards on our networks by third parties and materially reduced
earnings from our payment services business.
We face substantial and increasingly intense competition in the payments industry, both from traditional players and new, emerging alternative
payment providers. For example, we compete with other payment networks to attract Network Partners to issue credit and debit cards and other card
products on the Discover Global Network. Competition with other operators of payment networks is generally based on issuer fees, fees paid to
networks (including switch fees), merchant acceptance, network size and functionality, technological capabilities and other economic terms.
Competition is also based on customer perception of service quality, brand image, reputation and market share. Further, we are facing ongoing
competition from alternative payment providers, who may create innovative network or other arrangements with our primary competitors, large
merchants or other industry participants, which could adversely impact our costs, transaction volume and ability to grow our business.
Many of our competitors are well established, larger than we are and/or have greater financial resources or scale than we do. These competitors
have provided financial incentives to card issuers, such as large cash signing bonuses for new programs, funding for and sponsorship of marketing
programs and other bonuses. Visa and MasterCard each enjoy greater merchant acceptance and broader global brand recognition than we do.
Although we have made progress in merchant acceptance, we have not achieved global market parity with Visa and MasterCard. In addition, Visa and
MasterCard have entered into long-term arrangements with financial institutions that may have the effect of discouraging those institutions from issuing
cards on the Discover Network or issuing debit cards on the PULSE network. Some of these arrangements are exclusive, or nearly exclusive, which
further limits our ability to conduct material amounts of business with these institutions. If we are unable to remain competitive by adjusting issuer fees
and incentives, we may be unable to offer adequate pricing to Network Partners while maintaining sufficient net revenues.
We also face competition as merchants put pressure on transaction fees. Failing to adjust merchant fees or acquirer fees could adversely affect
our effort to increase merchant acceptance of credit cards issued on the Discover Global Network and may cause merchant acceptance to decrease.
This, in turn, could adversely affect our ability to attract and retain Network Partners who may seek out alternatives from both traditional and non-
traditional payment
-33-
Table of Contents
services providers, which may limit our ability to maintain or grow revenues from our networks. In addition, competitors’ settlements with merchants
and related actions, including pricing pressures and/or surcharging, could negatively impact our business practices. Competitor actions related to the
structure of merchant and acquirer fees and merchant and acquirer transaction routing strategies may adversely affect our PULSE network’s business
practices, network transaction volume, revenue and prospects for future growth and entry into new product markets. We believe Visa has entered into
arrangements with some merchants and acquirers that have, and are expected to continue to have, the effect of discouraging those merchants and
acquirers from routing debit transactions to PULSE. In addition, the Dodd-Frank Act’s network participation requirements and competitor actions
negatively impact PULSE’s ability to enter into exclusivity arrangements, which affects PULSE’s business practices and may materially adversely affect
its network transaction volume and revenue. PULSE’s transaction processing revenue was $345 million and $303 million for the years ended
December 31, 2024 and 2023, respectively.
American Express is also a strong competitor, with international acceptance, high transaction fees and an upscale brand image. Internationally,
American Express competes in the same market segments as Diners Club. We may face challenges in increasing international acceptance on our
networks, particularly if third parties that we rely on to issue Diners Club cards, increase card acceptance and market our brands do not perform to our
expectations.
In addition, if we are unable to maintain sufficient network functionality to be competitive with other networks, or if our competitors develop better
data security solutions or more innovative products and services than we do, our ability to retain and attract network partners and maintain or increase
the revenues generated by our proprietary card-issuing business or our PULSE business may be materially adversely affected. Our competitive
position could also be affected if we are unable to deploy, in a cost effective and competitive manner, technology such as generative AI. Additionally,
competitors may develop ancillary products, which as a consequence of the competitors’ market power, we may be forced to use. Such developments
could adversely affect our business, as those competitors may be better positioned to absorb the costs of such data security solutions over higher
volumes or a larger customer base.
Our business depends upon relationships with issuers, merchant acquirers, other payment enablers and licensees, many of whom are financial
institutions. The economic and regulatory environment and increased consolidation in the financial services industry decrease our opportunities for
new business and may result in the termination of existing business relationships if a business partner is acquired or goes out of business. In addition,
as a result of this environment, financial institutions may have decreased interest in engaging in new card issuance opportunities or expanding existing
card issuance relationships, which would inhibit our ability to grow our payment services business. We continue to face substantial and intense
competition in the payments industry, which impacts our revenue margins, transaction volume and business strategies.
If we are unsuccessful in maintaining a strong base of network licensees and achieving meaningful global card acceptance, we may be
unable to achieve long-term success in our international network business.
We continue to make progress toward achieving increased global card acceptance for the Discover Global Network since we acquired the
Diners Club network and related assets in 2008. Achieving global card acceptance would allow our customers, including third-party issuers leveraging
the network, to use their cards at merchant and ATM locations around the world.
Our international network business depends upon the cooperation, support and continued business operations of the network licensees that
issue Diners Club cards and that maintain a merchant acceptance network. As is the case for other card payment networks, our Diners Club network
does not issue cards or determine the terms and conditions of cards issued by the network licensees. If we are unable to continue our relationships
with network licensees or if the network licensees are unable to continue their relationships with merchants, our ability to maintain or increase
revenues and to remain competitive would be adversely affected due to the potential deterioration in customer relationships and related demand that
could result. If one or more licensees were to experience a significant impairment of their business or were to cease doing business for economic,
regulatory or other reasons, we would face the adverse effects of business interruption in a particular market, including loss of volume, acceptance and
revenue and exposure to potential reputational risk. If such conditions arise in the future, we may deploy resources and incur expenses in order to
sustain network acceptance. Additionally, interruption of network licensee relationships could have an adverse effect on the acceptance of Discover
cards when they are used on the Diners Club network.
The long-term success of our international network business depends upon achieving meaningful global card acceptance, which has included
and may continue to include higher overall costs or longer timeframes than anticipated.
-34-
Table of Contents
Acquisitions, strategic investments or divestitures may not be successful and could disrupt our business, harm our financial condition or
reduce our earnings.
We may consider or undertake strategic acquisitions of, or material investments in, businesses, products, portfolios of loans or technologies in
the future, and we may also divest or explore the sale of businesses, portfolios of loans or technologies from time to time. We may not be able to
identify suitable acquisition or investment candidates, or even if we do identify suitable candidates, they may be difficult to finance or expensive to
fund. Additionally, there is no guarantee that we can obtain any necessary regulatory approvals, obtain any necessary financing or complete
transactions on terms that are favorable to us or in a timely manner. We generally must receive federal regulatory approvals before we can acquire a
bank, bank holding company, deposits or certain assets or businesses. For additional information regarding bank regulatory limitations on acquisitions
and investments, see “Business — Supervision and Regulation — Acquisitions and Investments.”
To the extent we pay the purchase price of any strategic acquisition or investment in cash, it may have an adverse effect on our financial
condition. Similarly, if the purchase price is paid with our stock, it may be dilutive to our stockholders. In addition, we may assume liabilities associated
with a business acquisition or investment, including unrecorded liabilities that are not discovered at the time of the transaction. The repayment or
settlement of those liabilities may have an adverse effect on our financial condition. Additionally, a divestiture may result in continued financial
obligations, such as through transition service agreements, guarantees, indemnities or other current or contingent financial obligations and liabilities,
following the transaction. The satisfaction of these continued financial obligations may also have an adverse effect on our financial condition.
We may not be able to successfully integrate or disaggregate personnel, operations, businesses, products, or technologies of an acquisition,
investment or divestiture. Integration may be particularly challenging if we enter into a line of business in which we have limited experience and/or if
the business operates in (or involves products or technologies in) a difficult legal, regulatory or competitive environment. We may find that we do not
have adequate operations or expertise to manage the new business, products or technologies. The integration or disaggregation of any acquisition,
investment or divestiture may divert management’s time and resources from our core business, which could impair our relationships with our current
employees, customers and strategic partners and disrupt our operations. Additionally, any acquisition, investment or divestiture may expose us to
increased information security risk as we integrate new systems that we may not be as familiar with or bring them in line with the requirements of our
information security and business continuity programs or provide data and information access to third parties. Acquisitions, investments and
divestitures also may not perform to our expectations for various reasons, including the loss of key personnel, customers or vendors or changes in the
economic or regulatory environment. If we fail to integrate acquisitions or investments, divest businesses or realize the expected benefits, we may lose
the return on these acquisitions, investments or divestitures or incur additional transaction costs. As a result, our business, reputation and financial
condition may be harmed.
Credit, Market and Liquidity Risk
The failure to successfully manage credit risk, which may result in high delinquency and charge-off rates, could materially adversely affect
our business, profitability and financial condition.
As a lender, we are exposed to the risk that our borrowers will be unable or unwilling to repay the principal of, or interest on, loans in accordance
with their terms. We seek to grow our loan receivables while maintaining quality credit performance. Our success depends on our ability to manage
credit risk while attracting new customers with profitable usage patterns. We select customers, manage their accounts and establish terms and credit
limits using externally developed and proprietary scoring models and other analytical techniques designed to set terms and credit limits to
appropriately compensate us for the credit risk we accept, while encouraging customers to use their available credit. The models and approaches we
use may not accurately predict future charge-offs due to, among other things, inaccurate assumptions. While we continually seek to improve our
assumptions and models, we may make modifications that unintentionally cause them to be less predictive or incorrectly interpret the data produced
by these models in setting our credit policies.
At December 31, 2024 and 2023, $2.3 billion, or 1.90%, and $2.2 billion, or 1.85%, of our loan receivables were non-performing (defined as
loans over 90 days delinquent and accruing interest, plus loans not accruing interest). Our ability to manage credit risk and avoid high charge-off rates
may be adversely affected by household, business, economic and market conditions that may be difficult to predict. When these conditions deteriorate,
we may experience reduced demand for credit and increased delinquencies or defaults, including loans which we have securitized and in which we
retain a residual interest. The level of nonperforming loans, charge-offs and delinquencies could rise and
-35-
Table of Contents
require additional provision for credit losses. There can be no assurance that our underwriting and portfolio management strategies will permit us to
avoid high charge-off levels or that our allowance for credit losses will be sufficient to cover actual losses.
A customer’s ability and willingness to repay us can be impacted by changes in their employment status, increases in their payment obligations
to other lenders and by restricted availability of credit to consumers generally. Our collection operations may not compete effectively to secure more of
customers’ diminished cash flow than our competitors. In addition, we may fail to quickly identify customers who are likely to default on their payment
obligations and reduce our exposure by closing credit lines and restricting authorizations, which could adversely impact our financial condition and
results of operations. Our ability to manage credit risk also may be adversely affected by legal or regulatory changes (such as restrictions on
collections, bankruptcy laws, minimum payment regulations and re-age guidance), competitors’ actions and consumer behavior, as well as inadequate
collections staffing, resources, techniques and models. There can be no assurance that we will be able to grow the loan receivables portfolio in
accordance with our strategies or manage credit and other risks associated with the loan products. Our failure to manage credit and other risks may
materially adversely affect profitability and the ability to grow the loan receivables portfolio and further diversify the business.
Adverse market conditions or an inability to effectively manage our liquidity risk could negatively impact our ability to meet our liquidity and
funding needs, which could materially adversely impact our business, results of operations and overall financial condition.
We must effectively manage the liquidity risk to which we are exposed. We require liquidity in order to meet cash requirements such as day-to-
day operating expenses, extensions of credit on our consumer loans, satisfaction of deposit liabilities upon withdrawal or maturity and required
payments of principal and interest on our borrowings. Our primary sources of liquidity and funding are payments on our loan receivables, deposits and
proceeds from securitization transactions and securities offerings. We may maintain too much liquidity, which can be costly, or we may be too illiquid,
which could limit financial flexibility and result in financial distress during a liquidity stress event. Our liquidity portfolio had a balance of approximately
$27.3 billion as of December 31, 2024, compared to $23.3 billion as of December 31, 2023. Our total contingent liquidity sources amounted to $82.0
billion as of December 31, 2024, compared to $69.8 billion as of December 31, 2023. As of December 31, 2024, our total contingent liquidity sources
consisted of $27.3 billion in our liquidity portfolio, $3.5 billion of undrawn capacity in private securitizations, $4.7 billion in borrowing capacity with the
FHLB of Chicago and $46.5 billion in incremental Federal Reserve discount window capacity.
In the event that our current sources of liquidity do not satisfy our needs, we would be required to seek additional financing. The availability of
additional financing will depend on a variety of factors such as market conditions, the general availability of credit to the financial services industry, new
regulatory restrictions and requirements and our credit ratings. Disruptions, uncertainty or volatility in the capital, credit or deposit markets may limit our
ability to repay or replace maturing liabilities in a timely manner. As such, we may be forced to delay the acquisition of additional funding or be forced
to issue or raise funding at undesirable terms and/or costs, which could decrease profitability and significantly reduce financial flexibility. Further, in
disorderly financial markets or for other reasons, it may be difficult or impossible to liquidate some of our investments to meet our liquidity needs.
There can be no assurance that significant disruption and volatility in the financial markets will not occur in the future. Likewise, adverse
developments with respect to financial institutions and other third parties with whom we maintain important financial relationships could negatively
impact our funding and liquidity. If we are unable to continue to fund our assets through deposits or access capital markets on favorable terms, or if we
experience an increase in our borrowing costs or otherwise fail to manage our liquidity effectively, our liquidity, results of operations and financial
condition may be materially adversely affected.
An inability to accept or maintain deposits in the future could materially adversely affect our liquidity position and our ability to fund our
business.
A major source of our funds is customer deposits, primarily in the form of savings accounts, certificates of deposits, money market accounts and
checking accounts. We obtain deposits from consumers directly and through third-party securities brokerage firms that offer our deposits to their
customers. We had $90.6 billion in deposits acquired directly and $16.4 billion in deposits originated through securities brokerage firms as of
December 31, 2024, compared to $84.0 billion and $24.9 billion, respectively, as of December 31, 2023. Our ability to attract and maintain deposits, as
well as our cost of funds, has been, and will continue to be, significantly affected by general
-36-
Table of Contents
economic conditions. Competition from other financial services firms that use deposit funding, the rates and services we offer on our deposit products
and our ability to maintain a high-quality customer experience may affect deposit renewal rates, costs or availability. Changes we make to the rates
offered on our deposit products may affect our profitability (through funding costs) and our liquidity (through volumes raised). In addition, our ability to
maintain existing or obtain additional deposits may be impacted by various factors, including factors beyond our control, such as perceptions about our
reputation, brand, or financial strength; quality of deposit servicing or branchless banking generally, which could reduce the number of consumers
choosing to place deposits with us; third parties continuing or entering into marketing arrangements with us; disruptions in technology services or the
internet, generally; or third-party securities brokerage firms continuing to offer our deposit products. A severe reputational event at the Company
resulting in fines or additional remediation impacts may result in material deposit outflows and limit our ability to attract new deposits. Furthermore,
customers may withdraw deposits to ensure that their deposits are fully insured or make investments that have a higher yield. If our customers
withdraw their deposits, our funding costs may increase, which may reduce our net interest income and net income.
Our ability to obtain deposit funding and offer competitive interest rates on deposits is also dependent on capital levels of our bank subsidiary. In
certain circumstances, the FDIA prohibits insured banks from accepting brokered deposits (as defined in the FDIA) and applies other restrictions, such
as a cap on interest rates we may pay. See “Business — Supervision and Regulation” and Note 17: Capital Adequacy to our consolidated financial
statements for more information. While our subsidiary, Discover Bank, met the FDIC’s definition of “well-capitalized” as of December 31, 2024 and has
no restrictions regarding acceptance of brokered deposits or setting of interest rates, there can be no assurance that it will continue to meet this
definition. Additionally, our regulators can adjust the requirements to be “well-capitalized” at any time and have authority to place limitations on our
deposit businesses, including the interest rate we pay on deposits.
If we are unable to securitize our credit card receivables, it may have a material adverse effect on our liquidity, cost of funds and overall
financial condition.
We use the securitization of credit card receivables as a significant source of funding as well as for contingent liquidity. The securitization of
credit card receivables involves the transfer of credit card receivables to a trust, the transfer of the beneficial interest in those credit card receivables to
a second trust through a special purpose entity and the issuance by the second trust of notes to third-party investors collateralized by the beneficial
interest in the transferred credit card receivables. Our average level of credit card securitized borrowings from third parties was $10.2 billion and $10.5
billion for the years ended December 31, 2024 and 2023, respectively. There can be no assurance that we will be able to complete additional credit
card securitization transactions if the credit card securitization market experiences significant and prolonged disruption or volatility.
Our ability to raise funding through the securitization market also depends, in part, on the credit ratings of the securities we issue from our
securitization trusts. If we are not able to satisfy rating agency requirements to confirm the ratings of asset-backed securities issued by our trusts at the
time of a new issuance of securities, it could limit our ability to access the securitization markets. Additional factors affecting the extent to which we
may securitize our credit card receivables in the future include the overall credit quality of our credit card receivables, the costs of securitizing our
credit card receivables, the demand for credit card asset-backed securities and the legal, regulatory, accounting or tax rules affecting securitization
transactions and asset-backed securities, generally.
A prolonged inability to securitize our credit card receivables, or an increase in the costs of such issuances that would make such activities
economically infeasible, may require us to seek alternative funding sources, which may be less efficient and more expensive than raising capital via
securitization transactions and may have a material adverse effect on our liquidity, cost of funds and overall financial condition.
The occurrence of events that result in the early amortization of our existing credit card securitization transactions or an inability to delay
the accumulation of principal collections for our existing credit card securitization transactions would materially adversely affect our
liquidity.
Our liquidity and cost of funds would be materially adversely affected by the occurrence of events that could result in the early amortization of
our existing credit card securitization transactions. Our credit card securitization transactions are structured as “revolving transactions” that do not
distribute to securitization investors their share of monthly principal payments received on the underlying receivables during the revolving period and
instead use those principal payments to fund the purchase of new credit card receivables. The occurrence of an “early amortization event” may result
in termination of the revolving periods of one or more of our securitization transactions, which would
-37-
Table of Contents
require us to repay the affected outstanding securitized borrowings out of principal collections without regard to the original payment schedule. Early
amortization events include, for example, insufficient cash flows in the securitized pool of credit card receivables to meet contractual requirements (i.e.,
excess spread less than zero) and certain breaches of representations, warranties or covenants in the agreements relating to the securitization
transactions. For more information on excess spread, see Note 5: Credit Card Loan Securitization Activities to our consolidated financial statements.
An early amortization event would negatively impact our liquidity and require us to rely on alternative funding sources, which may or may not be
available at the time or may be less efficient and more expensive. An early amortization event also could impact our ability to access the undrawn
secured credit facilities that we maintain for contingent liquidity purposes. Additionally, the occurrence of an early amortization event with respect to
any of our securitization transactions may adversely impact investor demand for notes issued in our future credit card securitization transactions.
Our credit card securitization structure includes a requirement that we accumulate principal collections into a restricted account in the amount of
scheduled maturities on a pro rata basis over the 12 months prior to a security’s maturity date. We have the option under our credit card securitization
documents to shorten this accumulation period, subject to the satisfaction of certain conditions. Historically, we have exercised this option to shorten
the accumulation period to a few months prior to maturity. If we were to determine that the payment rate on the underlying credit card receivables
would not support a short accumulation period, we would need to begin accumulating principal cash flows earlier than we have historically. A
lengthening of the accumulation period could negatively impact our liquidity, requiring management to implement mitigating measures. During periods
of significant maturity levels, absent management actions, the lengthening of the accumulation period could materially adversely affect our financial
condition.
A downgrade in the credit ratings of our or our subsidiaries’ securities could materially adversely affect our liquidity, results of operations
and financial condition.
We, along with Discover Bank, are regularly evaluated by the ratings agencies. Their ratings for our long-term debt and other securities,
including asset-backed securities issued by our securitization trusts, are based on a number of factors that may change from time to time, including our
financial strength as well as factors that may not be within our control. Factors that affect our unsecured credit ratings include, but are not limited to,
the macroeconomic environment in which we operate and the credit ratings of the U.S. government, the credit quality and performance of our assets,
the amount and quality of our capital, the level and stability of our earnings and the structure and amount of our liquidity. In addition to these factors,
the ratings of our asset-backed securities are also based on the quality of the underlying receivables and the credit enhancement structure of the
trusts. Downgrades in our ratings, those of Discover Bank or our asset-backed securities could occur at any time and without notice by any of the
rating agencies, which could, among other things, materially adversely affect our cost of funds, access to capital and funding and overall financial
condition. There can be no assurance that we will be able to maintain our current credit ratings or that our credit ratings will not be lowered or
withdrawn.
We may not be successful in managing the investments in our liquidity investment portfolio and investment performance may deteriorate
due to market fluctuations, which would adversely affect our business and financial condition.
We must effectively manage the risks of the investments in our liquidity investment portfolio, which is composed of cash and cash equivalents
and high-quality liquid investments. The value of our investments may be adversely affected by market fluctuations including changes in interest rates,
prices, prepayment rates, credit risk premiums and overall market liquidity. Also, investments backed by collateral could be adversely impacted by
changes in the value of the underlying collateral. In addition, economic conditions may cause certain of the obligors, counterparties and underlying
collateral on our investments to incur losses of their own or default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or
other reasons, thereby increasing our credit risk exposure to these investments. These risks could result in a decrease in the value of our investments,
which could negatively impact our financial condition. These risks could also restrict our access to funding. While the securities in our investment
portfolio are currently limited to obligations of high-quality sovereign and government-sponsored issuers, we may choose to expand the range of our
investments over time, which may result in greater fluctuations in market value. While we expect these investments to be readily convertible into cash
and do not believe they present a material increase to our risk profile or will have a material impact on our risk-based capital ratios, they are subject to
certain market fluctuations that may reduce the ability to fully convert them into cash.
-38-
Table of Contents
Changes in the level of interest rates could materially adversely affect our earnings.
Changes in interest rates cause our net interest income to increase or decrease, as some of our assets and liabilities carry interest rates that
fluctuate with market benchmarks. The Federal Reserve began easing monetary policy in September 2024, cutting rates by 100 basis points by the
end of the year based on positive inflation data and expectations of a softening labor market. Since late 2024, the Federal Reserve indicated a
preference to slow down rate cuts, suggesting that the timing and pace of interest rate changes is uncertain and will highly depend on trends in
inflation, employment and other macroeconomic factors. Higher interest rates could negatively impact our customers as total debt service payments
would increase, impede our ability to grow our consumer lending businesses and increase the cost of our funding, which would put us at a
disadvantage as compared to some of our competitors that have less expensive funding sources.
Some of our consumer loan receivables bear interest at a fixed rate or do not earn interest and we are not able to increase the rate on those
loans to offset any higher cost of funds, which could materially reduce earnings. At the same time, some of our variable-rate loan receivables are
subject to a cap, exposing us to interest-rate risk. In addition, we utilize a combination of fixed- and variable-rate funding from various sources, and we
may use derivative instruments to hedge the liabilities. However, timing mismatches between loan receivable growth and funding procurement could
expose us to interest-rate risk.
Interest rates may also adversely impact our delinquency and charge-off rates. Many consumer lending products bear interest rates that
fluctuate with certain base lending rates published in the market, such as the prime rate and Secured Overnight Financing Rate. As a result, higher
interest rates often lead to higher payment requirements by consumers under obligations to us and other lenders, which may reduce their ability to
remain current on their obligations to us and thereby lead to loan delinquencies and additions to our credit loss provision, which could materially
adversely affect our earnings.
We continually monitor interest rates and have a number of tools, including the composition of our loans and investments, liability terms and
interest rate derivatives, to manage our interest rate risk exposure. Changes in market assumptions regarding future interest rates could significantly
impact our interest rate risk strategy, our financial position and results of operations. If our interest rate risk management strategies are not
appropriately monitored or executed, these activities may not effectively mitigate our interest rate sensitivity or have the desired impact on our results
of operations or financial condition. For information related to interest rate risk sensitivities, see “Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.”
Operational and Other Risk
Our risk management framework and models for managing risks may not be effective in mitigating our risk of loss.
Management of our risks in some cases depends upon the use of analytical and/or forecasting models. We use a variety of models to manage
and inform decision-making with respect to customers and for the measurement of risk including credit, market and operational risks and for our
finance and treasury functions. Models used by Discover can vary in their complexity and are designed to identify, measure and mitigate risks at
various levels such as loan-level, portfolio segments, entire portfolios and products. These models use a set of computational rules to generate
numerical estimates of uncertain values to be used for assessment of price, financial forecasts and estimates of credit, interest rate, market and
operational risk. These models and the quality of their outputs are dependent on the quality and accuracy of the data loaded into the models. To the
extent that the quality and integrity of that data is compromised, the models could result in inaccurate forecasts, ineffective risk management practices
or inaccurate risk reporting. All models carry some level of uncertainty that introduces risks in the estimates.
If the models that we use to mitigate risks are inadequate or do not accurately predict future outcomes, we may incur increased losses. In
addition, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. If our risk
management framework and models do not effectively identify or mitigate our risks, we could suffer unexpected losses and our financial condition and
results of operations could be materially adversely affected.
If the security of our systems, or the systems of third parties we rely upon, is compromised, our business could be disrupted and we may
be subject to significant financial exposure, liability and damage to our reputation.
Our digital banking and network operations rely heavily on the secure processing, storage and transmission of confidential or sensitive
information about us, our customers and third parties with whom we do business. Information security risks for financial institutions have increased and
continue to increase in part because of the proliferation of
-39-
Table of Contents
new technologies, the use of the internet and cloud, mobile and telecommunications technologies to conduct financial transactions and the increased
sophistication and activities of organized crime, activists, hackers, terrorist organizations, nation state actors and other external parties. Those parties
may also attempt to fraudulently induce employees, customers or other users of our systems (including third parties) to disclose confidential or
sensitive information in order to gain access to our data or that of our customers.
Our technologies, systems, networks and software, those of other financial institutions and other firms (such as hardware vendors, cloud
providers and others), have been, and are likely to continue to be, the target of increasingly frequent cyber-attacks, malicious code, ransomware,
denial of service attacks, phishing and other social engineering, other remote access attacks and physical attacks that could result in unauthorized
access, misuse, loss, unavailability or destruction of data (including confidential customer information), account takeovers, identity theft and fraud,
unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the part of external or internal parties
or may result from technological failure or otherwise. Further, our vulnerability to these types of threats may be increased to the extent employees work
remotely or in hybrid work arrangements. More recently, the evolution of AI tools has lowered the barrier of entry for hackers to develop and deploy
malicious payloads or launch effective phishing campaigns.
We may not be able to anticipate or to implement effective preventive measures against all known and unknown security threats, attacks or
breaches or events of these types, especially because the techniques used change frequently and are becoming increasingly more sophisticated or
are not recognized until launched or vulnerabilities in software or hardware are unknown or are unable to be entirely addressed even after becoming
known, and because:
•
Security attacks can originate from a wide variety of sources and geographic locations and may be undetected for a period of time.
•
We rely on many third-party service providers and network participants, including merchants, and, as such, a security breach or cyber-attack
affecting one of these third parties could impact us. For example, the financial services industry continues to see attacks against the
environments where personal and identifiable information is handled. For additional information see the risk factor “— Failure to manage our
relationships with third-party service providers could result in our revenue or results of operations being materially adversely affected.”
•
Our customers may use computers and mobile devices that are beyond our security control systems to access our products and services.
•
Advancement in AI and AI tools could provide efficiencies or other advantages in generating malicious code and cyber attack vectors.
We are subject to increasing risk related to information and data security as we increase acceptance of the Discover card internationally, expand
our suite of online digital banking products, enhance our mobile payment technologies, acquire new or outsource some of our business operations,
expand our internal usage of web-based products and applications, and otherwise attempt to keep pace with rapid technological changes in the
financial services industry. Our efforts to mitigate this risk increase our expenses. While we continue to invest in our information security defenses
(including cybersecurity defenses), if our security systems or those of third parties are penetrated or circumvented such that the confidentiality, integrity
or availability of information about us, our customers, transactions processed on our networks or on third-party networks on our behalf or third parties
with which we do business is compromised, we could be subject to significant liability that may not be covered by insurance, including significant legal
and financial exposure, actions by our regulators, damage to our reputation, or a loss of confidence in the security of our systems, products and
services that could materially adversely affect our business.
Cyber-attacks that are successful, or are perceived to be successful, in compromising the data or disrupting the services of other peer financial
institutions, whether or not we are impacted, could lead to a general loss of customer confidence, which could negatively impact market perception of
our products and services. Media reports of attempted cyber-attacks, service disruptions or vulnerabilities in our information systems or security
procedures or those of any of the third-party service providers we engage, could cause significant legal and financial exposure, lead to regulatory and
legislative intervention and cause an overall negative effect in our business. For additional information on risks in this area, see the risk factors below
regarding fraudulent activity, the introduction of new products and services, the use of third parties for outsourcing, technology generally, and laws and
regulations addressing consumer privacy and data use and security.
-40-
Table of Contents
If we cannot remain organizationally effective, we will be unable to address the opportunities and challenges presented by our strategy and
the increasingly dynamic and competitive economic and regulatory environment.
To remain organizationally effective, we must effectively empower, integrate and deploy our management and operational resources and
incorporate global and local business, regulatory and consumer perspectives into our decisions and processes. In order to execute on our objective to
be the leading consumer bank and payments partner, we must develop and implement innovative and efficient technology solutions and marketing
initiatives while effectively managing legal, regulatory, compliance, security, operational and other risks as well as expenses. Examples include the
implementation of a broader rollout of our checking product and a structure for a more competitive global network business. If we fail to develop and
implement these solutions, we may be unable to expand quickly and the results of our expansion may be unsatisfactory. In addition, if we are unable to
make decisions quickly, assess our opportunities and risks, execute our strategy and implement new governance, managerial and organizational
processes as needed in this increasingly dynamic and competitive economic and regulatory environment, our financial condition, results of operations,
relationships with our business partners, banking regulators, customers and shareholders, and ultimately our prospects for achieving our long-term
strategies, may be negatively impacted.
We may be unable to increase or sustain Discover credit card usage, which could impair growth in, or lead to diminishing, average balances
and total revenue.
A key element of our business strategy is to increase the usage of the Discover credit card by our customers, including making it their primary
credit card, and thereby increase our revenue from transaction and service fees and interest income. However, our customers’ use and payment
patterns may change because of social, legal and economic factors, and customers may decide to use debit cards or other payment products instead
of credit cards, not increase credit card usage, or pay their balances within the grace period to avoid finance charges. We face challenges from
competing card products in our attempts to increase credit card usage by our existing customers. Our ability to increase credit card usage also is
dependent on customer satisfaction, which may be adversely affected by factors outside of our control, including competitors’ actions and
legislative/regulatory changes. Existing legal and regulatory restrictions limit pricing changes that may impact an account throughout its lifecycle, which
may reduce our capability to offer lower price promotions to drive account usage and customer engagement. As part of our strategy to increase usage,
we have been increasing the number of merchants who accept credit cards issued on the Discover Network. If we are unable to continue increasing
merchant acceptance or fail to improve awareness of existing merchant acceptance of our credit cards, our ability to grow usage of Discover credit
cards may be hampered. As a result of these factors, we may be unable to increase or sustain credit card usage, which could impair growth in or lead
to diminishing average balances and total revenue.
A reduction in the number of large merchants that accept cards on the Discover Network or PULSE network or in the rates they pay could
materially adversely affect our business, financial condition, results of operations and cash flows.
Discover card net transaction dollar volume was concentrated among our top 100 merchants in 2024, with our largest merchant accounting for
approximately 6% of that net transaction volume. Transaction volume on the PULSE network was also concentrated among the top 100 merchants in
2024, with our largest merchant accounting for approximately 16% of PULSE transaction volume. These merchants could seek to negotiate better
pricing or other financial incentives by conditioning their continued participation in the Discover Network and/or PULSE network on a change in the
terms of their economic participation. Loss of acceptance at our largest merchants would decrease transaction volume, negatively impact our brand
and could cause customer attrition. In addition, some of our merchants, primarily our remaining small- and mid-size merchants, are not contractually
committed to us for any period of time and may cease to participate in the Discover Network at any time on short notice.
Actual or perceived limitations on acceptance of credit cards issued on the Discover Network or debit cards issued on the PULSE network could
adversely affect the use of Discover cards by existing customers and the attractiveness of Discover cards to prospective customers. Also, we may
have difficulty attracting and retaining network partners if we are unable to add or retain acquirers or merchants who accept cards issued on the
Discover or PULSE networks. As a result of these factors, a reduction in the number of our merchants or the rates they pay could materially adversely
affect our business, financial condition, results of operations and cash flows.
-41-
Table of Contents
Our business, financial condition and results of operations may be adversely affected by merchants’ increasing focus on the fees charged
by credit card and debit card networks.
Merchant acceptance and fees are critical to the success of both our card-issuing and payment processing businesses. Merchants are
concerned with the fees charged by credit card and debit card networks. They seek to negotiate better pricing or other financial incentives as a
condition of continued participation in the Discover Network and PULSE network. Merchants and their trade groups have filed numerous lawsuits
against Visa, MasterCard, American Express and their card-issuing banks, claiming that their practices toward merchants, including issuer fees, violate
federal antitrust laws. There can be no assurance that they will not in the future bring legal proceedings against other credit card and debit card issuers
and networks, including us. Merchants also may promote forms of payment with lower fees, such as ACH-based payments, or seek to impose
surcharges at the point of sale for use of credit or debit cards. Merchant groups have also promoted federal and state legislation that would restrict
issuer practices or enhance the ability of merchants, individually or collectively, to negotiate more favorable fees. The heightened focus by merchants
on the fees charged by credit card and debit card networks, together with the Dodd-Frank Act and recent industry litigation, which would allow
merchants to encourage customers to use other payment methods or cards and may increase merchant surcharging, could lead to reduced
transactions on, or merchant acceptance of, Discover Network or PULSE network cards or reduced fees, any of which could adversely affect our
business, financial condition and results of operations.
Political, economic or other instability in a country or geographic region, or other unforeseen or catastrophic events, could adversely affect
our business activities and reduce our revenue.
Geopolitical events, natural disasters, extreme weather-related events or other catastrophic events, including terrorist attacks and pandemics,
may have a negative effect on our business and infrastructure, including our information technology systems. Climate change may exacerbate certain
of these threats, including the frequency and severity of weather-related events and other natural disasters, including wildfires and hurricanes. Our
Diners Club network, concentrated primarily on serving the global travel industry, could be adversely affected by a number of factors including
international conditions, travel restrictions, pandemics or negative perceptions about the safety of travel that may result in an indefinite decline in
consumer or business travel activity. Armed conflict, public health emergencies, natural disasters, political instability or terrorism may have a significant
and prolonged negative effect on travel activity and related revenue. Although a regionalized event or condition may primarily affect one of our network
participants, it may also affect our overall network and card activity and our resulting revenue. Overall network and card transaction activity may
decline as a result of concerns about safety or disease or may be limited because of economic conditions that result in spending, including on travel, to
decline. The impact of such events and other catastrophes on the overall economy may also adversely affect our financial condition or results of
operations.
Fraudulent activity associated with our products or our networks could cause our brands to suffer reputational damage, the use of our
products to decrease and our fraud losses to be materially adversely affected.
We are subject to the risk of fraudulent activity associated with merchants, customers and other third parties handling customer information. The
fraud environment continues to be challenging for the financial services industry in general. Credit and debit card fraud, identity theft and electronic-
transaction related crimes are prevalent and perpetrators are growing ever more sophisticated. More recently, emerging generative AI capabilities,
such as synthetic video and images and identity documents may introduce new risks in the form of identity fraud and scams. While we have policies
and procedures designed to address such risk, there can be no assurance that losses will not occur. Our resources, customer authentication methods
and fraud prevention tools may be insufficient to accurately predict, prevent or detect fraud. Consumer activists and regulators have sought to expand
financial institutions’ responsibility to hold customers harmless for fraudulent transactions on their accounts. We incurred fraud losses and other
charges of $122 million and $131 million during the years ended December 31, 2024 and 2023, respectively.
Our risk of fraud continues to increase as third parties that handle confidential consumer information suffer security breaches, acceptance of the
Discover card grows internationally and we expand our digital banking business and introduce new products and features. Our financial condition, the
level of our fraud charge-offs and other results of operations could be materially adversely affected if fraudulent activity were to significantly increase.
Furthermore, high-profile fraudulent activity could negatively impact our brand and reputation. In addition, significant increases in fraudulent activity
could lead to regulatory intervention (such as mandatory card reissuance) and reputational and financial damage to our brands, which could negatively
impact the use of our deposit accounts, cards and networks and thereby have a material adverse effect on our business. Further, fraudulent activity
may result in lower license fee revenue from our Diners Club licensees.
-42-
Table of Contents
The financial services and payment services industries are rapidly evolving and we may be unsuccessful in introducing new products or
services on a large scale in response to these changes.
Technological changes continue to significantly impact the financial services and payment services industries. For example, we may be
unsuccessful in deploying new technologies to strengthen our credit underwriting capabilities, enhance the effectiveness of our marketing efforts,
ensure acceptance with new payment technologies, enhance customer service, drive efficiencies in back-office functions or reduce fraud. The
competitive mobile, e-wallet and tokenization spaces are expected to continue to bring risks and opportunities to both our digital banking and payment
services businesses.
The effect of technological changes on our business is both rapid and unpredictable. We depend, in part, on third parties for the development of
and access to new technologies. We expect that new services and technologies relating to the payments business will continue to appear in the
market and these new services and technologies may be superior to, or render obsolete, the technologies that we currently use in our products and
services. Rapidly evolving technologies and new entrants in mobile and emerging payments pose a risk to us both as a card issuer and as a payments
business. As a result, our future success may be dependent on our ability to identify and adapt to technological changes and evolving industry
standards and to provide payment solutions for our cardholders, merchants and financial institution customers.
The process of developing new products and services or enhancing our existing products and services is complex, costly and uncertain.
Difficulties or delays in the development, production, testing and marketing of new products or services may be caused by a number of factors
including, among other things, operational, capital and regulatory constraints. The occurrence of such difficulties may affect the success of our
products or services. Developing unsuccessful products and services could result in financial losses as well as decreased capital availability. In
addition, the new products and services offered may not be adopted by consumers, merchants or financial institution customers. Also, the success of a
new product or service may depend upon our ability to deliver it on a large scale, which may require a significant capital investment that we may not be
in a position to make. If we are unable to successfully introduce and support new income-generating products and services while also managing our
expenses, it may impact our ability to compete effectively and materially adversely affect our business, financial condition and results of operations.
Failure to manage our relationships with third-party service providers could result in our revenue or results of operations being materially
adversely affected.
We depend on third-party service providers for many aspects of the operation of our business. For example, we depend on third parties for
software and systems development, the timely transmission of information across our data transportation network and for other telecommunications,
processing, remittance, technology-related and other services in connection with our digital banking and payment services businesses. If a service
provider fails to provide the services that we require or expect, or fails to meet contractual requirements, such as service levels, security requirements
or compliance with applicable laws, the failure could negatively impact our business by adversely affecting our ability to process customers’
transactions in a secure, consistent, timely and accurate manner, otherwise hampering our ability to serve our customers, or subjecting us to litigation
and regulatory risk for poor vendor oversight. Such a failure could adversely affect the perception of the reliability of our networks and services, and the
quality of our brands, and could have a materially adverse effect on our reputation, revenues and/or our results of operations.
With remote and hybrid work arrangements, we have become increasingly dependent on third-party service providers, including those with which
we have no direct relationship, such as our employees’ internet service providers. If these third-parties experience service disruptions, our operations
may be interrupted or negatively impacted.
If our key technology platforms become obsolete, or if we experience disruptions, including difficulties in our ability to process
transactions, our revenue or results of operations could be materially adversely affected.
Our ability to deliver services to our customers and run our business in compliance with applicable laws and regulations may be affected by the
functionality of our technology systems. The implementation of technology changes as well as patches and upgrades to maintain current and
integrated systems may result in compliance issues and may, at least temporarily, cause disruptions to our business, including, but not limited to,
systems interruptions, transaction processing errors and system conversion delays, all of which could have a negative impact on us. In addition, our
transaction processing systems and other operational systems may encounter service interruptions at any time due to system or software failure,
natural disaster or other reasons. Such services could be disrupted at any of our primary or back-up facilities or our other owned or leased facilities.
Third parties to whom we outsource the maintenance and
-43-
Table of Contents
development of certain technological functionality may experience errors or disruptions that could adversely impact us and over which we may have
limited control. In addition, there is no assurance that we will be able to sustain our investment in new technology to avoid obsolescence of critical
systems and applications. A failure to maintain current technology, systems and facilities or to control third-party risk, could cause disruptions in the
operation of our business, which could materially adversely affect our transaction volumes, revenues, reputation and/or our results of operations.
If we are unable to recruit, retain and motivate key officers and employees to drive our business, our business could be materially adversely
affected.
Our success depends, in large part, on our ability to recruit, retain and motivate key officers and employees to manage and grow our business.
Our senior management team has significant industry experience and would be difficult to replace. We believe we are in a critical period of competition
in the financial services and payments industry. The market for qualified individuals is highly competitive and we may not be able to attract and retain
qualified personnel or candidates to replace or succeed members of our senior management team or other key personnel or it may be expensive to do
so. We may be subject to restrictions under future legislation or regulation limiting executive compensation. For example, the federal banking agencies
have previously issued proposed rulemaking on incentive compensation practices for certain employees at banking organizations, including
executives, and may issue additional rules relating to such activities in the future. These requirements could negatively impact our ability to compete
with other companies in attracting, hiring and retaining key personnel and offer incentives that motivate our key personnel to perform and may require
us to extensively restructure certain of our existing incentive compensation practices. Additionally, the market for individuals with skills in fields such as
technology, advanced analytics, digital marketing and payments is increasingly competitive and we may not be able to attract and retain persons with
the desired skill set or experience. If we are unable to recruit, retain and motivate key personnel to manage and grow our business well, our business
could be materially adversely affected.
Merchant defaults may adversely affect our business, financial condition, cash flows and results of operations.
As an issuer and merchant acquirer in the U.S. on the Discover Network and as a holder of certain merchant agreements internationally for the
Diners Club network, we may be contingently liable for certain disputed credit card sales transactions that arise between customers and merchants. If
a dispute is resolved in the customer’s favor, we will cause a credit or refund of the amount to be issued to the customer and charge back the
transaction to the merchant or merchant acquirer. If we are unable to collect this amount from the merchant or merchant acquirer, we will bear the loss
for the amount credited or refunded to the customer. Where the purchased product or service is not provided until some later date following the
purchase, such as an airline ticket, the likelihood of potential liability increases. Losses related to merchant chargebacks were not material for the
years ended December 31, 2024 and 2023.
Damage to our reputation could negatively affect our business and brand.
In recent years, financial services companies have experienced increased reputational risk as consumers protest and regulators scrutinize
business and compliance practices of such companies. Maintaining a positive reputation is critical to attracting and retaining customers, investors and
employees. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from
numerous sources, including, among others, employee misconduct; a breach of our or our service providers’ cybersecurity defenses; litigation or
regulatory outcomes; failing to deliver minimum standards of service and quality; compliance failures; and the activities of customers, business
partners and counterparties. Social media also can cause harm to our reputation. By its very nature, social media can reach a wide audience in a very
short amount of time, which presents unique corporate communications challenges. Negative or otherwise undesirable publicity generated through
unexpected social media coverage can damage our reputation and brand. Negative publicity regarding us, whether or not true, may result in customer
attrition and other harm to our business prospects. There has also been increased focus on topics related to ESG policies, and criticism of our policies
in these areas could also harm our reputation and/or potentially limit our access to some forms of capital or liquidity. Additionally, policymakers in some
jurisdictions have adopted or proposed laws, regulations and policies relating to ESG that diverge from, or potentially conflict with, those in other
jurisdictions. Our customers, shareholder, employees and other stakeholders may have diverse expectations, demands and perspectives on ESG,
which we may not be able to meet as proposed laws, regulations and policies continue to evolve. This could harm our reputation, reduce customer
demand for our products and services and subject us to other legal and operational risks.
-44-
Table of Contents
We may be unsuccessful in protecting or defending our brands or other intellectual property, or third parties may allege that we are
infringing their intellectual property rights.
We rely on a multifaceted strategy to protect our intellectual property that takes advantage of protection such as patents, trademarks, copyrights,
trade secrets and other restrictions on disclosure of confidential and proprietary information. We develop our intellectual property internally and in
some cases license it from third parties.
In addition, the Discover, PULSE and Diners Club brands have substantial economic and intangible value. Our success is dependent on our
ability to promote and protect these brands and our other intellectual property. Our ability to attract and retain customers is highly dependent upon the
external perception of our Company and brands. We strategically license our trademarks to business partners and network participants, some of whom
have contractual obligations to promote and develop our brands. For example, the Discover card brand is now being issued by certain Diners Club
licensees in their local markets.
If our business partners or other third parties do not adhere to contractual standards, engage in improper business practices, or otherwise
misappropriate, misuse or diminish the value of our brands or our other intellectual property, we may suffer reputational and financial damage. If we will
not be able to adequately protect our brands, our proprietary information and other intellectual property, our business success may be adversely
affected. In addition, third parties may allege that our developed or licensed marketing, processes or systems may infringe upon their intellectual
property rights. Given the potential risks and uncertainties of such claims, our business could be adversely affected by having to pay significant
monetary damages, technology development expenses or licensing fees, and we may have to alter our business practices or be prevented from
competing effectively.
Laws, regulations and supervisory guidance and practices, or the application thereof, may adversely affect our business, financial condition
and results of operations.
We must comply with an array of banking, consumer lending and payment services laws and regulations in jurisdictions in which we operate as
described more fully in “Business — Supervision and Regulation,” the risk factor entitled "— Financial regulatory developments have and will continue
to significantly impact the environment for the financial services industry, which could adversely impact our business, results of operations and financial
condition” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Environment and
Developments.” In addition, we are subject to inquiries and enforcement actions from states’ attorney general offices and regulation by federal
regulators, state banking regulators and the U.S. Department of Justice, as well as the SEC and New York Stock Exchange in our capacity as a public
company. We also are subject to the requirements of entities that set and interpret accounting standards (such as the Financial Accounting Standards
Board, the SEC, banking regulators and our independent registered public accounting firm), which may add new requirements or change their
interpretations on how standards should be applied. Guidance not yet issued could potentially have a material impact on business lines, as well as
how we record and report our financial condition and results of operations, and could have an impact on regulatory capital.
Failure to comply with laws, regulations and standards could lead to adverse consequences such as financial, structural, reputational and
operational penalties, including our bank subsidiary being placed in receivership, litigation exposure and disgorgement and fines (as described further
below). For example, failure to comply with anti-terrorism, anti-money laundering, anti-bribery and anti-corruption laws, including the USA Patriot Act of
2001, the U.S. Foreign Corrupt Practices Act and other laws regarding corporate conduct, can expose us and/or individual employees to severe
criminal and civil penalties.
Legislative, regulatory and tax code changes could impact the profitability of our business activities, alter consumer behavior in ways we did not
anticipate, require us to limit or change our business practices or our product offerings, or expose us to additional costs (including increased
compliance costs). Significant changes in laws and regulations may have a more adverse effect on our results of operations than on the results of our
competitors or may disproportionately benefit our competitors.
Current and proposed laws and regulations addressing consumer privacy and data use and security could affect the competitiveness of our
products and increase our costs.
Legal or regulatory pronouncements relating to consumer privacy, data use and security affect our business. We are subject to a number of laws
concerning consumer privacy and data use and security enacted by U.S. and non-U.S. governmental and regulatory authorities, such as the European
Union’s General Data Protection Regulation, the GLBA, and the California Consumer Privacy Act. Due to recent consumer data compromise events in
the U.S., which resulted in
-45-
Table of Contents
unauthorized access to millions of customers’ data, these areas continue to be a focus of the U.S. Executive Branch and Congress, state legislators
and attorneys general and other regulators. Developments in this area, such as new laws, regulations, regulatory guidance, litigation or enforcement
actions, could result in new or different requirements on Discover and other card issuers or networks that could increase costs or adversely affect the
competitiveness of our credit card or debit card products. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Regulatory Environment and Developments” for more information. In addition, failure to comply with the privacy and data use and
security laws and regulations to which we are subject, including by reason of inadvertent disclosure of confidential information or the failure to provide
timely notification of a disclosure, could result in litigation, fines, sanctions, penalties or other adverse consequences and loss of consumer confidence,
which could materially adversely affect our results of operations, overall business and reputation.
Litigation and regulatory actions could subject us to significant fines, penalties and/or requirements resulting in increased expenses,
oversight and reputation risk.
Consumer banking and payment services institutions have historically been subject to significant legal actions, both from private and government
litigants. In addition to regulatory actions, private litigation may include class action lawsuits and commercial, shareholder and patent litigation. Many of
these actions have included claims for substantial compensatory, statutory or punitive damages. We have been, currently are, and may again be
involved in various actions or proceedings brought by private litigants as well as governmental regulatory and enforcement agencies. This includes the
2020 Order with the CFPB pursuant to which Discover is required to implement a redress and compliance plan in addition to the payment of at least
$10 million in consumer redress to consumers who may have been harmed and a $25 million civil money penalty to the CFPB, and the September
2023 consent order by the FDIC with Discover Bank regarding its compliance management system for consumer protection laws pursuant to which
Discover Bank has 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 over such matters. In addition, we may be subject to further actions, including the
imposition of additional consent orders, regulatory agreements or civil money penalties, by governmental regulatory and enforcement agencies
regarding similar or other issues. Furthermore, issues with or delays in satisfying the requirements of a regulatory action could affect our progress on
others, and failure to satisfy the requirements of a regulatory action on a timely basis could result in additional penalties, enforcement actions, and
other negative consequences, including reputational harm, requiring changes to business activities and product offerings, or subjecting us to material
fines, penalties, customer restitution or other requirements, resulting in increased expenses. Compliance with existing consent orders, and any other
consent orders or regulatory actions, as well as the implementation of their requirements, may increase our expenses, require us to reallocate
resources away from growing our existing businesses, subject us to business restrictions, negatively impact our capital and liquidity, require us to
undergo significant changes to our business, operations, products and services, and risk management practices, and expose us to private litigation.
See Note 19: Litigation and Regulatory Matters to our consolidated financial statements for more information on current matters affecting us.
Historically, we have offered customers an arbitration clause in agreements to quickly and economically resolve disputes. The arbitration clause
has, in some cases, also limited our exposure to consumer class action litigation, while still being able to resolve individual customer disputes.
However, there is no guarantee that we will be able to continue to offer arbitration clauses in the future or that we will be successful in enforcing the
arbitration clause in court. Legal challenges to the enforceability of these clauses may cause us to discontinue their use. In addition to court
enforceability uncertainty, there have been bills pending in the U.S. Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses
in some or all consumer banking products. Members of Congress have also urged the CFPB to enact rules prohibiting or limiting the use of pre-dispute
arbitration clauses.
We may be limited in our ability to pay dividends on and repurchase our stock.
Due to provisions in the Merger Agreement with Capital One, we were required to keep our quarterly common stock dividend consistent in 2024
at $0.70 per share and to refrain from the repurchasing of our outstanding common stock. These restrictions will remain in place through the
completion of the merger. The declaration and payment of future dividends, as well as the amount thereof, are otherwise subject to the discretion of
our Board of Directors. The amount and size of any future dividends and share repurchases will depend upon regulatory limitations imposed by the
Federal Reserve or under applicable banking laws and our results of operations, financial condition, capital levels, cash requirements, future
prospects, regulatory review and other factors as further described in “Business — Supervision and Regulation — Capital, Dividends and Share
Repurchases.” 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 on or set aside for payment on our common stock if full dividends
-46-
Table of Contents
have not been declared and paid on all outstanding shares of our preferred stock in any dividend period. Banking laws and regulations and our
banking regulators may limit or prohibit our payment of dividends on or our repurchase of our stock at any time. There can be no assurance that we will
declare and pay any dividends on or repurchase our stock in the future.
We are a holding company and depend on payments from our subsidiaries.
Discover Financial Services, our parent holding company, depends on dividends, distributions and other payments from its subsidiaries,
particularly Discover Bank, to fund its dividend payments, share repurchases, payments on its obligations, including debt obligations, and to provide
funding and capital as needed to its operating subsidiaries. Banking laws and regulations and our banking regulators may limit or prohibit our transfer
of funds freely, either to or from our subsidiaries, at any time. These laws, regulations and rules may hinder our ability to access funds that we may
need to make payments on our obligations or otherwise achieve strategic objectives. For more information, see “Business — Supervision and
Regulation — Capital, Dividends and Share Repurchases.”
Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K and materials we have filed or will file with the SEC (as well as information included in our other written or oral
statements) contain or will contain certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.
Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,”
“anticipates,” “believes,” “estimates,” “forecasts,” and other similar expressions or future or conditional verbs such as “will,” “should,” “would,” and
“could,” are intended to identify such forward-looking statements. You should not rely solely on the forward-looking statements and should consider all
uncertainties and risks throughout this annual report on Form 10-K, including those described under “Risk Factors.” The statements are only as of the
date they are made and we undertake no obligation to update any forward-looking statement.
Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements
include the following:
•
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 our card and personal loan growth;
•
our ability to increase or sustain Discover card usage or attract new customers;
-47-
Table of Contents
•
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, compliance and legal risk and strategic risk;
•
the availability and cost of funding and capital;
•
access to deposit, securitization, equity, debt and credit markets;
•
the impact of rating agency actions;
•
the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other
market indices;
•
losses in 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;
•
the effect of political, economic and market conditions, geopolitical events, climate change, pandemics and unforeseen or catastrophic
events;
•
our ability to introduce new products or 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, including existing consent orders;
•
new lawsuits, investigations, consent orders or similar matters or unanticipated developments related to current matters.
We routinely evaluate and may pursue acquisitions of, investments in or divestitures from businesses, products, technologies, loan portfolios or
deposits, which may involve payment in cash or our debt or equity securities.
The foregoing review of important factors should not be construed as exclusive and should be read in conjunction with the other cautionary
statements that are included in this annual report on Form 10-K. These factors expressly qualify all subsequent oral and written forward-looking
statements attributable to us or persons acting on our behalf. Except for any ongoing obligations to disclose material information as required under
U.S. federal securities laws, we do not have any intention or obligation to update forward-looking statements after we distribute this annual report on
Form 10-K, whether as a result of new information, future developments or otherwise.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Assessment and Management
Our Information Security Program is led by our CISO and overseen by our TIRC and Management Risk Committee. The program is designed to
safeguard the confidentiality, integrity and availability of information assets of the Company, customers and users from harm, and against unauthorized
access to, or use of, computer resources that process, store or transmit these assets. This is accomplished by monitoring the cyber threat landscape,
internal threats
-48-
Table of Contents
and technological changes and through the implementation of controls to mitigate risk to the organization and our customers.
Our Enterprise Risk Management governance structure is based on the principle that each line of business is responsible for managing risks,
including information security risk, inherent in its business.
Our Operational Risk Oversight (“ORO”) department provides second line defense oversight of the Information Security Program in support of
senior management and the Board of Directors’ responsibility to provide appropriate risk oversight. Owned by the VP, Information Security and
Technology Risk (“VP-ISTR”) in ORO, the Information Security Policy provides a framework for the security of information assets and computer
resources and is consistent with our ERM framework, which incorporates certain components that guide the Company’s approach to risk management:
Governance and Oversight, Business Strategy, Risk Infrastructure and Risk Culture. The Information Security Policy is designed to comply with
applicable laws and regulations, such as the GLBA and the Sarbanes-Oxley Act.
Our enterprise-wide incident management framework addresses risk mitigation activities that stem from incidents including governance structure
and organization; risk, incident management and escalation principles; requirements for testing and assessing our processes; and external reporting
guidance. We conduct internal assessments and engage external assessors, consultants and auditors to help provide assurance and validation of our
security controls, as well as alignment to industry norms.
We are also committed to strong third party risk management. Our Third Party Program provides guidance for managing third party risk and is
designed to assist us with the identification, measurement, management, monitoring and reporting of third party risk.
Our Information Security Program requires that employees adhere to our Third Party Information Security Policy, as well as the Third Party Risk
Management Policy, which requires review of third-party controls to determine whether such controls meet the objectives of our Third Party Information
Security Policy. The ORO team is responsible for overseeing that appropriate information security risks are identified and monitored. We rely on many
third-party service providers and network participants, including merchants, and, as such, a security breach or cyber attack affecting one of these third
parties could impact us.
Incident Management
While we continue to invest in our information security defenses, including cybersecurity defenses, if our security systems or those of third
parties are penetrated or circumvented such that the confidentiality, integrity or availability of information about us, our customers, transactions
processed on our networks or on third-party networks on our behalf, or third parties with which we do business is compromised, we could be subject to
significant liability that may not be covered by insurance, including significant legal and financial exposure, actions by our regulators, damage to our
reputation or loss of confidence in the security of our systems, products and services that could materially adversely affect our business. For more
information about the risks posed by cybersecurity threats, see “Item 1A. Risk Factors — Operational and Other Risk — If the security of our systems,
or the systems of third parties we rely upon, is compromised, our business could be disrupted and we may be subject to significant financial exposure,
liability and damage to our reputation.”
Board of Directors Oversight
Our Risk Oversight Committee and Audit Committee are responsible for reviewing and approving our Information Security Program, as well as
reviewing the quality and effectiveness of our technology security. These committees are also responsible for reviewing the guidelines and policies for
assessing and managing our exposure to risks, including cybersecurity risk, and the steps management takes to monitor and control such exposures.
The Risk Oversight Committee and Audit Committee periodically meet to facilitate oversight of risk management matters, including cybersecurity risk.
For example, at least five times per year, the committees receive updates from the CISO and VP-ISTR on our Information Security Program.
The Board of Directors regularly devotes time during its meetings to review and discuss the most significant risks facing us over the short-,
medium- and long-term, and our responses to those risks, including cybersecurity risks. Within these discussions, the Board of Directors receives
updates from senior executives including the CRO and, on an annual basis, the CISO on the risks posed by cybersecurity threats and our information
security program. Additionally, the CISO provides annual Information Security training to the Board of Directors. The training covers the regulatory
-49-
Table of Contents
landscape, risk management practices, cyber landscape and threats to us and the roles and responsibilities of management and board members.
Management Oversight
Our Information Security Program is led by our CISO, who reports to our CIO, and overseen by the TIRC, which serves as a sub-committee to
the Management Risk Committee. The TIRC provides oversight, leadership and direction for data risks, technology risks and information security. Our
CISO leads the Information Security organization and has the overall responsibility of implementing its strategy and objectives to build a strong cyber
engineering function. Reporting to the CISO is the Security Intelligence Incident Response Team, which is responsible for managing cybersecurity
incidents by leading, designing and implementing threat intelligence, continuous monitoring and rapid response services.
Our CISO has over 20 years of information technology experience with specialization in information security and technology risk management.
Our CISO is a Certified Information Systems Auditor and Certified Data Privacy Security Engineer. He serves as a Board member at the National
Cybersecurity Alliance and is a member of Finance Services Information Sharing and Analysis Center (FS-ISAC) along with multiple other customer
advisory boards. He was formerly a director at a large financial services organization and been in various information security roles at a Big 4
consulting firm prior to joining Discover.
Item 2. Properties
Our principal properties are located in the U.S. and include our corporate headquarters, our call centers and a processing center. Our corporate
headquarters is used by both our Digital Banking and Payment Services segments and the call centers and processing center largely support our
Digital Banking segment. We also have various offices located outside the U.S. that primarily support our Payment Services segment.
We have optimized our physical space to ensure they are fit for purpose and as a result, our call centers are being utilized to a reasonable
capacity. We believe our facilities that support both our Digital Banking and Payment Services segments are suitable and adequate to meet our current
and projected needs.
Item 3. Legal Proceedings
For a description of legal proceedings, see Note 19: Litigation and Regulatory Matters to our consolidated financial statements.
Item 4. Mine Safety Disclosures
None.
-50-
Table of Contents
Part II.
Part II | Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is traded on the New York Stock Exchange (ticker symbol DFS). As of February 14, 2025, there were approximately 34,581
holders of record of our common stock.
Issuer Purchases of Equity Securities
In accordance with the Merger Agreement with Capital One, share repurchases have been paused through the completion of the merger. For
more information on the pending merger, see “Business — Pending Merger with Capital One Financial Corporation” to our consolidated financial
statements.
The following table sets forth information regarding 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
October 1-31, 2024
Employee transactions
1,097
$
149.99
November 1-30, 2024
Employee transactions
4,542
$
154.04
December 1-31, 2024
Employee transactions
7,570
$
177.68
Total
Employee transactions
13,209
$
167.25
(1)
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.
(2)
Average price paid per share excludes any excise tax.
(2)
(1)
(1)
(1)
(1)
-51-
Table of Contents
Stock Performance Graph
The following graph compares the cumulative total stockholder return of our common stock, the S&P 500 Financials Index and the S&P 500
Index for the period from December 31, 2019 through December 31, 2024. The graph assumes an initial investment of $100 on December 31, 2019.
The cumulative returns include stock price appreciation and assume full reinvestment of dividends. This graph does not forecast future performance of
our common stock.
December 31,
2019
2020
2021
2022
2023
2024
Discover Financial Services
$
100.00
$
110.08
$
142.87
$
123.49
$
145.98
$
229.69
S&P 500 Index
$
100.00
$
118.39
$
152.34
$
124.73
$
157.48
$
196.85
S&P 500 Financials Index
$
100.00
$
98.24
$
132.50
$
118.49
$
132.83
$
173.35
Item 6. Reserved
-52-
Table of Contents
Item 7. 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 audited
consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K. Some of the information contained in this
discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those
discussed below and elsewhere in this annual report on Form 10-K particularly under “Risk Factors” and “Special Note Regarding Forward-Looking
Statements,” which immediately follows “Risk Factors.” Unless otherwise specified, references to Notes to our consolidated financial statements are to
the Notes to our audited consolidated financial statements as of December 31, 2024 and 2023 and for years ended December 31, 2024, 2023 and
2022.
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, 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 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.
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.
2024 Highlights
The highlights below compare results as of and for the year ended December 31, 2024 against results as of and for the year ended
December 31, 2023.
•
Net income was $4.5 billion, or $17.72 per diluted share, compared to net income of $2.8 billion, or $10.70 per diluted share, in the prior year.
•
Total loans declined $7.3 billion, or 6%, to $121.1 billion. The sale of our private student loan portfolio was completed during the fourth
quarter of 2024.
•
Credit card loans grew $0.5 billion, or 1%, to $102.8 billion.
•
The net charge-off rate for credit card loans increased 148 basis points to 5.38% and the delinquency rate for credit card loans over 30 days
past due decreased 3 basis points to 3.84%.
•
Direct-to-consumer deposits grew $6.6 billion, or 8%, to $90.6 billion.
•
Payment Services transaction volume for the segment was $402.5 billion, up 10%.
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 maintaining regulatory capital levels above a
threshold based on the results of supervisory stress tests after accounting for planned dividend payments.
-53-
Table of Contents
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 and substance of any additional changes to
existing guidance or new guidance are uncertain. Moreover, following the failure of 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”, and together with the Federal Reserve and the OCC, the “Agencies”) 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 September 2024, the Federal Reserve Vice Chair for Supervision previewed potential changes to
the July 2023 proposal, including no longer subjecting Category IV institutions to the proposed revisions other than the requirement to recognize
accumulated other comprehensive income, such as unrealized gains and losses on available-for-sale securities, in regulatory capital. The Federal
Reserve, OCC and FDIC have not yet issued any changes to the July 2023 proposal.
In August 2023, 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, substance or impact of the finalization of these proposals or other regulatory changes, if any such
change were adopted, it would likely revise the regulatory tailoring currently applicable to DFS, otherwise tighten the prudential regulatory
requirements that would apply to DFS and increase our expenses.
In accordance with the capital plan rule amendments, we elected not to participate in the 2023 supervisory stress tests, but did submit to the
Federal Reserve a capital plan based on a forward-looking internal assessment of income and capital under baseline and stressful conditions. In July
2023, the Federal Reserve disclosed that our SCB was 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. On June 26, 2024, the Federal Reserve announced the results of the 2024
Comprehensive Capital Analysis and Review (“CCAR”) exercise, followed by the release of the final large bank capital requirements on August 28,
2024. Our new SCB requirement increased to 3.1%, effective beginning October 1, 2024, through September 30, 2025, subject to potential
recalculation, as discussed in the next paragraph.
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. We determined our entry into an agreement and plan of
merger ("Merger Agreement") with Capital One required us to resubmit our capital plan and we submitted an updated capital plan on May 3, 2024. The
resubmission process is ongoing. Under the capital plan rule and as a consequence of the resubmission requirement, we must receive prior approval
for any dividend or other capital distribution, other than a capital distribution on a newly issued capital instrument, and the Federal Reserve may
recalculate our SCB.
Consumer Financial Services
The 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
-54-
Table of Contents
“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. Additionally,
detection of repeat offenders, such as companies that violate a formal court or agency order, has also become a priority for the CFPB. In March 2022,
the CFPB 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 19: Litigation and Regulatory Matters to our 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 credit card late fees to $8 and eliminates
automatic annual inflation adjustments to that safe harbor amount. The rule is currently under legal challenge, and we continue to monitor legal
developments that could impact the implementation of the final rule, which if implemented, could result in increased cardholder delinquencies and
credit losses.
Although the priorities and actions of the CFPB may change in the new U.S. presidential administration, state regulators (including attorneys
general) may seek to fill a perceived void.
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.
Data Security and Privacy
Policymakers at the federal and state levels remain focused on enhancing data security and data breach incident response requirements. These
policymakers have proposed and enacted regulations and legislation to augment consumer data privacy standards and require companies to assess
and/or disclose cybersecurity metrics, risks, opportunities, policies and practices. At the 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 our consumers’ nonpublic personal
information (“NPI”). In October 2024, the CFPB finalized its Personal Financial Data Rights Rule, which requires financial institutions to make certain
consumer data available upon request to consumers and authorized third parties and standardizes the way in which the data is shared. In July 2023,
the SEC adopted rules on Cybersecurity Risk Management, Strategy, Governance and Incident Disclosure. For more information on Discover’s
cybersecurity program in connection with these rules, see “Item 1C. Cybersecurity.” In April 2024, the Department of Homeland Security proposed
regulations to implement the Cyber Incident Reporting for Critical Infrastructure Act of 2022 and create new cyber incident and ransom payment
reporting requirements for covered entities, including entities that own or operate financial services sector infrastructure. Final regulations are expected
to be published in late 2025 and become effective in 2026.
At the state level, the California Consumer Privacy Act ("CCPA"), which became effective in 2020, created a broad set of privacy rights and
remedies. The California Privacy Rights Act, which became effective in 2023, amended the CCPA, enhanced consumer privacy protections and
created a new California Privacy Protection Agency (“CPPA”). 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. To date, these laws have contained either data-level exemptions for NPI or entity-level exemptions for
financial institutions subject to the GLBA or state banking laws, so the impact of 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 privacy laws, on our businesses and other providers of consumer
financial services, including laws regulating the capture and use of consumer biometric information. 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.”
-55-
Table of Contents
Environmental, Social and Governance Matters
Environmental, social and governance (“ESG”) issues, including climate change, human capital and governance practices, are a significant area
of focus by U.S. federal, state and international lawmakers and regulatory agencies, as well as shareholders and other stakeholders. In recent months,
there have been substantial legislative and regulatory developments on such issues, including proposed, issued or implemented legislation and
rulemakings concerning how companies assess and/or disclose climate and other ESG information, risks, opportunities, policies and practices. For
example, in October 2023, three climate-related disclosure bills were signed in California, and in March 2024, the SEC issued a final rule on climate-
related disclosures. The potential impacts of these legislative and regulatory requirements are being evaluated at this time (including as a result of
ongoing litigation challenging such requirements and the SEC’s order stating its final rule on climate-related disclosures pending the completion of
judicial review as well as recent executive orders and other actions by legislators or the new presidential administration). We expect that these and
other emerging and evolving legal and regulatory requirements on ESG issues, if adopted, will result in additional compliance and reporting costs to
us, and we continue to evaluate and assess the potential impact of these legal and regulatory developments.
Results of Operations
The discussion below provides a summary of our results of operations and information about our loan receivables as of and for the year ended
December 31, 2024, compared to the year ended December 31, 2023. Refer to our annual report on Form 10-K/A for the year ended December 31,
2023, for discussion of our results of operations and loan receivables information as of and for the year ended December 31, 2023, compared to the
year ended December 31, 2022.
-56-
Table of Contents
Segments
We manage our business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. For a
detailed description of the operations of each segment, as well as the allocation conventions used in our business segment reporting, see Note 22:
Segment Disclosures to our consolidated financial statements.
The following table presents segment data (dollars in millions):
For the Years Ended December 31,
2024
2023
2022
Digital Banking
Interest income
Credit card loans
$
16,109
$
14,438
$
10,632
Private student loans
800
1,033
831
Personal loans
1,402
1,156
872
Home loans
525
324
165
Other loans
2
2
2
Other interest income
1,182
892
362
Total interest income
20,020
17,845
12,864
Interest expense
5,724
4,746
1,865
Net interest income
14,296
13,099
10,999
Provision for credit losses
4,911
6,018
2,359
Other income
2,902
2,245
2,041
Other expense
Employee compensation and benefits
2,739
2,356
2,068
Marketing and business development
1,055
1,147
1,020
Information processing and communications
704
582
485
Professional fees
1,231
991
838
Premises and equipment
90
86
115
Other expense
911
783
523
Total other expense
6,730
5,945
5,049
Income before income taxes
5,557
3,381
5,632
Payment Services
Other income
712
450
176
Other expense
Employee compensation and benefits
85
78
71
Marketing and business development
15
17
15
Information processing and communications
31
26
28
Professional fees
43
50
33
Premises and equipment
3
3
3
Other expense
18
20
17
Total other expense
195
194
167
Income before income taxes
517
256
9
Total income before income taxes
$
6,074
$
3,637
$
5,641
-57-
Table of Contents
The following table presents information on transaction volume (dollars in millions):
For the Years Ended December 31,
2024
2023
2022
Network Transaction Volume
PULSE Network
$
328,295
$
285,616
$
253,072
Network Partners
32,774
39,671
44,542
Diners Club
41,425
39,299
33,505
Total Payment Services
402,494
364,586
331,119
Discover Network — Proprietary
219,419
224,572
218,738
Total Network Transaction Volume
$
621,913
$
589,158
$
549,857
Transactions Processed on Networks
Discover Network
3,750
3,728
3,617
PULSE Network
9,609
7,705
6,200
Total Transaction Processed on Networks
13,359
11,433
9,817
Credit Card Volume
Discover Card Volume
$
224,579
$
232,785
$
224,477
Discover Card Sales Volume
$
212,251
$
217,914
$
210,645
(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 $5.6 billion for the year ended December 31, 2024, as compared to $3.4 billion for the
year ended December 31, 2023.
Net interest income increased for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily driven by a
higher average level of loan receivables and a higher yield on loans, partially offset by higher funding costs. Interest income increased compared to the
prior year primarily due to a higher average level of loan receivables and higher market rates. Interest expense increased compared to the prior year
primarily due to higher funding costs driven by lower coupon maturities, higher market rates and a larger funding base.
For the year ended December 31, 2024, the provision for credit losses decreased as compared to the year ended December 31, 2023, primarily
driven by the reversal of the private student loans’ allowance due to the sale of the student loan portfolio. For a detailed discussion on provision for
credit losses, see “— Loan Quality — Provision and Allowance for Credit Losses.”
Total other income increased for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily due to
increases in other income, net discount and interchange revenue and loan fee income. Other income increased primarily from a gain recognized from
the sale of our private student loan portfolio. The increase in discount and interchange revenue was driven primarily by lower rewards expense. Loan
fee income increased primarily due to a higher volume of late payments.
Total other expense increased for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily due to
increases in employee compensation and benefits, professional fees, information processing and communications and other expense. The increase in
employee compensation and benefits was driven primarily by higher average salaries and employee retention awards. Professional fees increased
primarily due to increased consulting supporting compliance and risk management initiatives and the pending merger. The increase in information
processing and communications was primarily driven by accelerated private student loan software depreciation. Other expense increased primarily
from charges for potential regulatory penalties to the card product card misclassification matter. For information regarding the card product
misclassification, see Note 19: Litigation and Regulatory Matters to our consolidated financial statements. The increase in total other expense was
partially offset by a decrease in marketing and business development primarily from lower private student loan marketing expenses.
(1)
(2)
(3)
(4)
-58-
Table of Contents
Discover card sales volume was $212.3 billion for the year ended December 31, 2024, which was a decrease of 2.6% as compared to the year
ended December 31, 2023. This volume decrease was primarily driven by lower new account growth.
Payment Services
Our Payment Services segment reported pretax income of $517 million for the year ended December 31, 2024, as compared to pretax income of
$256 million for the year ended December 31, 2023. The increase in segment pretax income was primarily due to a favorable legal settlement.
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 $8.3 billion at December 31, 2024, which reflects a $1.0 billion release from the amount of the allowance for
credit losses at 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 "— Loan Quality," Note 4: Loan
Receivables and Note 2: Summary of Significant Accounting Policies to our consolidated financial statements.
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 $487 million at December 31,
2024 if we applied 100% weight to the most adverse scenario used in our loss forecast in our sensitivity analysis to reflect continued elevated interest
rates, a decline in consumer confidence, the influence of geopolitical events and increasing unemployment.
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
-59-
Table of Contents
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 estimates for the loan portfolio and does not imply any expectation of future losses.
Furthermore, the hypothetical increase in our allowance for credit losses for loans does not incorporate the impact of management judgment for
qualitative factors applied in the current allowance for credit losses, which may have a positive or negative effect on our actual financial condition and
results of operations.
The overall economic environment directly impacts the macroeconomic variables that are used in the loss forecast models. If management used
different assumptions about the economic environment in estimating expected credit losses, the impact to the allowance for credit losses could have a
material effect on our consolidated financial condition and results of operations. In addition, if we experience 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 consolidated statements of income (dollars in millions):
For the Years Ended December 31,
2024 vs. 2023
Increase (Decrease)
2023 vs. 2022
Increase (Decrease)
2024
2023
2022
$
%
$
%
Interest income
$
20,020
$
17,845
$
12,864
$
2,175
12 %
$
4,981
39 %
Interest expense
5,724
4,746
1,865
978
21 %
2,881
154 %
Net interest income
14,296
13,099
10,999
1,197
9 %
2,100
19 %
Provision for credit losses
4,911
6,018
2,359
(1,107)
(18)%
3,659
155 %
Net interest income after provision for credit losses
9,385
7,081
8,640
2,304
33 %
(1,559)
(18)%
Other income
3,614
2,695
2,217
919
34 %
478
22 %
Other expense
6,925
6,139
5,216
786
13 %
923
18 %
Income before income taxes
6,074
3,637
5,641
2,437
67 %
(2,004)
(36)%
Income tax expense
1,539
841
1,325
698
83 %
(484)
(37)%
Net income
$
4,535
$
2,796
$
4,316
$
1,739
62 %
$
(1,520)
(35)%
Net income allocated to common stockholders
$
4,446
$
2,715
$
4,228
$
1,731
64 %
$
(1,513)
(36)%
-60-
Table of Contents
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;
•
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, Secured Overnight Financing Rate (“SOFR”); and
•
The effectiveness of interest rate swaps in our interest rate risk management program.
Net interest income increased for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily driven by a
higher average level of loan receivables and a higher yield on loans, partially offset by higher funding costs. Interest income increased compared to the
prior year primarily due to a higher average level of loan receivables and higher market rates. Interest expense increased compared to the prior year
primarily due to higher funding costs driven by lower coupon maturities, higher market rates and a larger funding base.
-61-
Table of Contents
Average Balance Sheet Analysis
(dollars in millions)
For the Years Ended December 31,
2024
2023
2022
Average
Balance
Yield/Rate
Interest
Average
Balance
Yield/Rate
Interest
Average
Balance
Yield/Rate
Interest
Assets
Interest-earning assets
Cash and cash equivalents
$
10,798
5.31 %
$
573
$
8,192
5.17 %
$
423
$
9,279
1.89 %
$
175
Restricted cash
535
6.82 %
37
250
7.80 %
20
515
1.48 %
8
Other short-term investments
1,194
4.29 %
51
—
—
—
—
— %
—
Investment securities
13,925
3.74 %
521
12,938
3.47 %
449
6,988
2.57 %
179
Loan receivables
Credit card loans
100,313
16.06 %
16,109
94,205
15.33 %
14,438
79,243
13.42 %
10,632
Private student loans
7,979
10.02 %
800
10,382
9.95 %
1,033
10,240
8.11 %
831
Personal loans
10,281
13.64 %
1,402
9,011
12.83 %
1,156
7,295
11.95 %
872
Home Loans
7,013
7.49 %
525
4,657
6.96 %
324
2,841
5.82 %
165
Other
52
3.11 %
2
56
3.26 %
2
54
2.93 %
2
Total loan receivables
125,638
14.99 %
18,838
118,311
14.33 %
16,953
99,673
12.54 %
12,502
Total interest-earning assets
152,090
13.16 %
20,020
139,691
12.77 %
17,845
116,455
11.05 %
12,864
Allowance for credit losses
(8,876)
(7,936)
(6,820)
Other assets
7,704
6,938
6,070
Total assets
$
150,918
$
138,693
$
115,705
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits
$
44,605
4.70 %
$
2,098
$
38,220
3.89 %
$
1,485
$
23,988
2.02 %
$
484
Money market deposits
7,166
4.20 %
301
8,143
4.16 %
339
8,453
1.67 %
141
Other interest-bearing savings deposits
55,763
4.26 %
2,373
51,366
4.01 %
2,062
44,276
1.43 %
632
Total interest-bearing deposits
107,534
4.44 %
4,772
97,729
3.98 %
3,886
76,717
1.64 %
1,257
Borrowings
Short-term borrowings
—
— %
—
44
10.21 %
5
225
0.70 %
2
Securitized borrowings
10,145
4.76 %
483
10,528
4.30 %
453
9,060
2.41 %
219
Other long-term borrowings
9,149
5.13 %
469
9,090
4.43 %
402
9,334
4.15 %
387
Total borrowings
19,294
4.93 %
952
19,662
4.37 %
860
18,619
3.26 %
608
Total interest-bearing liabilities
126,828
4.51 %
5,724
117,391
4.04 %
4,746
95,336
1.96 %
1,865
Other liabilities and stockholders’ equity
24,090
21,302
20,369
Total liabilities and stockholders’ equity
$
150,918
$
138,693
$
115,705
Net interest income
$
14,296
$
13,099
$
10,999
Net interest margin
11.38 %
11.07 %
11.04 %
Net yield on interest-earning assets
9.40 %
9.38 %
9.45 %
Interest rate spread
8.65 %
8.73 %
9.09 %
(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 $425 million, $468 million and $365 million of amortization of balance transfer fees for the years ended December 31, 2024, 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 years ended December 31, 2024, 2023 and 2022.
(4)
The return on average assets, based on net income, was 3.00%, 2.02% and 3.73% for the years ended December 31, 2024, 2023 and 2022, respectively.
(5)
Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding for the year ended December 31, 2024
(6)
Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the years ended December 31, 2024, 2023 and 2022.
(7)
Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding for the years ended December 31, 2024, 2023 and 2022.
(8)
Includes the impact of terminated derivatives formerly designated as fair value hedges for the years ended December 31, 2024, 2023 and 2022.
(9)
Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding for the years ended December 31, 2024, 2023 and 2022.
(10)
The return on average stockholders’ equity, based on net income, was 28%, 20% and 32% for the years ended December 31, 2024, 2023 and 2022, respectively.
(11)
Net interest margin represents net interest income as a percentage of average total loan receivables.
(12)
Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
(13)
Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
(1)
(2)(3)
(4)
(5)
(6)(7)(8)
(7)(8)(9)
(10)
(11)
(12)
(13)
-62-
Table of Contents
Rate/Volume Variance Analysis
(dollars in millions)
Year Ended December 31, 2024 vs.
Year Ended December 31, 2023 vs.
Year Ended December 31, 2023
Year Ended December 31, 2022
Volume
Rate
Total
Volume
Rate
Total
Increase/(Decrease) in net interest income due to
changes in:
Interest-earning assets
Cash and cash equivalents
$
138
$
12
$
150
$
(23)
$
271
$
248
Restricted cash
20
(3)
17
(6)
18
12
Other short-term investments
51
—
51
—
—
—
Investment securities
36
36
72
191
79
270
Loan receivables
Credit card loans
964
707
1,671
2,170
1,636
3,806
Private student loans
(241)
8
(233)
11
191
202
Personal loans
170
76
246
216
68
284
Home loans
175
26
201
121
38
159
Other
—
—
—
—
—
—
Total loan receivables
1,068
817
1,885
2,518
1,933
4,451
Total interest income
1,313
862
2,175
2,680
2,301
4,981
Interest-bearing liabilities
Interest-bearing deposits
Time deposits
273
340
613
391
610
1,001
Money market deposits
(41)
3
(38)
(5)
203
198
Other interest-bearing savings deposits
180
131
311
116
1,314
1,430
Total interest-bearing deposits
412
474
886
502
2,127
2,629
Borrowings
Short-term borrowings
(3)
(2)
(5)
(2)
5
3
Securitized borrowings
(17)
47
30
40
194
234
Other long-term borrowings
3
64
67
(10)
25
15
Total borrowings
(17)
109
92
28
224
252
Total interest expense
395
583
978
530
2,351
2,881
Net interest income
$
918
$
279
$
1,197
$
2,150
$
(50)
$
2,100
(1) The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances between the years ended December 31, 2024, 2023 and 2022 based on the percentage
of the rate or volume variance to the sum of the two absolute variances.
1)
-63-
Table of Contents
Loan Quality
Loan receivables consist of the following (dollars in millions):
December 31,
2024
2023
Credit card loans
$
102,786
$
102,259
Other loans
Private student loans
—
10,352
Personal loans
10,314
9,852
Home loans
7,963
5,890
Other loans
55
56
Total other loans
18,332
26,150
Total loan receivables
121,118
128,409
Allowance for credit losses
(8,323)
(9,283)
Net loan receivables
$
112,795
$
119,126
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 "— Critical Accounting Estimates — Allowance for Credit Losses" and Note 4: Loan Receivables to our consolidated financial
statements for more details on how we estimate the allowance for credit losses.
-64-
Table of Contents
The following tables provide changes in our allowance for credit losses (dollars in millions):
For the Year Ended December 31, 2024
Credit Card Loans
Private Student
Loans
Personal Loans
Home Loans
Total Loans
Balance at December 31, 2023
$
7,619
$
858
$
722
$
84
$
9,283
Additions
Provision for credit losses
5,178
(770)
476
67
4,951
Deductions
Charge-offs
(6,522)
(100)
(484)
(12)
(7,118)
Recoveries
1,128
12
66
1
1,207
Net charge-offs
(5,394)
(88)
(418)
(11)
(5,911)
Balance at December 31, 2024
$
7,403
$
—
$
780
$
140
$
8,323
For the Year Ended December 31, 2023
Credit Card Loans
Private Student
Loans
Personal Loans
Home Loans
Total Loans
Balance at December 31, 2022
$
5,883
$
839
$
595
$
57
$
7,374
Cumulative effect of ASU No. 2022-02 adoption
(66)
—
(2)
—
(68)
Balance at January 1, 2023
5,817
839
593
57
7,306
Additions
Provision for credit losses
5,476
152
363
28
6,019
Deductions
Charge-offs
(4,481)
(155)
(290)
(1)
(4,927)
Recoveries
807
22
56
—
885
Net charge-offs
(3,674)
(133)
(234)
(1)
(4,042)
Balance at December 31, 2023
$
7,619
$
858
$
722
$
84
$
9,283
For the Year Ended December 31, 2022
Credit Card Loans
Private Student
Loans
Personal Loans
Home Loans
Total Loans
Balance at December 31, 2021
$
5,273
$
843
$
662
$
44
$
6,822
Additions
Provision for credit losses
2,233
99
24
13
2,369
Deductions
Charge-offs
(2,417)
(126)
(159)
—
(2,702)
Recoveries
794
23
68
—
885
Net charge-offs
(1,623)
(103)
(91)
—
(1,817)
Balance at December 31, 2022
$
5,883
$
839
$
595
$
57
$
7,374
(1)
Excludes a $40 million, $1 million and $10 million adjustment to the liability for expected credit losses on unfunded commitments for the years ended December 31, 2024, 2023 and 2022, respectively, as the
liability is recorded in accrued expenses and other liabilities in our consolidated statements of financial condition. With the sale of the private student loan portfolio in 2024, a liability for expected credit losses on
unfunded commitments is no longer recorded.
(2)
Represents the adjustment to the allowance for credit losses as a result of the adoption of Accounting Standards Update (“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 $8.3 billion at December 31, 2024, which reflects a $1.0 billion release from the amount of the
allowance for credit losses at December 31, 2023. The release in the allowance for credit losses between December 31, 2024 and December 31,
2023, was primarily driven by the reversal of the private student loans’ allowance due to the sale of the student loan portfolio.
(1)
(2)
(1)
(1)
-65-
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 December 31, 2024, we used a macroeconomic forecast that projected the following weighted
average amounts: (i) unemployment rate ending 2025 at 4.56% and, within our reasonable and supportable period, peaking at 4.7% in the third quarter
of 2025 and (ii) 1.8% growth rate in real gross domestic product in 2025.
In estimating expected credit losses, we considered the uncertainties associated with borrower behavior and payment trends, as well as recent
and expected macroeconomic conditions, including those relating to consumer price inflation and the fiscal and monetary policy responses to that
inflation. The Federal Reserve acted to reduce the federal funds target range by 100 basis points since September 2024 citing improvement in inflation
outlook and shifting focus to ensuring robust economic growth. While Federal Reserve officials believe recent trends in inflation and employment
continue to be supportive of a less restrictive monetary policy in the longer-term, near-term outlook is less certain as inflation persists at higher than
targeted levels while economic output and labor market data remains strong. The timing and magnitude of rate decreases throughout 2025 will be
dependent on closely monitored trends in economic data, particularly inflation and labor market conditions, and monetary policy is expected to remain
restrictive. As easing of monetary policy typically precedes weaker consumer credit conditions caused by rising unemployment and slowing economic
growth, we see a pause in reducing interest rates as a sign of observed economic resilience. While credit performance in our lending portfolios has
evolved in line with our expectations, we assessed the prospects for various macroeconomic outcomes in setting our allowance for credit 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.
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 year ended December 31, 2024, the provision for credit losses decreased by
$1.1 billion, as compared to the year ended December 31, 2023. The reserve release during the year ended December 31, 2024, was primarily driven
by the reversal of the private student loans’ allowance due to the sale of the student loan portfolio.
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 Years Ended December 31,
2024
2023
2022
$
%
$
%
$
%
Credit card loans
$
5,394
5.38 %
$
3,674
3.90 %
$
1,623
2.05 %
Personal loans
$
418
4.06 %
$
234
2.60 %
$
91
1.25 %
Home loans
$
11
0.16 %
$
1
0.02 %
$
—
— %
The net charge-offs and net charge-off rate for credit card loans, personal loans and home loans increased for the year ended December 31,
2024, when compared to the same periods in 2023, primarily driven by portfolio seasoning.
-66-
Table of Contents
Delinquencies
Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan
become 30 days past due.
The following table presents the amounts and delinquency rates of key loan products that are 30 and 90 days or more delinquent, and loan
receivables that are not accruing interest regardless of delinquency (dollars in millions):
December 31,
2024
2023
$
%
$
%
Loans 30 or more days delinquent
Credit card loans
$
3,944
3.84 %
$
3,955
3.87 %
Personal loans
$
174
1.69 %
$
143
1.45 %
Home loans
$
98
1.23 %
$
51
0.86 %
Total loan receivables
$
4,216
3.48 %
$
4,156
3.45 %
Loans 90 or more days delinquent
Credit card loans
$
1,980
1.93 %
$
1,917
1.87 %
Personal loans
$
51
0.50 %
$
39
0.40 %
Home loans
$
40
0.50 %
$
19
0.33 %
Total loan receivables
$
2,071
1.71 %
$
1,975
1.59 %
Loans not accruing interest
$
299
0.25 %
$
261
0.21 %
The 30-day and 90-day delinquency rates remained relatively stable for credit card loans at December 31, 2024, compared to December 31,
2023. The 30-day delinquency and 90-day delinquency rates for personal loans and home loans at December 31, 2024, increased compared to
December 31, 2023, primarily driven by portfolio seasoning.
Modified and Restructured Loans
For information regarding modified and restructured loans, see Note 4: Loan Receivables to our consolidated financial statements.
Maturities and Sensitivities of Loan Receivables to Changes in Interest Rates
Our loan portfolio had the following maturity distribution (dollars in millions):
At December 31, 2024
Due One
Year or
Less
Due After
One Year
Through
Five Years
Due After
Five Years
Through Fifteen
Years
Due After Fifteen
Years
Total
Credit card loans
$
33,456
$
54,978
$
14,072
$
280
$
102,786
Personal loans
2,891
6,901
522
—
10,314
Home loans
206
975
2,852
3,930
7,963
Other loans
—
8
5
42
55
Total loan receivables
$
36,553
$
62,862
$
17,451
$
4,252
$
121,118
(1) Because of the uncertainty regarding loan repayment patterns, the above amounts have been calculated using contractually required minimum payments. Historically, actual loan repayments have been higher
than such minimum payments and, therefore, the above amounts may not necessarily be indicative of our actual loan repayments.
At December 31, 2024, approximately $54.0 billion of our loan portfolio due after one year had interest rates tied to an index and approximately
$30.5 billion were fixed-rate loans.
(1)
-67-
Table of Contents
Other Income
The following table presents the components of other income (dollars in millions):
For the Years Ended December 31,
2024 vs. 2023
Increase (Decrease)
2023 vs. 2022
Increase
2024
2023
2022
$
%
$
%
Discount and interchange revenue, net
$
1,520
$
1,381
$
1,303
$
139
10 %
$
78
6 %
Protection products revenue
169
172
172
(3)
(2)%
—
— %
Loan fee income
819
763
632
56
7 %
131
21 %
Transaction processing revenue
345
303
249
42
14 %
54
22 %
Losses on equity investments
(2)
(9)
(214)
7
(78)%
205
(96)%
Other income
763
85
75
678
798 %
10
13 %
Total other income
$
3,614
$
2,695
$
2,217
$
919
34 %
$
478
22 %
(1)
Net of rewards, including Cashback Bonus rewards, of $3.0 billion, $3.1 billion and $3.0 billion for the years ended December 31, 2024, 2023 and 2022, respectively.
Total other income increased for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily due to
increases in other income, net discount and interchange revenue and loan fee income. Other income increased primarily from a gain recognized from
the sale of our private student loan portfolio and a favorable legal settlement in our Payment Services segment. The increase in discount and
interchange revenue was driven primarily by lower rewards expense. Loan fee income increased primarily due to a higher volume of late payments.
Other Expense
The following table represents the components of other expense (dollars in millions):
For the Years Ended December 31,
2024 vs. 2023
Increase (Decrease)
2023 vs. 2022
Increase (Decrease)
2024
2023
2022
$
%
$
%
Employee compensation and benefits
$
2,824
$
2,434
$
2,139
$
390
16 %
$
295
14 %
Marketing and business development
1,070
1,164
1,035
(94)
(8)%
129
12 %
Information processing and communications
735
608
513
127
21 %
95
19 %
Professional fees
1,274
1,041
871
233
22 %
170
20 %
Premises and equipment
93
89
118
4
4 %
(29)
(25)%
Other expense
929
803
540
126
16 %
263
49 %
Total other expense
$
6,925
$
6,139
$
5,216
$
786
13 %
$
923
18 %
Total other expense increased for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily due to
increases in employee compensation and benefits, professional fees, information processing and communications and other expense. The increase in
employee compensation and benefits was driven primarily by higher average salaries and employee retention awards. Professional fees increased
primarily due to increased consulting supporting compliance and risk management initiatives and the pending merger. The increase in information
processing and communications was primarily driven by accelerated private student loan software depreciation. Other expense increased primarily
from charges for potential regulatory penalties to the card product card misclassification matter. For information regarding the card product
misclassification, see Note 19: Litigation and Regulatory Matters to our consolidated financial statements. The increase in total other expense was
partially offset by a decrease in marketing and business development primarily from lower private student loan marketing expenses.
(1)
-68-
Table of Contents
Income Tax Expense
The following table reconciles our effective tax rate to the U.S. federal statutory income tax rate (dollars in millions):
For the Years Ended December 31,
2024
2023
2022
U.S. federal statutory income tax rate
21.0 %
21.0 %
21.0 %
U.S. state, local and other income taxes, net of U.S. federal income tax benefits
3.6
3.5
3.4
Accrual for nondeductible penalties
1.2
—
—
Tax credits
(0.5)
(2.1)
(1.3)
Other
—
0.7
0.4
Effective income tax rate
25.3 %
23.1 %
23.5 %
Income tax expense
$
1,539
$
841
$
1,325
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 (“direct-to-consumer deposits”) and 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 diverse customer base, and therefore, the majority of these
deposit account balances are insured according to the FDIC’s insurance limits. Brokered deposit products include certificates of deposit and sweep
accounts. In accordance with FDIC guidance, we do not categorize certain retail deposit products such as deposits generated through certain sweep
deposit relationships as brokered for regulatory reporting purposes. At December 31, 2024, we had $90.6 billion of direct-to-consumer deposits and
$16.4 billion of brokered deposits, of which there are $93.5 billion of deposit balances due in less than one year and $13.5 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
December 31, 2024, there were $29.4 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization
investors for the year ended December 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 December 31, 2024, we had $8.5 billion of
-69-
Table of Contents
outstanding public asset-backed securities and $2.3 billion of outstanding subordinated asset-backed securities that had been issued to our wholly-
owned subsidiaries.
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 December 31, 2024, the DiscoverSeries three-month rolling average excess spread was 14.18%. 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. Alternatively, we could employ structured discounting, which was used effectively in 2009 to bolster excess spread and mitigate early
amortization risk.
The following table summarizes expected contractual maturities of the investors’ interests in credit card securitizations, excluding those that have
been issued to our wholly-owned subsidiaries (dollars in millions):
At December 31, 2024
Total
Less Than
One Year
One Year and
Thereafter
Scheduled maturities of borrowings - owed to credit card securitization investors
$
8,475
$
5,640
$
2,835
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 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
-70-
Table of Contents
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 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. As of December 31, 2024, we had total committed borrowing capacity of $5.2 billion based on the amount and type of assets
pledged, of which $523 million of long-term advances were outstanding with the FHLB of Chicago. Under certain stressed conditions, we could pledge
our liquidity portfolio securities and borrow against them at a modest reduction to their value.
Other Long-Term Borrowings — 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 December 31, 2024
Principal Amount
Outstanding
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2025-2032
$
2,850
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing 2025-2031
$
138
Discover Financial Services (Parent Company) fixed to floating-rate senior notes, maturing 2034
$
1,000
Discover Bank fixed-rate senior bank notes, maturing 2026-2030
$
2,800
Discover Bank fixed-rate subordinated bank notes, maturing 2028
$
500
At December 31, 2024, $591 million of interest on our fixed-rate debt is due in less than one year and $1.6 billion of interest is due in one year
and thereafter. See Note 9: Long-Term Borrowings to our consolidated financial statements for more information on the maturities of our long-term
borrowings.
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 December 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 December 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
December 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 December 31, 2024, Discover Bank had $46.5
billion of available borrowing capacity through the discount window based on the amount and type of assets pledged, primarily consumer loans. As of
December 31, 2024, we had no borrowings outstanding under the discount window and reserve this capacity as a source of contingency liquidity.
-71-
Table of Contents
Funding Uses
Our primary uses of funds include the extensions of loans and credit to customers, primarily through Discover Bank; the maintenance of
sufficient working capital for routine operations; the service of our debt and capital obligations, including interest, principal, and dividend payments; and
the purchase of investment securities for our liquidity portfolio.
In addition to originating consumer loans to new customers, we also extend credit to existing customers, which primarily arises from agreements
for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions established in the related
agreement. At December 31, 2024, our unused credit arrangements were approximately $232.6 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 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 December 31, 2024, we have debt obligations, common stock and preferred stock outstanding, for which we incur servicing costs. Refer to
“— Funding Sources” and “— Capital” for more information related to our debt obligations and capital service, respectively, and the timing of expected
payments.
We assess funding uses and liquidity needs under stressed and normal operating conditions, considering primary uses of funding, such as on-
balance sheet loans and 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.
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 18: 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.
-72-
Table of Contents
The table below reflects our current credit ratings and outlooks:
Moody’s Investors
Service
Standard & Poor’s
Fitch Ratings
Discover Financial Services
Senior unsecured debt
Baa2
BBB-
BBB+
Outlook for Discover Financial Services senior unsecured debt
Under Review
Positive
Positive
Discover Bank
Senior unsecured debt
Baa1
BBB
BBB+
Outlook for Discover Bank senior unsecured debt
Under Review
Positive
Positive
Subordinated debt
Baa1
BBB-
BBB
Discover Card Execution Note Trust (DCENT)
Class A
Aaa(sf)
AAA(sf)
AAA(sf)
(1)
On February 20, 2024, following the announcement of the pending merger between Discover and Capital One, Moody’s Investor Services 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. We seek to balance the trade-offs between maintaining too much liquidity, which may be costly, with having too little
liquidity, which could cause financial distress. The ALCO, chaired by our Treasurer, has cross-functional membership and manages liquidity risk
centrally. The ALCO monitors the liquidity risk profiles of DFS and Discover Bank and oversees any actions Corporate Treasury may take to ensure
that we maintain ready access to our funding sources and sufficient liquidity to meet current and projected needs. In addition, the ALCO and our Board
of Directors regularly review our compliance with our liquidity limits at DFS and Discover Bank, which are established in accordance with the liquidity
risk appetite set by our Board of Directors.
We employ a variety of metrics to monitor and manage liquidity. We utilize early warning indicators (“EWIs”) to detect emerging liquidity stress
events. 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 advances with unused borrowing capacity or by pledging securities to the
FHLB of Chicago. Moreover, we have unused
(1)
(2)
-73-
Table of Contents
borrowing capacity with the Federal Reserve discount window, which provides an additional source of contingency liquidity. We seek to maintain
sufficient liquidity to satisfy all maturing obligations and fund business operations for at least 12 months in a severe stress environment. In such an
environment, we may also take actions to curtail the size of our balance sheet, which would reduce the need for funding and liquidity.
At December 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 residential mortgage-backed securities issued by U.S. government agencies. 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 December 31, 2024, our liquidity portfolio and undrawn credit facilities were $82.0 billion, which was $12.2 billion higher than the balance at
December 31, 2023. Our liquidity portfolio and undrawn credit facilities grew primarily as a result of increases in other short-term investments and
unused borrowing capacity with the Federal Reserve discount window. During the years ended December 31, 2024 and 2023, the average balance of
our liquidity portfolio was $25.4 billion and $21.0 billion, respectively. Our liquidity portfolio and undrawn facilities consist of the following (dollars in
millions):
December 31,
2024
2023
Liquidity portfolio
Cash and cash equivalents
$
7,693
$
9,815
Other short-term investments
5,423
—
Investment securities
14,209
13,439
Total liquidity portfolio
27,325
23,254
Private asset-backed securitizations
3,500
2,750
Federal Home Loan Bank of Chicago
4,679
2,551
Primary liquidity sources
35,504
28,555
Federal Reserve discount window
46,489
41,199
Total liquidity portfolio and undrawn credit facilities
$
81,993
$
69,754
(1)
Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes.
(2)
Excludes $364 million and $320 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of December 31, 2024 and 2023, respectively.
(3)
See “— Additional Funding Sources” for additional information.
Bank Holding Company Liquidity
The primary uses of funds at the unconsolidated DFS level include debt service obligations (interest payments and return of principal) and
capital service and management activities, including dividend payments on capital instruments and the periodic repurchase of shares of our common
stock. Our primary sources of funds at the bank holding company level include the proceeds from the issuance of unsecured debt and capital
securities, as well as dividends from our subsidiaries, notably Discover Bank. Under periods of idiosyncratic or systemic stress, the bank holding
company could lose or experience impaired access to the capital markets. In addition, our regulators have the discretion to restrict dividend payments
from Discover Bank to the bank holding company.
We utilize a measure referred to as Number of Months of Pre-Funding to determine the length of time DFS can meet upcoming funding
obligations, including common and preferred stock dividend payments and debt service obligations using existing cash resources. In managing this
metric, we structure our debt maturity schedule to manage prudently the amount of debt maturing within a short period. See Note 9: Long-Term
Borrowings to our consolidated financial statements for further information regarding our debt.
(1)
(2)
(3)
(3)
-74-
Table of Contents
Capital
Our primary sources of capital are the earnings generated by our businesses and the proceeds from issuances of capital securities. We seek to
manage capital to a level and composition sufficient to support our businesses’ growth, account for their risks, and meet regulatory requirements,
rating agency targets and debt investor expectations. Within these constraints, we are focused on deploying capital in a manner that provides
attractive returns to our stockholders. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic
initiatives and legislative and regulatory developments.
Under regulatory capital requirements adopted by the Federal Reserve and the FDIC, DFS, along with Discover Bank, must maintain minimum
capital levels. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could limit our business activities and have a direct material effect on our financial condition and operating
results. We must meet specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as
calculated under regulatory guidance and regulations. Current or future legislative or regulatory reforms, such as those related to the adoption of the
CECL accounting model 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 III
rules. Under 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 $1.6 billion as of January 1, 2024. For additional information regarding the risk-based capital and
leverage ratios, see Note 17: Capital Adequacy to our consolidated financial statements.
Federal Reserve 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. We are required to assess whether 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. 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. In July 2023, the Federal Reserve
disclosed our SCB was 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. On June 26, 2024, the Federal Reserve announced the results of the 2024 CCAR exercise, followed by the
release of the final large bank capital requirements on August 28, 2024. Our new SCB requirement increased to 3.1% and is effective from October 1,
2024, through September 30, 2025, subject to potential recalculation as discussed below.
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. We determined our entry into the Merger Agreement with
Capital One required us to resubmit our capital plan, which we did on May 3, 2024. The resubmission process is ongoing. See "— Regulatory
Environment and Developments — Banking — Capital Standards and Stress Testing" for additional information.
-75-
Table of Contents
At December 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.
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 December 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 among different companies.
The following table reconciles total common stockholders’ equity (a GAAP financial measure) to tangible common equity (dollars in millions):
December 31,
2024
2023
Total common stockholders’ equity
$
16,870
$
13,179
Less: goodwill
(255)
(255)
Tangible common equity
$
16,615
$
12,924
(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 2024, 2023 and 2022:
Declaration Date
Record Date
Payment Date
Dividend per Share
2024
October 14, 2024
November 21, 2024
December 05, 2024
$
0.70
July 15, 2024
August 22, 2024
September 05, 2024
0.70
April 17, 2024
May 23, 2024
June 06, 2024
0.70
January 16, 2024
February 22, 2024
March 07, 2024
0.70
Total common stock dividends
$
2.80
2023
October 16, 2023
November 22, 2023
December 07, 2023
$
0.70
July 17, 2023
August 24, 2023
September 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
Total common stock dividends
$
2.70
2022
October 18, 2022
November 23, 2022
December 08, 2022
$
0.60
July 20, 2022
August 25, 2022
September 08, 2022
0.60
April 27, 2022
May 26, 2022
June 09, 2022
0.60
January 18, 2022
February 17, 2022
March 03, 2022
0.50
Total common stock dividends
$
2.30
(1)
-76-
Table of Contents
On January 21, 2025, we declared a quarterly cash dividend on our common stock of $0.70 per share, payable on March 6, 2025 to holders of
record on February 20, 2025, which is consistent with the quarterly amount paid in 2024.
Our Board of Directors declared the following Series C preferred stock dividends during 2024, 2023 and 2022:
Declaration Date
Record Date
Payment Date
Dividend per Depositary
Share
2024
July 15, 2024
October 15, 2024
October 30, 2024
$
27.50
January 16, 2024
April 15, 2024
April 30, 2024
27.50
Total Series C preferred stock dividends
$
55.00
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
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 2024 and 2023:
Declaration Date
Record Date
Payment Date
Dividend per Depositary
Share
2024
July 15, 2024
September 06, 2024
September 23, 2024
$
30.625
January 16, 2024
March 08, 2024
March 25, 2024
30.625
Total Series D preferred stock dividends
$
61.250
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
On January 21, 2025, we declared a semi-annual cash dividend on our Series C and Series D preferred stock of $27.50 and $30.625 per
depositary share, respectively, payable on April 30, 2025 and March 24, 2025, respectively, to holders of record on April 15, 2025 and March 7, 2025,
respectively.
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. Under the Merger Agreement with Capital One, quarterly cash dividends on
our common stock may not exceed $0.70 per share without the prior written consent of Capital One. For additional information on the merger, see
“Business — Pending Merger with Capital One Financial Corporation.” 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 rules, may require us to hold more capital or could adversely
impact our capital level. As a result,
-77-
Table of Contents
there can be no assurance that we will declare and pay any dividends or repurchase any shares of our common stock in the future.
During the year ended December 31, 2024, there were no share repurchases. In accordance with the Merger Agreement with Capital One, we
have paused share repurchases through the completion of the merger.
Item 7A. 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 21: Derivatives and Hedging Activities to our 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 December 31, 2024, the majority of our credit card 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.
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
-78-
Table of Contents
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, our deposit “beta,” is one of the most significant of these assumptions. Assumptions about deposit
beta and other matters are inherently uncertain and, as a result, actual earnings may differ from the simulated earnings presented below. Our actual
earnings depend on multiple factors including, but not limited to, the direction and timing of changes in interest rates, the movement of short-term
interest rates relative to long-term rates, balance sheet composition, competitor actions affecting pricing decisions in our loans and deposits, the mix of
promotional balances in our card portfolio, the level of interest charge-offs and recoveries, the influence of loan repayment rates on revolving balances
and strategic actions undertaken by our management.
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. The prior year numbers do not include the impact of a sale of the private student loan portfolio (dollars in millions):
December 31,
2024
2023
Basis point change
$
%
$
%
+100
$
52
0.36 %
$
161
1.17 %
-100
$
(25)
(0.17)%
$
(153)
(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.
-79-
Table of Contents
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Discover Financial Services
Riverwoods, IL
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Discover Financial Services (the “Company”) as of December 31, 2024, based on
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated statement of financial condition, and the related consolidated statements of income, comprehensive income, changes in stockholders’
equity, and cash flows as of and for the year ended December 31, 2024, of the Company and our report dated February 20, 2025, expressed an
unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 20, 2025
-80-
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Discover Financial Services
Riverwoods, IL
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Discover Financial Services (the “Company”) as of December 31,
2024 and 2023, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for each of
the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2025, expressed an unqualified
opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions
on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses — Credit Card Loans and Personal Loans — Refer to Notes 2 and 4 to the financial statements
Critical Audit Matter Description
The allowance for credit losses (“allowance”) represents management’s estimate of expected credit losses over the remaining life of each loan, using
relevant available information, relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. As
of December 31, 2024, the total allowance was $8.3 billion, which includes the allowance associated with the credit card loan and personal loan
portfolios of $7.4 billion and $780 million, respectively.
The determination of the allowance estimate involves a high degree of subjectivity and requires significant estimates of current credit risk using both
quantitative and qualitative analysis. Management uses statistical models, which are
-81-
Table of Contents
developed on the historical relationship between losses and predictive variables, to estimate the quantitative component of the allowance. The
statistical models require that management select certain inputs for each estimate, including the macroeconomic forecast scenario, and the reasonable
and supportable forecast period. In addition, management considers relevant qualitative factors that have occurred but are not yet reflected in the
model estimate.
Auditing certain aspects of the allowance associated with the credit card loan and personal loan portfolios required a high degree of auditor judgment
and an increased extent of effort, including the involvement of our credit modeling specialists. This included evaluating the (1) model methodology,
including the selection of predictive variables during model development, (2) selection of key model assumptions, including the macroeconomic
forecast scenario and reasonable and supportable period, and (3) qualitative analysis of the results, including the use of qualitative adjustments, if
applicable.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the allowance for credit losses balance, specific to the credit card loan and personal loan portfolios included the
following procedures, among others:
•
We tested the design and operating effectiveness of management’s controls over the determination and review of model methodology,
selection of key model assumptions, and qualitative analysis of the results
•
We evaluated whether the methodology and key model assumptions are appropriate in the context of the applicable financial reporting
framework
•
With assistance from credit modeling specialists, we evaluated whether the models are suitable for determining the estimate, which included
understanding the model methodologies and logic and whether the selected methods for estimating loan losses is appropriate for each loan
portfolio
•
We evaluated whether the selected macroeconomic forecasts were reasonable, including evaluating if they were internally consistent with
other aspects of the Company’s operations, and externally consistent with other macroeconomic forecasts
•
We evaluated the reasonableness and consistency of the reasonable and supportable forecast period
•
We evaluated whether judgments have been applied consistently to the models and that any qualitative adjustments are consistent with the
measurement objective of the applicable financial reporting framework and are appropriate in the circumstances
•
We considered any contradictory evidence that arose while performing our procedures, and whether or not this evidence was indicative of
management bias
•
We evaluated the completeness and accuracy of the Company’s allowance for credit losses disclosures
Litigation and Regulatory Matters — Card Product Misclassification Counterparty Restitution Liability — Refer to Note 19 to the financial
statements
Critical Audit Matter Description
Beginning in 2007, the Company incorrectly classified certain credit card accounts into its highest merchant and merchant acquirer pricing tier. The
misclassification affected pricing for certain merchants and merchant acquirers, but not for cardholders. As of December 31, 2024, the Company
recorded a liability of $1.2 billion within accrued expenses and other liabilities which includes calculated refunds to merchants and merchant acquirers,
interest, other settlement concessions agreed to, less cumulative disbursements made through December 31, 2024, a portion of which is the critical
audit matter.
The Company used facts and data available as of December 31, 2024, to develop its best estimate for the amount it expects to pay to merchant and
merchant acquirers. The determination of the refund liability involved management judgment and estimation as a result of differences in individual
merchant agreements, changes in network terms and differences in the available historical data.
We identified the portion of the liability which represents calculated refunds to merchants and merchant acquirers as a critical audit matter because
auditing management’s judgment in determining the methodology for the liability calculation and assumptions applied within the calculation required a
high degree of auditor judgment and an increased extent of effort. Auditing the interest, other settlement concessions agreed to, and cumulative
disbursements
-82-
Table of Contents
made through December 31, 2024 did not require a high degree of auditor judgment nor an increased extent of effort. Therefore those portions of the
counterparty restitution liability have not been identified as a critical audit matter.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the card misclassification refund liability included the following procedures, among others:
•
We tested the design and operating effectiveness of management’s controls over the determination and review of the liability calculation and
assumptions used in the calculation
•
We performed a combination of procedures to assess the completeness and accuracy of data used within the calculation
•
We evaluated the reasonableness of the methodology used to calculate the liability which included, evaluating the mathematical accuracy of
the calculation, the application of the data inputs to the calculation, and assumptions used within the calculation
•
We inspected meeting minutes for the Board of Directors, Audit Committee, Risk Oversight Committee, and Governance and Controls
Committee
•
We performed inquiries with members of management regarding the liability
•
We inspected supporting documentation and inquired of members of management regarding the status of any ongoing regulatory reviews
specific to the liability or settlement negotiations
•
We considered any contradictory evidence that arose while performing our procedures, and whether or not this evidence was indicative of
management bias
•
We evaluated the completeness and accuracy of the Company’s disclosures related to the liability
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 20, 2025
We have served as the Company’s auditor since the spin-off from its former parent company in 2007 and as Discover Bank’s (a wholly owned
subsidiary of the Company) auditor since 1985.
-83-
Table of Contents
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Financial Condition
(dollars in millions, except for share amounts)
December 31,
2024
2023
Assets
Cash and cash equivalents
$
8,474
$
11,685
Restricted cash
25
43
Other short-term investments
5,423
—
Investment securities (includes available-for-sale securities of $14,359 and $13,402 reported at fair value with associated amortized cost of
$14,475 and $13,451 at December 31, 2024 and 2023, respectively)
14,630
13,655
Loan receivables
Loan receivables
121,118
128,409
Allowance for credit losses
(8,323)
(9,283)
Net loan receivables
112,795
119,126
Premises and equipment, net
1,072
1,091
Goodwill
255
255
Other assets
4,966
5,858
Total assets
$
147,640
$
151,713
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Interest-bearing deposit accounts
$
105,459
$
107,493
Non-interest-bearing deposit accounts
1,550
1,438
Total deposits
107,009
108,931
Short-term borrowings
—
750
Long-term borrowings
16,253
20,581
Accrued expenses and other liabilities
6,452
7,216
Total liabilities
129,714
137,478
Commitments, contingencies and guarantees (Notes 15, 18 and 19)
Stockholders’ Equity
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 572,608,227 and 570,837,720 shares issued at December 31,
2024 and 2023, respectively
6
6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at December 31, 2024 and
2023, respectively
1,056
1,056
Additional paid-in capital
4,651
4,553
Retained earnings
33,583
29,855
Accumulated other comprehensive loss
(296)
(225)
Treasury stock, at cost; 321,268,743 and 320,734,860 shares at December 31, 2024 and 2023, respectively
(21,074)
(21,010)
Total stockholders’ equity
17,926
14,235
Total liabilities and stockholders’ equity
$
147,640
$
151,713
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 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.
December 31,
2024
2023
Assets
Restricted cash
$
25
$
43
Loan receivables
$
29,394
$
30,590
Allowance for credit losses allocated to securitized loan receivables
$
(1,294)
$
(1,347)
Other assets
$
1
$
3
Liabilities
Short- and long-term borrowings
$
8,475
$
11,743
Accrued expenses and other liabilities
$
13
$
19
See Notes to the Consolidated Financial Statements.
-84-
Table of Contents
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Income
(dollars in millions, except for share amounts)
For the Years Ended December 31,
2024
2023
2022
Interest income
Credit card loans
$
16,109
$
14,438
$
10,632
Other loans
2,729
2,515
1,870
Investment securities
521
449
179
Other interest income
661
443
183
Total interest income
20,020
17,845
12,864
Interest expense
Deposits
4,772
3,886
1,257
Short-term borrowings
19
5
2
Long-term borrowings
933
855
606
Total interest expense
5,724
4,746
1,865
Net interest income
14,296
13,099
10,999
Provision for credit losses
4,911
6,018
2,359
Net interest income after provision for credit losses
9,385
7,081
8,640
Other income
Discount and interchange revenue, net
1,520
1,381
1,303
Protection products revenue
169
172
172
Loan fee income
819
763
632
Transaction processing revenue
345
303
249
Losses on equity investments
(2)
(9)
(214)
Other income
763
85
75
Total other income
3,614
2,695
2,217
Other expense
Employee compensation and benefits
2,824
2,434
2,139
Marketing and business development
1,070
1,164
1,035
Information processing and communications
735
608
513
Professional fees
1,274
1,041
871
Premises and equipment
93
89
118
Other expense
929
803
540
Total other expense
6,925
6,139
5,216
Income before income taxes
6,074
3,637
5,641
Income tax expense
1,539
841
1,325
Net income
$
4,535
$
2,796
$
4,316
Net income allocated to common stockholders
$
4,446
$
2,715
$
4,228
Basic earnings per common share
$
17.72
$
10.71
$
15.25
Diluted earnings per common share
$
17.72
$
10.70
$
15.23
See Notes to the Consolidated Financial Statements.
-85-
Table of Contents
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Comprehensive Income
(dollars in millions)
For the Years Ended December 31,
2024
2023
2022
Net income
$
4,535
$
2,796
$
4,316
Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax
(49)
99
(250)
Unrealized (losses) gains on cash flow hedges, net of tax
(12)
6
(5)
Unrealized pension and post-retirement plan (losses) gains, net of tax
(10)
9
10
Other comprehensive (loss) income
(71)
114
(245)
Comprehensive income
$
4,464
$
2,910
$
4,071
See Notes to the Consolidated Financial Statements.
-86-
Table of Contents
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Changes in Stockholders’ Equity
(dollars in millions, shares in thousands)
Preferred Stock
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Loss
Treasury
Stock
Total
Stockholders’
Equity
Shares
Amount
Shares
Amount
Balance at December 31, 2021
11
$
1,056
568,831
$
6
$
4,369
$
24,147
$
(94)
$
(16,695)
$
12,789
Net income
—
—
—
—
—
4,316
—
—
4,316
Other comprehensive loss
—
—
—
—
—
—
(245)
—
(245)
Purchases of treasury stock
—
—
—
—
—
—
—
(2,359)
(2,359)
Common stock issued under employee benefit
plans
—
—
107
—
10
—
—
—
10
Common stock issued and stock-based
compensation expense
—
—
751
—
89
—
—
—
89
Dividends — common stock ($2.30 per share)
—
—
—
—
—
(643)
—
—
(643)
Dividends — Series C preferred stock ($5,500
per share)
—
—
—
—
—
(31)
—
—
(31)
Dividends — Series D preferred stock ($6,125
per share)
—
—
—
—
—
(31)
—
—
(31)
Balance at December 31, 2022
11
1,056
569,689
6
4,468
27,758
(339)
(19,054)
13,895
Cumulative effect of ASU No. 2022-02 adoption
—
—
—
—
—
52
—
—
52
Net income
—
—
—
—
—
2,796
—
—
2,796
Other comprehensive income
—
—
—
—
—
—
114
—
114
Purchases of treasury stock
—
—
—
—
—
—
—
(1,956)
(1,956)
Common stock issued under employee benefit
plans
—
—
118
—
11
—
—
—
11
Common stock issued and stock-based
compensation expense
—
—
1,031
—
74
—
—
—
74
Dividends — common stock ($2.70 per share)
—
—
—
—
—
(689)
—
—
(689)
Dividends — Series C preferred stock ($5,500
per share)
—
—
—
—
—
(31)
—
—
(31)
Dividends — Series D preferred stock ($6,125
per share)
—
—
—
—
—
(31)
—
—
(31)
Balance at December 31, 2023
11
1,056
570,838
6
4,553
29,855
(225)
(21,010)
14,235
Cumulative effect of ASU No. 2023-02 adoption
—
—
—
—
—
(37)
—
—
(37)
Net income
—
—
—
—
—
4,535
—
—
4,535
Other comprehensive loss
—
—
—
—
—
—
(71)
—
(71)
Purchases of treasury stock
—
—
—
—
—
—
—
(64)
(64)
Common stock issued under employee benefit
plans
—
—
101
—
13
—
—
—
13
Common stock issued and stock-based
compensation expense
—
—
1,669
—
85
—
—
—
85
Dividends — common stock ($2.80 per share)
—
—
—
—
—
(708)
—
—
(708)
Dividends — Series C preferred stock ($5,500
per share)
—
—
—
—
—
(31)
—
—
(31)
Dividends — Series D preferred stock ($6,125
per share)
—
—
—
—
—
(31)
—
—
(31)
Balance at December 31, 2024
11
$
1,056
572,608
$
6
$
4,651
$
33,583
$
(296)
$
(21,074)
$
17,926
See Notes to the Consolidated Financial Statements.
-87-
Table of Contents
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Cash Flows
(dollars in millions)
For the Years Ended December 31,
2024
2023
2022
Cash flows provided by operating activities
Net income
$
4,535
$
2,796
$
4,316
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
4,911
6,018
2,359
Deferred income taxes
162
(671)
(452)
Depreciation and amortization
300
458
561
Amortization of deferred revenues
(425)
(468)
(365)
Gains related to loans sold
(450)
—
—
Net losses on investments and other assets
65
50
261
Other, net
82
110
125
Changes in assets and liabilities:
Decrease (increase) in other assets
43
(658)
(846)
(Decrease) increase in accrued expenses and other liabilities
(798)
928
1,181
Net cash provided by operating activities
8,425
8,563
7,140
Cash flows (used for) provided by investing activities
Purchases of other short-term investments
(5,370)
—
—
Maturities of available-for-sale investment securities
2,217
1,831
2,084
Purchases of available-for-sale investment securities
(3,106)
(2,996)
(7,682)
Maturities of held-to-maturity investment securities
16
16
32
Purchases of held-to-maturity investment securities
(35)
(49)
(50)
Proceeds from the sale of loans originated for investment
10,679
—
—
Net change in principal on loans originated for investment
(7,893)
(19,934)
(19,961)
Proceeds from the sale of available for sale securities
8
—
—
Proceeds from the sale of other investments
25
44
336
Purchases of other investments
(83)
(100)
(169)
Proceeds from sale of premises and equipment
59
—
9
Purchases of premises and equipment
(268)
(303)
(236)
Net cash used for investing activities
(3,751)
(21,491)
(25,637)
Cash flows (used for) provided by financing activities
Net change in short-term borrowings
(750)
750
(1,750)
Net change in deposits
(1,995)
17,250
19,208
Proceeds from issuance of securitized debt
750
2,230
5,620
Maturities, repayments and transfers of securitized debt
(3,290)
(1,494)
(4,395)
Proceeds from issuance of other long-term borrowings
—
2,041
1,265
Maturities and repayments of other long-term borrowings
(1,777)
(2,340)
(834)
Proceeds from issuance of common stock
13
12
10
Dividends paid on common and preferred stock
(771)
(752)
(703)
Purchases of treasury stock
(83)
(1,938)
(2,359)
Net cash (used for) provided by financing activities
(7,903)
15,759
16,062
Net (decrease) increase in cash, cash equivalents and restricted cash
(3,229)
2,831
(2,435)
Cash, cash equivalents and restricted cash, at the beginning of the period
11,728
8,897
11,332
Cash, cash equivalents and restricted cash, at the end of the period
$
8,499
$
11,728
$
8,897
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents
$
8,474
$
11,685
$
8,856
Restricted cash
25
43
41
Cash, cash equivalents and restricted cash, at the end of the period
$
8,499
$
11,728
$
8,897
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense
$
5,690
$
4,508
$
1,666
Income taxes, net of income tax refunds
$
1,180
$
1,605
$
1,865
See Notes to the Consolidated Financial Statements.
-88-
Table of Contents
Notes to the Consolidated Financial Statements
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,
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 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 22: Segment Disclosures for a detailed description of each segment’s operations and the allocation conventions used in business
segment reporting.
Sale of The Private Student Loan Portfolio
The sale of the private student loan portfolio was completed during the fourth quarter of 2024. As a result, the Company recognized a gain of
approximately $450 million recorded in other income on the consolidated statements of income for the year ended December 31, 2024. As part of the
sale transaction, the Company sold its beneficial interest in its remaining private student loan securitization trust, which resulted in the derecognition of
loan receivables held by the trust and debt issued by the trust. For more information, see Discover's Current Report on Form 8-K furnished to the
Securities and Exchange Commission (the "SEC") on July 17, 2024.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
U.S. (“GAAP”). The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and related disclosures. These estimates are based on information available as of the
date of the consolidated financial statements. The Company believes that the estimates used in the preparation of the consolidated financial
statements are reasonable. Actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on the
Company’s consolidated financial condition, results of operations or changes in stockholders’ equity.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s
policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock unless it does not control the entity. However, the
Company did not have a controlling voting interest in any entity other than its wholly-owned subsidiaries in the periods presented in the accompanying
consolidated financial statements.
It is also the Company’s policy to consolidate any VIEs for which the Company is the primary beneficiary, as defined by GAAP. On this basis, the
Company consolidates the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust (“DCENT”) and consolidated the
student loan securitization trust prior to the sale of the private student loan portfolio, which was completed during the fourth quarter of 2024. The
Company is deemed to be the primary beneficiary of each of these trusts since it is, for each, the trust Servicer and the holder of both the residual
interest and the majority of the most subordinated interests. Because of those involvements, the Company has,
-89-
Table of Contents
for each trust, (i) the power to direct the activities that most significantly impact the economic performance of the trust and (ii) the obligation (or right) to
absorb losses (or receive benefits) of the trust that could potentially be significant. The Company has determined that it was not the primary beneficiary
of any other VIE during the years ended December 31, 2024, 2023 and 2022.
For investments in any entities in which the Company owns 50% or less of the outstanding voting stock but in which the Company has significant
influence over operating and financial decisions, the Company applies the equity method of accounting. In cases where the Company’s equity
investment is less than 20% and significant influence does not exist, such investments are carried at cost as they typically do not have readily
determinable fair values, and are adjusted for any impairment in value. Investments in actively traded stock are carried at fair value with changes in fair
value recorded as an adjustment to earnings.
Recently Issued Accounting Pronouncements (Not Yet Adopted)
In November 2024, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2024-03, Income
Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement
Expenses. This ASU aims to build a better understanding of an entity’s expenses through more detailed tabular disclosures surrounding certain costs
and expenses (including but not limited to employee compensation, amortization of intangibles, and depreciation), defining and disclosing selling
expense, and qualitatively describing remaining amounts not disaggregated in relevant expense captions. In addition, certain existing expense
disclosures will be required to be presented within the same note and tabular format as prescribed by ASU No. 2024-03. The guidance is effective for
the Company for the year ending December 31, 2027, and interim periods thereafter and can be applied on a prospective or retrospective basis. While
the ASU implements further disclosure requirements, it does not change how an entity calculates and/or records its expenses, and it will have no
impact on the Company’s consolidated financial condition, results of operations or cash flows.
In December 2023, the FASB issued 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.
Recently Adopted Accounting Pronouncement
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The
ASU required disclosure of additional segment level information, particularly regarding significant segment expenses. The Company has disclosed
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. As appropriate, other segment items have also been reported, which are those items that make up the difference
between segment revenues less significant segment expenses and reported segment profit or loss. Additionally, the Company has disclosed the title
and position of the CODM and how the CODM uses the reported measures of segment profit or loss for assessing the performance of and allocating
resources to the Company’s operating segments. The guidance was effective for the Company for the year ending December 31, 2024, and interim
periods thereafter and has been applied retrospectively. While the ASU implemented further segment disclosure requirements, it did not change how
the Company identifies its operating or reportable segments, and it had no impact on the Company’s consolidated financial condition, results of
operations or cash flows.
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 expanded the use of the proportional amortization method of accounting
for tax credit investments. 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
-90-
Table of Contents
statements of income. Previously, the method was limited to Low Income Housing Tax Credit investments, however the Company historically did not
elect to use this method. Under the amended guidance, use of proportional amortization is available to any qualifying tax credit investments, which
now also includes New Markets Tax Credit investments among others. The ASU was effective for the Company on January 1, 2024. All of the
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 the opening balance of retained earnings to reflect the cumulative effect of adopting the
proportional amortization method on a modified-retrospective basis for the 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.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents is defined by the Company as cash on deposit with banks, including time deposits and other highly liquid
investments with maturities of 90 days or less when purchased, excluding amounts restricted by certain contractual or other obligations. Cash and
cash equivalents included $919 million and $2.0 billion of cash and due from banks and $7.6 billion and $9.7 billion of interest-earning deposits at
other banks at December 31, 2024 and 2023, respectively.
Restricted Cash
Restricted cash includes cash in accounts from which the Company’s ability to withdraw funds at any time is contractually limited. Restricted
cash is generally designated for specific purposes arising out of certain contractual or other obligations.
Investments
Other Short-Term Investments
At December 31, 2024, other short-term investments primarily consisted of U.S. Treasury bills with contractual maturities greater than 90 days
but less than one year at the time of acquisition. These investments are reported at fair value with unrealized gains and losses, net of tax, reported as
a component of accumulated other comprehensive income (“AOCI”) included in stockholders’ equity.
Investments Securities
At December 31, 2024, investment securities consisted of debt obligations of the U.S. Treasury, mortgage-backed securities issued by
government agencies, and municipal bonds issued by state agencies. Investment securities that the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity (“HTM”) and are reported at amortized cost. All other investment securities are classified as available-for-
sale (“AFS”), as the Company does not hold investment securities for trading purposes. AFS investment securities are reported at fair value with
unrealized gains and losses, net of tax, reported as a component of AOCI included in stockholders’ equity. The Company estimates the fair value of
AFS investment securities as more fully discussed in Note 20: Fair Value Measurements. The amortized cost for each HTM and AFS investment
security is adjusted for amortization of premiums or accretion of discounts, as appropriate. Such amortization or accretion is included in interest
income. Interest on investment securities is accrued each month in accordance with their contractual terms and recorded in other assets in the
consolidated statements of financial condition. The obligations of the U.S. Treasury and government-sponsored enterprises of the U.S. (“U.S. GSEs”)
and mortgage-backed securities issued by government agencies or U.S. GSEs in which the Company invests have long histories with no credit losses
and are explicitly or implicitly guaranteed by the U.S. 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. HTM investments in debt securities occur only
with respect to Discover Bank’s activities pursuant to the Community Reinvestment Act.
Tax Credit Investments
At December 31, 2024, tax credit investments consisted of membership interests in limited liability companies invested in affordable housing
projects and community revitalization projects. The Company earns a return from these investments primarily through tax credits allocated to the
underlying projects. The Company does not consolidate these
-91-
Table of Contents
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.
The Company has elected to account for its qualifying investments which generate affordable housing tax credits and new markets tax credits
under the proportional amortization method beginning January 1, 2024, on a modified retrospective basis. As of December 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 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 condensed consolidated statements of income and within
cash flows provided by operating activities on the condensed consolidated statements of cash flows.
Loan Receivables
Loan receivables consist of credit card receivables and other loan receivables. The carrying values of all classes of loan receivables include
unamortized net deferred loan origination fees and costs (also see “— Significant Revenue Recognition Accounting Policies — Loan Interest and Fee
Income”). The credit card loan receivables carrying amount includes the principal amounts outstanding and uncollected billed interest and fees and is
reduced for unearned revenue related to balance transfer fees (also see “— Significant Revenue Recognition Accounting Policies — Loan Interest and
Fee Income”). Other loans consist of private student loans (prior to its sale), personal loans, home loans and other loans and the carrying amount of
those loans includes principal amounts outstanding. The Company’s loan receivables are deemed to be held-for-investment at origination or
acquisition because management has the intent and ability to hold them for the foreseeable future. Cash flows associated with loans originated or
acquired for investment are classified as cash flows from investing activities, regardless of a subsequent change in intent.
Delinquent Loans and Net Charge-Offs
The entire balance of an account is contractually past due if the minimum payment is not received by the specified date on the customer’s billing
statement. Delinquency is reported on loans that are 30 days or more past due.
Credit card loans are charged off at the end of the month during which an account becomes 180 days past due. Closed-end unsecured
consumer loan receivables are charged off at the end of the month during which an account becomes 120 days contractually past due. Home loans
are written down to fair value, less cost to sell, once the loan becomes 180 days past due. Customer bankruptcies and probate accounts are charged
off by the end of the month 60 days following the receipt of notification of the bankruptcy or death, but not later than the 180-day or 120-day time frame
described above. Receivables associated with alleged or potential fraudulent transactions are reserved for at their net realizable value upon receipt of
notification of such fraud through a charge to other expense and are subsequently written off at the end of the month 90 days following notification, but
not later than the contractual 180-day or 120-day time frame described above. The Company’s charge-off policies are designed to comply with
guidelines established by the Federal Financial Institutions Examination Council (“FFIEC”).
The Company’s net charge-offs include the principal amount of loans charged off less principal recoveries and exclude charged-off interest and
fees, recoveries of interest and fees and fraud losses.
The practice of re-aging an account also may affect loan delinquencies and charge-offs. A re-age is intended to assist delinquent customers who
have experienced financial difficulties but who demonstrate both an ability and willingness to repay. Accounts meeting specific criteria are re-aged
when the Company and the customer agree on a temporary repayment schedule that may include concessionary terms. With re-aging, the outstanding
balance of a delinquent account is returned to a current status. Customers may also qualify for a workout re-age when either a longer term or
permanent hardship exists. The Company’s re-age practices are designed to comply with FFIEC guidelines.
Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level that is appropriate to absorb net credit losses anticipated over the remaining
expected life of loan receivables as of the balance sheet date. The estimate of expected credit losses considers uncollectible principal, interest and
fees associated with the Company's loan receivables existing as of the balance sheet date. Additionally, the estimate includes expected recoveries of
amounts that were either
-92-
Table of Contents
previously charged off or are expected to be charged off. The allowance is evaluated quarterly for appropriateness and is maintained through an
adjustment to the provision for credit losses. Charge-offs of principal amounts of loans outstanding are deducted from the allowance and subsequent
recoveries of such amounts increase the allowance. Charge-offs of loan balances representing unpaid interest and fees result in a reversal of interest
and fee income, respectively, which is effectively a reclassification of the provision for credit losses.
The Company calculates its allowance for credit losses by estimating expected credit losses separately for classes of receivables with similar
risk characteristics. This results in segmenting the portfolio by loan product type, which is the level that the Company develops and documents its
methodology for determining the allowance for credit losses. The estimate of expected credit losses for each loan product type is based on: (i) a
reasonable and supportable forecast period; (ii) a reversion period; and (iii) a post-reversion period based on historical information covering the
remaining life of the loan, all of which is netted with expected recoveries. The lengths of the reasonable and supportable forecast and reversion periods
can vary and are subject to a quarterly assessment that considers the economic outlook and level of variability among macroeconomic forecasts. The
Company applies a weighted approach in reverting from the reasonable and supportable forecast period to the post-reversion period.
Several analyses are used to help estimate credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet
date. The Company's estimation process includes models that predict customer losses based on risk characteristics and portfolio attributes,
macroeconomic variables and historical data and analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the
results produced by the models to determine the allowance.
For credit card loans, the Company uses a modeling framework that includes the following components for estimating expected credit losses:
•
Probability of default: this component estimates the probability of charge-off at different points in time over the life of each loan.
•
Exposure at default: this component estimates the balance on the loan at the time of default. Given that there is no stated life of a receivable
balance on a revolving credit card account, the Company applies a percentage of expected payments to estimate the balance that would
remain at the time of charge-off.
•
Recoveries from charged-off accounts are estimated separately and are netted as part of the aggregation of all of the components of the card
loss modeling framework.
•
The output of the above three components is adjusted to remove post measurement date activity.
For personal loans, the Company follows the same probability of default, exposure at default and recoveries framework as credit card loans.
Personal loans have a stated life, therefore exposure at default is directly measurable with no adjustment needed.
For home loans, the Company uses vintage-based models that estimate expected credit losses over the life of the loan, net of recovery
estimates, impacted mainly by time elapsed since origination, credit quality of origination vintages and macroeconomic forecasts.
The components described above for credit card, personal and home loans are developed utilizing historical data and applicable macroeconomic
variable inputs based on statistical analysis and customer behavioral relationships with credit performance. Expected recoveries from loans charged
off as of the balance sheet date are modeled separately and included in the allowance estimate. The Company leverages these models and recent
macroeconomic forecasts for the portion of the estimate associated with the reasonable and supportable forecast period. To estimate expected credit
losses for the remainder of the life of the credit card and personal loans, the Company reverts to historical experience of credit card and personal loans
with characteristics similar to those as of the balance sheet date and observed over various phases of a credit cycle. To estimate expected credit
losses for the remainder of the life of home loans, the Company generally reverts to use of industry and internal loan performance data over an
appropriate historical period.
The considerations in these models include past and current loan performance, loan growth and seasoning, risk management practices, account
collection strategies, economic conditions, bankruptcy filings, policy changes and forecasting uncertainties. Consideration of past and current loan
performance includes the post-modification performance of loans to borrowers experiencing financial difficulty. For the credit card and personal loan
portfolios, the Company estimates its credit losses on a loan-level basis, which includes loans that are delinquent and/or no longer accruing interest
and/or loans that have been restructured. For home loans, the Company estimates its credit losses on
-93-
Table of Contents
a pooled basis. For all loan types, recoveries are estimated at a pooled level based on estimates of future cash flows derived using historical
experience.
Accrued interest receivable on credit card loans is included in the estimate of expected credit losses once billed to the customer (i.e., once the
interest becomes part of the loan balance). An allowance for credit losses is not recorded for unbilled credit card interest or accrued interest receivable
on other loan classes as the impact to the allowance for credit losses is not material.
No liability for expected credit losses is required for unused lines of credit on the Company’s credit card loans because they are unconditionally
cancellable. As of December 31, 2024, none of the Company's other lending products feature unfunded commitments.
As part of certain collection strategies, the Company may modify the terms of loans to customers experiencing financial hardship. Modifications
on credit card, personal and home loans are generally subject to disclosure as loan modifications to borrowers experiencing financial difficulty.
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 described above for unmodified loans. The effects of all loan modifications, whether or not they are subject to disclosure as loan
modifications to borrowers experiencing financial difficulty, are reflected in the allowance for credit losses.
Premises and Equipment, net
Premises and equipment, net, are stated at cost less provisions for impairment and accumulated depreciation and amortization. Accumulated
depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. The Company periodically
reviews the estimated useful lives and may adjust them as necessary. Buildings are depreciated over a period of thirty-nine years. The costs of
improvements are capitalized and depreciated either over the asset’s estimated useful life, typically ten years to fifteen years, or over the remaining
term of the lease, when applicable. Furniture and fixtures are depreciated over a period of five years to ten years. Equipment is depreciated over three
years to ten years. Maintenance and repairs are immediately expensed when incurred, while the costs of significant improvements are capitalized.
Purchased software and capitalized costs related to internally developed software are amortized over their useful lives of three years to ten
years. Costs incurred during the application development stage related to internally developed software are capitalized. Costs are expensed as
incurred during the preliminary project stage and post implementation stage. Once the capitalization criteria as defined in GAAP have been met,
external direct costs incurred for materials and services used in developing or obtaining internal-use computer software and payroll and payroll-related
costs for employees who are directly associated with the internal-use computer software project (to the extent those employees devoted time directly
to the project) are capitalized. Amortization of capitalized costs begins when the software is ready for its intended use. Capitalized software is included
in premises and equipment, net in the Company’s consolidated statements of financial condition. See Note 6: Premises and Equipment for further
information about the Company’s premises and equipment.
Cloud computing arrangements involving the licensing of software that meet certain criteria are recognized as the acquisition of software. Such
assets are measured at the present value of the license obligation, if the license is to be paid over time, in addition to any capitalized upfront costs and
amortized over the life of the arrangement. Cloud computing arrangements that do not meet the criteria to be recognized as acquired software are
accounted for as service contracts. To date, none of the Company’s cloud computing arrangements have met the criteria to be recognized as acquired
software.
Premises and equipment are subject to impairment testing when events or conditions indicate that the carrying value of the asset may not be
fully recoverable from future cash flows. A test for recoverability is done by comparing the asset’s carrying value to the sum of the undiscounted future
net cash inflows expected to be generated from the use of the asset over its remaining useful life. Impairment exists if the sum of the undiscounted
expected future net cash inflows is less than the carrying amount of the asset. Impairment would result in a write-down of the asset to its estimated fair
value. The estimated fair values of these assets are based on the discounted present value of the stream of future net cash inflows expected to be
derived over the remaining useful lives of the assets. If an impairment write-down is recorded, the remaining useful life of the asset will be evaluated to
determine whether revision of the remaining amortization or depreciation period is appropriate.
-94-
Table of Contents
Goodwill
Goodwill is recorded as part of the Company’s acquisitions of businesses when the purchase price exceeds the fair value of the net tangible and
separately identifiable intangible assets acquired. The Company’s goodwill is not amortized, but rather is subject to an impairment test at the reporting
unit level annually as of October 1, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. The Company’s reported goodwill relates to PULSE, which it acquired in 2005. The Company’s
goodwill is tested for impairment by comparing the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds its
carrying value, goodwill is not impaired. If the carrying value exceeds its fair value, an impairment loss must be recognized in an amount equal to that
excess, limited to the total amount of goodwill allocated to that reporting unit. No impairment was identified during the impairment test conducted as of
October 1, 2024.
Other Real Estate Owned
Other real estate owned represents real estate received in full or partial satisfaction of a loan. Amounts are recorded at fair value, less costs to
sell, generally based on property appraisals and classified in other assets on the consolidated statements of financial condition.
Stock-based Compensation
The Company measures the cost of services received from employees and non-employee directors in exchange for an award of stock-based
compensation based on the grant-date fair value of the award. The cost, net of estimated forfeitures, is recognized over the requisite service period.
Awards to employees who are retirement-eligible at any point during the year are amortized over 12 months in accordance with the vesting terms that
apply under those circumstances. No compensation cost is recognized for awards that are subsequently forfeited.
Advertising Costs
The Company expenses television and radio advertising costs in the period in which the advertising is first aired and all other advertising costs
as incurred. Advertising costs are recorded in marketing and business development and were $329 million, $359 million and $307 million for the years
ended December 31, 2024, 2023 and 2022, respectively.
Income Taxes
Income tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based on
the temporary differences between the financial reporting and income tax bases of assets and liabilities using currently enacted tax rates. Deferred tax
assets are recognized when their realization is determined to be more likely than not. A valuation allowance is provided if the Company believes it is
more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that
results from a change in circumstances and which causes a change in management’s judgment about the realizability of the related deferred tax asset
is included in the current tax provision. Uncertain tax positions are measured at the highest amount of tax benefit for which realization is judged to be
more likely than not. Tax benefits that do not meet these criteria are unrecognized tax benefits. The Company recognizes and reports interest and
penalties, if necessary, related to uncertain tax positions within its provision for income tax expense. See Note 15: Income Taxes for more information
about the Company’s income taxes.
Accumulated Other Comprehensive Income
The Company records unrealized gains and losses on available-for-sale securities, changes in the fair value of cash flow hedges and certain
pension and foreign currency translation adjustments in other comprehensive income (“OCI”) on an after-tax basis where applicable. The Company’s
policy is to adjust the tax effects of a component of AOCI in the same period in which the item is sold or otherwise derecognized, or when the carrying
value of the item is remeasured. Details of OCI, net of tax, are presented in the statement of comprehensive income and a roll forward of AOCI is
presented in the consolidated statements of changes in stockholders’ equity and Note 13: Accumulated Other Comprehensive Income.
-95-
Table of Contents
Significant Revenue Recognition Accounting Policies
Loan Interest and Fee Income
Interest on loans is composed largely of interest on credit card loans and is recognized based on the amount of loans outstanding and their
contractual interest rate. Interest on credit card loans is included in loan receivables when billed to the customer. The Company accrues unbilled
interest revenue each month from a customer’s billing cycle date to the end of the month. The Company applies an estimate of the percentage of loans
that will revolve in the next cycle in the estimation of the accrued unbilled portion of interest revenue that is included in other assets on the
consolidated statements of financial condition. Interest on other loan receivables is accrued each month in accordance with their contractual terms and
recorded in other assets in the consolidated statements of financial condition.
The Company recognizes fees (except balance transfer fees and certain product fees) on loan receivables in interest income or loan fee income
as the fees are assessed. Balance transfer fees and certain product fees are recognized in interest income or loan fee income ratably over the periods
to which they relate. Balance transfer fees are accreted to interest income over the estimated life of the related balance. As of December 31, 2024 and
2023, deferred revenues related to balance transfer fees, recorded as a reduction of loan receivables, were $83 million and $107 million, respectively.
Loan fee income primarily consists of fees on credit card loans and includes late, cash advance, returned check and other miscellaneous fees and is
reflected net of waivers and charge-offs.
Direct loan origination costs on credit card loans are deferred and amortized on a straight-line basis over a one year period and recorded in
interest income from credit card loans. Direct loan origination costs on other loan receivables are deferred and amortized over the life of the loan using
the interest method and are recorded in interest income from other loans. As of December 31, 2024 and 2023, the remaining unamortized deferred
costs related to loan origination were $242 million and $306 million, respectively, and were recorded in loan receivables.
The Company accrues interest and fees on credit card and closed-end loan receivables until the loans are paid or charged off, except in
instances of customer bankruptcy, death or suspected fraud, where no further interest and fee accruals occur following notification. Upon completion of
the fraud investigation, non-fraudulent credit card and closed-end consumer loan receivables may resume accruing interest. Payments received on
non-accrual loans are allocated according to the same payment hierarchy applied to loans that are accruing interest. When loan receivables are
charged off, unpaid accrued interest and fees are reversed against the income line items in which they were originally recorded in the consolidated
statements of income. Charge-offs and recoveries of amounts that relate to capitalized interest on private student loans are treated as principal
charge-offs and recoveries, affecting the provision for credit losses rather than interest income. The Company considers uncollectible interest and fee
revenues in assessing the adequacy of the allowance for credit losses.
Interest income from loans disclosed as modifications to borrowers experiencing financial difficulty is accounted for in the same manner as other
accruing loans. Cash collections on these loans are allocated according to the same payment hierarchy applied to loans that have not been modified.
Discount and Interchange Revenue
The Company earns discount revenue from fees charged to merchants with whom it has entered into card acceptance agreements for
processing credit card purchase transactions. The Company earns acquirer interchange revenue primarily from merchant acquirers on Discover
Network, Diners Club and PULSE transactions made by credit and debit card customers at merchants with whom merchant acquirers have entered
into card acceptance agreements for processing payment card transactions. These card acceptance arrangements generally renew automatically and
do not have fixed durations. Under these agreements, the Company stands ready to process payment transactions as and when each is presented.
The Company earns discount, interchange and similar fees only when transactions are processed. Contractually defined per-transaction fee amounts
typically apply to each type of transaction processed and are recognized as revenue at the time each transaction is captured for settlement. These
fees are typically collected by the Company as part of the process of settling transactions daily with merchants and acquirers and are fully earned at
the time settlement is made.
The Company pays issuer interchange to card-issuing entities that have entered into contractual arrangements to issue cards on the Discover
Network and on certain transactions on the Diners Club and PULSE networks. This cost is contractually established and is based on the card-issuing
organization’s transaction volume. The Company classifies this cost as a reduction of discount and interchange revenue. Costs of cardholder reward
arrangements, including the Cashback Bonus reward program, are classified as reductions of discount and interchange revenue pursuant to
-96-
Table of Contents
guidance under Accounting Standards Codification (“ASC”) Topic 606 governing consideration payable to a customer. For both issuer interchange and
transaction-based cardholder rewards, the Company accrues the cost at the time each underlying card transaction is captured for settlement.
Customer Rewards
The Company offers its customers various reward programs, including the Cashback Bonus reward program, pursuant to which the Company
pays certain customers a reward equal to a percentage of their credit card purchase amounts based on the type and volume of the customer’s
purchases. The liability for customer rewards is recorded on an individual customer basis and is accumulated as qualified customers earn rewards
through their ongoing credit card purchase activity or other defined actions. The Company recognizes customer rewards costs as a reduction of the
related revenue, if any. In instances where a reward is not associated with a revenue-generating transaction, such as when a reward is given for
opening an account, the reward cost is recorded as an operating expense. For the years ended December 31, 2024, 2023 and 2022, rewards costs
amounted to $3.0 billion, $3.1 billion and $3.0 billion, respectively. The liability for customer rewards was $2.1 billion and $2.2 billion at December 31,
2024 and 2023, respectively, and is included in accrued expenses and other liabilities on the consolidated statements of financial condition.
Protection Products Revenue
The Company earns revenue related to fees received for providing ancillary products and services, including payment protection and identity
theft protection services, to its credit card customers. A portion of this revenue comprises amounts earned for arranging for the delivery of products
offered by third-party service providers. The amount of revenue recorded is generally based on either a percentage of a customer’s outstanding
balance or a flat fee, in either case assessed monthly and recognized as earned. These contracts are month-to-month arrangements that are
cancellable at any time. The Company recognizes each monthly fee in the period to which the service or coverage relates.
Transaction Processing Revenue
Transaction processing revenue represents switch fees charged to financial institutions and merchants under network participation agreements
for processing ATM and debit transactions over the PULSE network, as well as various participation and membership fees. Network participation
agreements generally renew automatically and do not have fixed durations, although the Company does enter into fixed-term pricing or incentive
arrangements with certain network participants. Similar to discount and interchange fees, switch fees are contractually defined per-transaction fee
amounts and are assessed and recognized as revenue at the time each transaction is captured for settlement. These fees are typically collected by the
Company as part of the process of settling transactions with network participants. Membership and other participation fees are recognized over the
periods to which each fee relates.
Other Income
Other income includes gains and losses on equity investments, sales-based royalty revenues earned by Diners Club, merchant fees, revenues
from network partners and other miscellaneous revenue items. Unrealized gains and losses on equity investments carried at fair value are recognized
quarterly based on changes in their respective fair values. Sales-based royalty revenues are recognized as the related sales are reported by Diners
franchisees. All remaining items of other income are recognized as the related performance obligations are satisfied.
Future Revenue Associated with Customer Contracts
For contracts under which the Company processes payment card transactions, the Company has the right to assess fees for services performed
and to collect those fees through the settlement process. The Company generates essentially all of its discount and interchange revenue and
transaction processing revenue, as well as some revenue reported as other income, through such contracts. There is no specified quantity of service
promised in these contracts as the number of payment transactions is dependent upon cardholder behavior, which is outside the control of the
Company and its network customers (i.e., merchants, acquirers, issuers and other network participants). As noted above, these contracts are typically
without fixed durations and renew automatically. For these reasons, the Company does not make or disclose an estimate of revenue associated with
performance obligations attributable to the remaining terms of these contracts. Future revenue associated with the Company’s sales-based royalty
revenues earned from Diners Club licensees is similarly variable and open-ended and therefore the Company does not make or disclose an estimate
of royalties associated with performance obligations attributable to the remaining terms of the licensing and
-97-
Table of Contents
royalty arrangements. Because of the nature of the services and the manner of collection associated with the majority of the Company’s revenue from
contracts with customers, material receivables or deferred revenues are not generated.
Incentive Payments
The Company makes certain incentive payments under contractual arrangements with financial institutions, Diners Club licensees, merchants,
acquirers and certain other customers. These payments are generally classified as contra-revenue unless a distinct good or service is received by the
Company in exchange for the payment and the fair value of the good or service can be reasonably estimated. If no such good or service is identified,
then the entire payment is classified as contra-revenue and included in the consolidated statements of income in the line item where the related
revenues are recorded. If the payment gives rise to an asset because it is expected to directly or indirectly contribute to future net cash inflows, it is
deferred and recognized over the expected benefit period. The unamortized portion of the deferred incentive payments included in other assets on the
consolidated statements of financial condition was $28 million and $27 million at December 31, 2024 and 2023, respectively.
3. Investments
The Company’s other short-term investments and investment securities consist of the following (dollars in millions):
December 31,
2024
2023
U.S. Treasury bills
$
5,423
$
—
Total other short-term investments
$
5,423
$
—
U.S. Treasury and U.S. GSE securities
$
13,988
$
12,937
Residential mortgage-backed securities - Agency
642
718
Total investment securities
$
14,630
$
13,655
(1)
Includes U.S. Treasury bills with maturity dates greater than 90 days but less than one year at the time of acquisition.
(2)
Includes $364 million and $320 million of U.S. Treasury securities pledged as swap collateral as of December 31, 2024 and 2023, respectively.
(3)
Consists of securities issued by the Federal Home Loan Bank (“FHLB”) as of December 31, 2023.
(4)
Primarily consists of securities issued by Fannie Mae, Freddie Mac, or Ginnie Mae.
(1)
(2)
(3)
(4)
-98-
Table of Contents
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 December 31, 2024
Available-for-Sale Investment Securities
U.S. Treasury securities
$
14,087
$
9
$
(108)
$
13,988
Residential mortgage-backed securities - Agency
388
—
(17)
371
Total available-for-sale investment securities
$
14,475
$
9
$
(125)
$
14,359
Held-to-Maturity Investment Securities
Residential mortgage-backed securities - Agency
$
271
$
—
$
(24)
$
247
Total held-to-maturity investment securities
$
271
$
—
$
(24)
$
247
At December 31, 2023
Available-for-Sale Investment Securities
U.S. Treasury and U.S. GSE securities
$
12,971
$
52
$
(86)
$
12,937
Residential mortgage-backed securities - Agency
480
—
(15)
465
Total available-for-sale investment securities
$
13,451
$
52
$
(101)
$
13,402
Held-to-Maturity Investment Securities
Residential mortgage-backed securities - Agency
$
253
$
—
$
(19)
$
234
Total held-to-maturity investment securities
$
253
$
—
$
(19)
$
234
(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 agency (“Agency”) or U.S. GSEs, which
have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. federal government. Therefore, management has
concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these
investments. In addition, the Company does not have the intent to sell any available-for-sale securities in an unrealized loss position and does not
believe it is more likely than not that it will be required to sell any such security before recovery of its amortized cost basis.
The following table provides information about available-for-sale investment securities with aggregate gross unrealized losses and the length of
time that individual investment securities have been in a continuous unrealized loss position (dollars in millions):
Less than 12 months
More than 12 months
Number of Securities in a
Loss Position
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
At December 31, 2024
Available-for-Sale Investment Securities
U.S. Treasury securities
177
$
9,492
$
(91)
$
1,963
$
(17)
Residential mortgage-backed securities - Agency
30
$
—
$
—
$
371
$
(17)
At December 31, 2023
Available-for-Sale Investment Securities
U.S. Treasury and U.S. GSE securities
105
$
3,513
$
(13)
$
3,978
$
(73)
Residential mortgage-backed securities - Agency
31
$
—
$
—
$
465
$
(15)
(1)
(2)
(3)
(1)
(2)
(3)
-99-
Table of Contents
During the year ended December 31, 2024, the Company had $8 million in proceeds from the sales of available-for-sale securities. During the
years ended December 31, 2023 and 2022, the Company had no sales of available-for-sale securities. See Note 13: Accumulated Other
Comprehensive Income for unrealized gains and losses on available-for-sale securities during the years ended December 31, 2024, 2023 and 2022.
Maturities and weighted-average yields of available-for-sale debt securities and held-to-maturity debt securities are provided in the following
table (dollars in millions):
At December 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
U.S. Treasury securities
$
2,290
$
11,797
$
—
$
—
$
14,087
Residential mortgage-backed securities - Agency
—
44
100
244
388
Total available-for-sale investment securities
$
2,290
$
11,841
$
100
$
244
$
14,475
Held-to-Maturity Investment Securities — Amortized Cost
Residential mortgage-backed securities - Agency
$
—
$
—
$
—
$
271
$
271
Total held-to-maturity investment securities
$
—
$
—
$
—
$
271
$
271
Available-for-Sale Investment Securities — Fair Values
U.S. Treasury securities
$
2,282
$
11,706
$
—
$
—
$
13,988
Residential mortgage-backed securities - Agency
—
43
96
232
371
Total available-for-sale investment securities
$
2,282
$
11,749
$
96
$
232
$
14,359
Held-to-Maturity Investment Securities — Fair Values
Residential mortgage-backed securities - Agency
$
—
$
—
$
—
$
247
$
247
Total held-to-maturity investment securities
$
—
$
—
$
—
$
247
$
247
Available-for-Sale Investment Securities — Weighted-Average Yields
U.S. Treasury securities
3.43 %
4.00 %
— %
— %
3.91 %
Residential mortgage-backed securities - Agency
— %
2.11 %
3.25 %
3.63 %
3.36 %
Total available-for-sale investment securities
3.43 %
3.99 %
3.25 %
3.63 %
3.89 %
Held-to-Maturity Investment Securities — Weighted-Average Yields
Residential mortgage-backed securities - Agency
— %
— %
— %
3.73 %
3.73 %
Total held-to-maturity investment securities
— %
— %
— %
3.73 %
3.73 %
(1)
Maturities of RMBS are reflective of the contractual maturities of the investment.
(2)
The weighted-average yield for available-for-sale investment securities is calculated based on the amortized cost.
Taxable interest on investment securities was $521 million, $449 million and $179 million for the years ended December 31, 2024, 2023 and
2022, respectively. U.S. federal income tax-exempt interest on investment securities for the year ended December 31, 2024 was immaterial. There
was no U.S. federal income tax-exempt interest on investment securities for the years ended December 31, 2023 and 2022.
Other Investments
As a part of the Company’s community reinvestment initiatives, the Company has made equity investments in certain limited partnerships and
limited liability companies that finance the construction and rehabilitation of affordable rental housing and stimulate economic development in low- to
moderate-income communities. These investments are recorded within other assets on the Company’s consolidated statements of financial condition.
As of December 31, 2024 and 2023, the Company had outstanding investments in these entities of $538 million and $514 million, respectively, and
related liabilities for delayed equity contributions of $223 million and $187 million, respectively. For the year ended December 31, 2024, the Company
recognized $62 million of amortization of the investments in income tax expense. During the year ended December 31, 2024, the Company recognized
$71 million of income tax credits and other income tax benefits recorded in income tax expense. Non-income tax benefits comprised only immaterial
cash distributions from these investments during the year ended December 31, 2024.
(1)
(1)
(1)
(1)
(2)
(1)
(1)
-100-
Table of Contents
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 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, these investments are carried at cost minus impairment, if any. As of December 31, 2024 and 2023, the carrying value of these
investments, which are recorded within other assets on the Company’s consolidated statements of financial condition, was $38 million and $35 million,
respectively.
4. 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):
December 31,
2024
2023
Credit card loans
$
102,786
$
102,259
Other loans
Private student loans
—
10,352
Personal loans
10,314
9,852
Home loans
7,963
5,890
Other loans
55
56
Total other loans
18,332
26,150
Total loan receivables
121,118
128,409
Allowance for credit losses
(8,323)
(9,283)
Net loan receivables
$
112,795
$
119,126
(1)
Amounts include carrying values of $10.8 billion and $14.8 billion underlying investors’ interest in trust debt at December 31, 2024 and 2023, respectively, and $18.6 billion and $15.6 billion in seller’s interest at
December 31, 2024 and 2023, respectively. See Note 5: Credit Card 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 consolidated statements of financial condition, was $785 million and $753 million at
December 31, 2024 and 2023, respectively.
(3)
Accrued interest receivable on personal and home loans, which is presented as part of other assets in the Company’s consolidated statements of financial condition, was $77 million and $30 million,
respectively, at December 31, 2024. Accrued interest receivable on private student, personal and home loans, which is presented as part of other assets in the Company’s consolidated statements of financial
condition, was $522 million, $69 million and $21 million, respectively, at December 31, 2023.
(4)
At December 31, 2023, there were $6.3 billion of private student loans in repayment.
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, personal and
home 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.
(1)(2)
(3)
(4)
-101-
Table of Contents
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, personal and home loan receivables (dollars in millions):
Credit Risk Profile by FICO Score
December 31,
2024
2023
660 and Above
Less than 660
or No Score
660 and Above
Less than 660
or No Score
$
%
$
%
$
%
$
%
Credit card loans
$
82,422
80 %
$
20,364
20 %
$
82,238
80 %
$
20,021
20 %
Personal loans by origination year
2024
$
4,712
99 %
$
66
1 %
2023
3,042
94 %
203
6 %
$
5,149
98 %
$
100
2 %
2022
1,355
90 %
157
10 %
2,604
93 %
187
7 %
2021
478
89 %
60
11 %
1,049
92 %
91
8 %
2020
136
90 %
15
10 %
355
92 %
29
8 %
Prior
74
82 %
16
18 %
247
86 %
41
14 %
Total personal loans
$
9,797
95 %
$
517
5 %
$
9,404
95 %
$
448
5 %
Home loans by origination year
2024
$
2,853
100 %
$
13
— %
2023
2,293
97 %
77
3 %
$
2,614
97 %
$
86
3 %
2022
1,442
97 %
48
3 %
1,668
97 %
56
3 %
2021
653
97 %
19
3 %
765
97 %
22
3 %
2020
305
97 %
11
3 %
359
97 %
12
3 %
Prior
240
96 %
9
4 %
294
95 %
14
5 %
Total home loans
$
7,786
98 %
$
177
2 %
$
5,700
97 %
$
190
3 %
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.
-102-
Table of Contents
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, personal and home loan receivables (dollars in millions):
December 31,
2024
2023
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
$
1,964
$
1,980
$
3,944
$
2,038
$
1,917
$
3,955
Personal loans by origination year
2024
$
21
$
7
$
28
2023
51
21
72
$
26
$
8
$
34
2022
34
15
49
44
16
60
2021
11
6
17
20
8
28
2020
3
1
4
7
2
9
Prior
3
1
4
7
5
12
Total personal loans
$
123
$
51
$
174
$
104
$
39
$
143
Home loans by origination year
2024
$
4
$
1
$
5
2023
17
9
26
$
5
$
1
$
6
2022
20
14
34
12
5
17
2021
9
8
17
7
5
12
2020
4
4
8
3
3
6
Prior
4
4
8
5
5
10
Total home loans
$
58
$
40
$
98
$
32
$
19
$
51
-103-
Table of Contents
Allowance for Credit Losses
The following tables provide changes in the Company’s allowance for credit losses (dollars in millions):
For the Year Ended December 31, 2024
Credit Card Loans
Private Student
Loans
Personal Loans
Home Loans
Total Loans
Balance at December 31, 2023
$
7,619
$
858
$
722
$
84
$
9,283
Additions
Provision for credit losses
5,178
(770)
476
67
4,951
Deductions
Charge-offs
(6,522)
(100)
(484)
(12)
(7,118)
Recoveries
1,128
12
66
1
1,207
Net charge-offs
(5,394)
(88)
(418)
(11)
(5,911)
Balance at December 31, 2024
$
7,403
$
—
$
780
$
140
$
8,323
For the Year Ended December 31, 2023
Credit Card Loans
Private Student
Loans
Personal Loans
Home Loans
Total Loans
Balance at December 31, 2022
$
5,883
$
839
$
595
$
57
$
7,374
Cumulative effect of ASU No. 2022-02 adoption
(66)
—
(2)
—
(68)
Balance at January 1, 2023
5,817
839
593
57
7,306
Additions
Provision for credit losses
5,476
152
363
28
6,019
Deductions
Charge-offs
(4,481)
(155)
(290)
(1)
(4,927)
Recoveries
807
22
56
—
885
Net charge-offs
(3,674)
(133)
(234)
(1)
(4,042)
Balance at December 31, 2023
$
7,619
$
858
$
722
$
84
$
9,283
For the Year Ended December 31, 2022
Credit Card Loans
Private Student
Loans
Personal Loans
Home Loans
Total Loans
Balance at December 31, 2021
$
5,273
$
843
$
662
$
44
$
6,822
Additions
Provision for credit losses
2,233
99
24
13
2,369
Deductions
Charge-offs
(2,417)
(126)
(159)
—
(2,702)
Recoveries
794
23
68
—
885
Net charge-offs
(1,623)
(103)
(91)
—
(1,817)
Balance at December 31, 2022
$
5,883
$
839
$
595
$
57
$
7,374
(1)
Excludes a $40 million, $1 million and $10 million adjustment to the liability for expected credit losses on unfunded commitments for the years ended December 31, 2024, 2023 and 2022, respectively, as the
liability is recorded in accrued expenses and other liabilities in the Company’s consolidated statements of financial condition. With the sale of the private student loan portfolio in 2024, a liability for expected
credit losses on unfunded commitments is no longer recorded.
(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 $8.3 billion at December 31, 2024, which reflects a $1.0 billion release from the amount of the
allowance for credit losses at December 31, 2023. The release in the allowance for credit losses between December 31, 2024 and December 31,
2023, was primarily driven by the reversal of the private student loans’ allowance due to the sale of the student loan portfolio.
(1)
(2)
(1)
(1)
-104-
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 December 31, 2024, the Company used a macroeconomic forecast that projected the following
weighted average amounts: (i) unemployment rate ending 2025 at 4.56% and, within the Company’s reasonable and supportable period, peaking at
4.7% in the third quarter of 2025 and (ii) 1.8% growth rate in real gross domestic product in 2025.
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 including those relating to consumer price inflation and the fiscal and monetary policy responses to
that inflation. The Federal Reserve acted to reduce the federal funds target range by 100 basis points since September 2024 citing improvement in
inflation outlook and shifting focus to ensuring robust economic growth. While Federal Reserve officials believe recent trends in inflation and
employment continue to be supportive of a less restrictive monetary policy in the longer-term, near-term outlook is less certain as inflation persists at
higher than targeted levels while economic output and labor market data remains strong. The timing and magnitude of rate decreases throughout 2025
will be dependent on closely monitored trends in economic data, particularly inflation and labor market conditions, and monetary policy is expected to
remain restrictive. As easing of monetary policy typically precedes weaker consumer credit conditions caused by rising unemployment and slowing
economic growth, the Company sees a pause in reducing interest rates as a sign of observed economic resilience. While credit performance in the
Company's lending portfolios has evolved in line with its expectations, the Company assessed the prospects for various macroeconomic outcomes in
setting its allowance for credit 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. 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, personal and home loans increased for the year ended December 31, 2024, when compared to the
year ended December 31, 2023, primarily due to 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 Years Ended December 31,
2024
2023
2022
Interest and fees accrued subsequently charged off, net of recoveries
(recorded as a reduction of interest income)
$
1,105
$
681
$
303
Fees accrued subsequently charged off, net of recoveries
(recorded as a reduction to other income)
$
256
$
192
$
100
(1)
Amounts presented in this table include charge-offs related to private student loans through June 30, 2024, the date those loans were transferred to held-for-sale classification.
(1)
-105-
Table of Contents
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, personal
and home loan receivables (dollars in millions):
For the Twelve Months Ended
December 31, 2024
For the Twelve Months Ended
December 31, 2023
Credit card loans
$
6,522
$
4,481
Personal loans by origination year
2024
$
22
2023
183
$
19
2022
170
119
2021
69
81
2020
22
33
Prior
18
38
Total personal loans
$
484
$
290
Home loans by origination year
2024
$
—
2023
3
$
—
2022
6
—
2021
2
1
2020
—
—
Prior
1
—
Total home loans
$
12
$
1
Delinquent and Non-Accruing Loans
The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent and non-accruing loans in the
Company’s loan portfolio is shown below for each class of loan receivables (dollars in millions):
30-89 Days
Delinquent
90 or
More Days
Delinquent
Total Past
Due
90 or
More Days
Delinquent
and
Accruing
Total
Non-accruing
December 31, 2024
Credit card loans
$
1,964
$
1,980
$
3,944
$
1,940
$
194
Other loans
Personal loans
123
51
174
50
11
Home loans
58
40
98
9
94
Total other loans
181
91
272
59
105
Total loan receivables
$
2,145
$
2,071
$
4,216
$
1,999
$
299
December 31, 2023
Credit card loans
$
2,038
$
1,917
$
3,955
$
1,881
$
197
Other loans
Personal loans
104
39
143
37
11
Home loans
32
19
51
3
53
Other loans
7
—
7
—
—
Total other loans
143
58
201
40
64
Total loan receivables
$
2,181
$
1,975
$
4,156
$
1,921
$
261
(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 $35 million, $37 million and $23 million for the years ended
December 31, 2024, 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.
(1)
(2)
-106-
Table of Contents
Loan Modifications to Borrowers Experiencing Financial Difficulty
The Company has internal loan modification programs that provide relief to credit card, personal and home 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.
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.
For home loan customers experiencing financial difficulties, the Company offers relief in the form of interest rate reductions and term extensions.
Detailed quantitative disclosures about home loan modifications have been omitted because the amounts are immaterial in the periods presented.
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 at
settlement is recorded as a charge-off.
The Company monitors borrower performance after using payment programs. 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.
-107-
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 Twelve Months Ended December 31,
2024
2023
Credit card loans
Interest rate reduction
$
3,425
$
2,330
Total credit card loans
$
3,425
$
2,330
% of total class of financing receivables
3.33 %
2.28 %
Personal loans
Payment delay
$
13
$
10
Term extension
41
29
Interest rate reduction and payment delay
91
65
Interest rate reduction and term extension
45
29
Total personal loans
$
190
$
133
% of total class of financing receivables
1.84 %
1.35 %
(1) Accrued interest receivable (including unbilled accrued interest receivable for credit card loans) on modified loans to borrowers experiencing financial difficulty, which is presented as part of other assets in the
Company's condensed consolidated statements of financial condition, was immaterial at December 31, 2024 and 2023.
(2) Accounts that entered a credit card loan modification program include $616 million and $408 million that were converted from revolving line-of-credit arrangements to term loans during the years ended
December 31, 2024 and 2023.
(3) For settlements, the amortized cost basis is zero at period-end and therefore there is no amount reported for principal forgiveness in the table above. See financial effects table below for principal forgiveness to
borrowers experiencing financial difficulty.
(4) The Company defines a payment delay as a temporary reduction in payments below the original contractually required payment amounts (e.g., interest-only payments). The Company's credit card loan
modification programs do not result in an other than insignificant delay in payment.
(5) The Company defines term extensions as only those modifications for which the maturity date is extended beyond the original contractual maturity date by virtue of a change in terms other than a payment delay
as defined above. Modifications to credit card loans are not considered term extensions because credit card loans do not have a fixed repayment term.
The 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 Twelve Months Ended December 31,
2024
2023
Credit card loans
Weighted-average interest rate reduction
14.33 %
13.85 %
Principal forgiven
$
229
$
121
Interest and fees forgiven
$
219
$
117
Personal loans
Weighted-average interest rate reduction
13.61 %
12.28 %
Weighted-average term extension (in months)
48
39
Payment delay duration (in months)
6 to 12
6 to 12
(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 consolidated statements of income.
(2) During 2024, 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.
(1)(2)
(3)
(1)
(4)
(5)
(4)
(5)
(3)
(1)
(2)
-108-
Table of Contents
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):
Current
30-89 Days
Delinquent
90 or More Days
Delinquent
At December 31, 2024
Credit card loans
$
2,885
$
297
$
244
Personal loans
156
29
6
Total
$
3,041
$
326
$
250
At December 31, 2023
Credit card loans
$
1,882
$
252
$
196
Personal loans
109
20
4
Total
$
1,991
$
272
$
200
(1) This table includes any loan that entered a modification program during the preceding 12 months without regard to whether it remained in a modification program as of the reporting date.
The following table presents the defaulted amount and period-end amortized cost basis, by modification category, of loans that defaulted during
the period and were modified on or after January 1, 2023 through the end of the reporting period to borrowers experiencing financial difficulty during
the 12 months preceding default (dollars in millions):
For the Twelve Months Ended December 31, 2024
For the Twelve Months Ended December 31, 2023
Defaulted Amount
Period-end Amortized Cost
Basis
Defaulted Amount
Period-end Amortized Cost
Basis
Credit card loans
Interest rate reduction
$
906 $
447
$
383 $
210
Total credit card loans
$
906 $
447
$
383 $
210
Personal loans
Payment delay
$
4 $
2
$
2 $
1
Term extension
9
3
4
2
Interest rate reduction and payment delay
32
7
10
2
Interest rate reduction and term extension
21
8
7
3
Total personal loans
$
66 $
20
$
23 $
8
(1)
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 payment status table above but are not counted as defaulted for purposes of this
disclosure.
(1)
(1)
(1)
-109-
Table of Contents
Geographical Distribution of Loans
The Company originated credit card loans throughout the U.S. The geographic distribution of the Company’s credit card loan receivables was as
follows (dollars in millions):
December 31,
2024
2023
$
%
$
%
Texas
$
9,195
8.9 %
$
9,150
8.9 %
California
9,065
8.8
9,078
8.9
Florida
7,636
7.4
7,496
7.3
New York
6,496
6.3
6,538
6.4
Illinois
5,017
4.9
5,012
4.9
Pennsylvania
4,988
4.9
4,985
4.9
Ohio
4,180
4.1
4,188
4.1
New Jersey
3,511
3.4
3,499
3.4
Georgia
3,343
3.3
3,294
3.2
Michigan
2,808
2.7
2,821
2.8
Other
46,547
45.3
46,198
45.2
Total credit card loans
$
102,786
100.0 %
$
102,259
100.0 %
The Company originated personal, home and other loans throughout the U.S. The geographic distribution of personal, home and other loan
receivables was as follows (dollars in millions):
December 31,
2024
2023
$
%
$
%
California
$
2,024
11.0 %
$
2,449
9.4 %
Texas
1,658
9.0
1,987
7.6
Florida
1,428
7.8
1,607
6.1
New York
1,043
5.7
2,074
7.9
Illinois
771
4.2
1,405
5.4
Georgia
765
4.2
851
3.3
New Jersey
746
4.1
1,285
4.9
Pennsylvania
683
3.7
1,567
6.0
Ohio
586
3.2
975
3.7
Virginia
570
3.1
778
3.0
Other
8,058
44.0
11,172
42.7
Total other loans
$
18,332
100.0 %
$
26,150
100.0 %
(1)
The U.S. geographic distribution as of December 31, 2023, includes the balances of private student loans prior to their sale in 2024.
(1)
-110-
Table of Contents
5. Credit Card 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.
The Company accesses the term asset securitization market through DCMT and 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 consolidated statements of financial condition.
Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted for use in
meeting obligations to the trust’s creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to the
Company’s third-party creditors. The trusts have ownership of cash balances, the amounts of which are reported in restricted cash within the
Company’s 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 consolidated statements of financial condition as relating
to securitization activities, are shown in the following table (dollars in millions):
December 31,
2024
2023
Restricted cash
$
25
$
36
Investors’ interests held by third-party investors
8,500
11,725
Investors’ interests held by wholly-owned subsidiaries of Discover Bank
2,260
3,117
Seller’s interest
18,634
15,598
Loan receivables
29,394
30,440
Allowance for credit losses allocated to securitized loan receivables
(1,294)
(1,347)
Net loan receivables
28,100
29,093
Other assets
1
2
Carrying value of assets of consolidated variable interest entities
$
28,126
$
29,131
(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 December 31, 2024, no economic or other early amortization events have occurred.
(1)
(1)
-111-
Table of Contents
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.
6. Premises and Equipment
A summary of premises and equipment, net is as follows (dollars in millions):
December 31,
2024
2023
Land
$
29
$
37
Buildings and improvements
520
605
Furniture, fixtures and equipment
780
1,155
Software
1,217
1,305
Premises and equipment
2,546
3,102
Less: accumulated depreciation
(970)
(1,409)
Less: accumulated amortization of software
(504)
(602)
Premises and equipment, net
$
1,072
$
1,091
Depreciation expense was $71 million, $74 million and $80 million for the years ended December 31, 2024, 2023 and 2022, respectively.
Amortization expense on capitalized software was $173 million, $113 million and $114 million for the years ended December 31, 2024, 2023 and 2022,
respectively.
7. Goodwill
As of December 31, 2024 and 2023, the Company had goodwill of $255 million related to PULSE, which is part of the Payment Services
segment. The Company conducted its annual goodwill impairment test as of October 1, 2024 and 2023 and no impairments were identified.
8. Deposits
The Company obtains deposits from consumers directly (“direct-to-consumer deposits”) and 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”). Uninsured deposits are the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit or similar state
deposit insurance regime, and amounts in any other uninsured investment or deposit accounts that are classified as deposits and not subject to any
federal or state deposit insurance regime. At December 31, 2024 and 2023, Discover Bank had approximately $9.3 billion and $7.0 billion of uninsured
deposits, respectively, a portion of which comprise intercompany deposits. 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.
-112-
Table of Contents
The following table summarizes certificates of deposit in uninsured accounts and accounts that are in excess of the FDIC insurance limit by time
remaining until maturity (dollars in millions):
At December 31, 2024
Three months or less
$
276
Over three months through six months
315
Over six months through twelve months
281
Over twelve months
260
Total
$
1,132
The following table summarizes certificates of deposit maturing over each of the next five years and thereafter (dollars in millions):
At December 31, 2024
2025
$
28,448
2026
5,515
2027
4,542
2028
2,202
2029
439
Thereafter
804
Total
$
41,950
-113-
Table of Contents
9. 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):
December 31,
2024
2023
Maturity
Interest
Rate
Weighted-
Average Interest
Rate
Outstanding
Amount
Outstanding
Amount
Securitized Debt
Fixed-rate asset-backed securities
2025-2026
1.03% - 5.03%
3.55%
$
8,475
$
10,003
Floating-rate asset-backed securities
2024
0.00%
—%
—
925
Total Discover Card Master Trust I and Discover Card Execution Note Trust
8,475
10,928
Floating-rate asset-backed security
2031
0.00%
—%
—
65
Total private student loan securitization trust
—
65
Total long-term borrowings - owed to securitization investors
8,475
10,993
Discover Financial Services (Parent Company)
Fixed-rate senior notes
2025-2032
3.75% - 6.70%
4.80%
2,840
3,336
Fixed-rate retail notes
2025-2031
3.25% - 4.40%
3.82%
138
140
Fixed to floating-rate senior notes
2034
7.96%
7.96%
993
993
Discover Bank
Fixed-rate senior bank notes
2026-2030
2.70% - 4.65%
3.82%
2,792
3,571
Fixed-rate subordinated bank notes
2028
5.97%
5.97%
492
500
Fixed-rate Federal Home Loan Bank advances
2030
4.77% - 4.82%
4.82%
523
523
Floating-rate Federal Home Loan Bank advances
2024
0.00% - 0.00%
—%
—
525
Total long-term borrowings
$
16,253
$
20,581
(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 21: Derivatives and Hedging Activities.
(2)
As part of the sale of the private student loan portfolio, the Company sold its beneficial interest in its remaining private student loan securitization trust, which resulted in the derecognition of loan receivables
held by the trust and debt issued by the trust.
(3)
The fixed to floating-rate senior notes include a rate reset on November 2, 2033, to a floating rate based on compounded SOFR + 3.370%.
(4)
The floating-rate FHLB advances include interest rate terms based on SOFR plus a spread ranging from 16 to 26 basis points as of December 31, 2023.
The following table summarizes long-term borrowings maturing over each of the next five years and thereafter (dollars in millions):
At December 31, 2024
2025
$
6,170
2026
4,905
2027
1,002
2028
1,415
2029
7
Thereafter
2,754
Total
$
16,253
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 December 31, 2024, the Company had total committed borrowing capacity of $5.2 billion based on the amount and type of
assets pledged, of which the outstanding balance
(1)
(2)
(3)
(1)
(4)
-114-
Table of Contents
was comprised of $523 million in long-term advances. As of December 31, 2023, the Company had total committed borrowing capacity of $3.6 billion
based on the amount and type of assets pledged, of which the outstanding balance was comprised of $1.0 billion in long-term advances. These
advances are presented as short- or long-term borrowings on the consolidated statements of financial condition 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 December 31, 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 and presented as short-term borrowings on the 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 2025 and 2026. 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.
10. Stock-Based Compensation Plans
The Company has two stock-based compensation plans: the Discover Financial Services Omnibus Incentive Plan (“Omnibus Plan”) and the
Discover Financial Services Directors’ Compensation Plan (“Directors’ Compensation Plan”).
Omnibus Plan
The Omnibus Plan, which is stockholder-approved, provides for the award of stock options, stock appreciation rights, restricted stock, restricted
stock units (“RSUs”), performance stock units (“PSUs”) and other stock-based and/or cash awards (collectively, “awards”). Currently, the Company
does not have any stock options, stock appreciation rights or restricted stock outstanding. Effective May 2023, the Discover Financial Services
Amended and Restated 2014 Omnibus Incentive Plan (the “Prior Plan”) was replaced with the Discover Financial Services 2023 Omnibus Incentive
Plan (the “Plan”). Subject to adjustments for certain transactions in the Plan, the total number of shares that may be granted is 18 million shares
reduced by the number of shares granted under the Prior Plan. Shares granted under the Omnibus Plan may be the following: (i) authorized but
unissued shares and (ii) treasury shares that the Company acquires in the open market, in private transactions or otherwise.
Directors’ Compensation Plan
The Directors’ Compensation Plan, which is stockholder-approved, permits the grant of RSUs to non-employee directors. Under the Directors’
Compensation Plan, the Company may issue awards of up to a total of 1 million shares of common stock to non-employee directors. Shares of stock
that are issuable pursuant to the awards granted under the Directors’ Compensation Plan may be one of the following: authorized but unissued shares,
treasury shares or shares that the Company acquires in the open market. Annual awards for eligible directors are calculated by dividing $170,000 by
the fair market value of a share of stock on the date of grant and are subject to a restriction period whereby 100% of such units shall vest in full on the
earlier of the first anniversary of the date of grant or immediately prior to the first annual meeting of shareholders following the date of grant. RSUs
include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Company common shareholders.
Stock-Based Compensation
The following table details the compensation cost, net of forfeitures (dollars in millions):
For the Years Ended December 31,
2024
2023
2022
RSUs
$
86
$
69
$
58
PSUs
9
5
31
Total stock-based compensation expense
$
95
$
74
$
89
Income tax benefit
$
19
$
18
$
16
-115-
Table of Contents
RSUs
The following table sets forth the activity related to vested and unvested RSUs:
Number of Units
Weighted-Average
Remaining
Contractual Term (in
years)
Aggregate
Intrinsic Value
(in millions)
RSUs at December 31, 2023
1,944,117
$
219
Granted
1,018,909
Conversions to common stock
(1,365,035)
Forfeited
(270,974)
RSUs at December 31, 2024
1,327,017
0.89
$
230
Vested and convertible RSUs at December 31, 2024
107,283
0.00
$
19
The following table sets forth the activity related to unvested RSUs:
Number of Units
Weighted-Average
Grant-Date Fair
Value
Unvested RSUs at December 31, 2023
1,157,694
$
106.87
Granted
1,018,909
$
111.69
Vested
(733,413)
$
108.78
Forfeited
(270,974)
$
109.17
Unvested RSUs at December 31, 2024
1,172,216
$
109.33
(1)
Unvested RSUs represent awards where recipients have yet to satisfy either explicit vesting terms or retirement-eligibility requirements.
Compensation cost associated with RSUs is determined based on the number of units granted and the fair value on the date of grant. The fair
value is amortized on a straight-line basis, net of estimated forfeitures, over the requisite service period for each separately vesting tranche of the
award. The requisite service period is generally the vesting period.
The following table summarizes the total intrinsic value of the RSUs converted to common stock and the total grant-date fair value of RSUs
vested (dollars in millions, except weighted-average grant-date fair value amounts):
For the Years Ended December 31,
2024
2023
2022
Intrinsic value of RSUs converted to common stock
$
172
$
68
$
59
Grant-date fair value of RSUs vested
$
80
$
56
$
41
Weighted-average grant-date fair value of RSUs granted
$
111.69
$
104.20
$
116.50
As of December 31, 2024, there was $45 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to
be recognized over a weighted-average period of 0.84 years.
RSUs provide for accelerated vesting if there is a change in control or upon certain terminations (as defined in the Omnibus Plan or the award
certificate). RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Company
common shareholders.
1)
(1)
-116-
Table of Contents
PSUs
The following table sets forth the activity related to vested and unvested PSUs:
Number of Units
Weighted-Average
Grant-Date Fair
Value
Weighted-Average
Remaining
Contractual Term (in
years)
Aggregate Intrinsic
Value
(in millions)
PSUs at December 31, 2023
580,677
$
108.56
$
65
Granted
116,539
$
—
Conversions to common stock
(364,211)
$
94.26
Forfeited
(72,358)
$
108.72
PSUs at December 31, 2024
260,647
$
116.69
0.64
$
45
(1) All PSUs outstanding at December 31, 2024 and December 31, 2023, are unvested PSUs.
(2) Includes 117,374 PSUs granted in 2022 that are earned based on the Company’s cumulative earnings per share (“EPS”) as measured over the three-year performance period, which ended December 31, 2024,
and are subject to the requisite service period, which ended February 1, 2025.
(3) Includes 143,273 PSUs granted in 2023 that are earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ends December 31, 2025, and are subject to the
requisite service period, which ends February 1, 2026.
(4) No PSUs were granted in 2024.
Compensation cost associated with PSUs is determined based on the number of instruments granted, the fair value on the date of grant and the
performance factor. The fair value is amortized on a straight-line basis, net of estimated forfeitures, over the requisite service period. Each PSU
outstanding at December 31, 2024, is a restricted stock instrument that is subject to additional conditions and constitutes a contingent and unsecured
promise by the Company to pay up to 1.5 shares per unit of the Company’s common stock on the conversion date for the PSU, contingent on the
number of PSUs to be issued. PSUs have a performance period of three years and a vesting period of three years. The requisite service period of an
award having both performance and service conditions is the longest of the explicit, implicit and derived service periods.
The following table summarizes the total intrinsic value of the PSUs converted to common stock and the total grant-date fair value of PSUs
vested (dollars in millions, except weighted-average grant-date fair value amounts):
For the Years Ended December 31,
2024
2023
2022
Intrinsic value of PSUs converted to common stock
$
43
$
47
$
29
Grant-date fair value of PSUs vested
$
34
$
35
$
17
Weighted-average grant-date fair value of PSUs granted
$
—
$
110.70
$
124.01
(1) No PSUs were granted in 2024.
As of December 31, 2024, there was $3 million of total unrecognized compensation cost related to non-vested PSUs. The cost is expected to be
recognized over a weighted-average period of 0.74 years.
PSUs provide for accelerated vesting if there is a change in control or upon certain terminations (as defined in the Omnibus Plan or the award
certificate). PSUs include the right to receive dividend equivalents, which will accumulate and pay out in cash if and when the underlying shares are
issued.
11. Employee Benefit Plans
The Company sponsors the Discover Financial Services Pension Plan (the “Discover Pension Plan”), which is a non-contributory defined benefit
plan that is qualified under Section 401(a) of the Internal Revenue Code, for eligible employees in the U.S. Effective December 31, 2008, the Discover
Pension Plan was amended to discontinue the accrual of future benefits. The Company also sponsors the Discover Financial Services 401(k) Plan (the
“Discover 401(k) Plan”), which is a defined contribution plan that is qualified under Section 401(a) of the Internal Revenue Code, for its eligible U.S.
employees.
Discover Pension Plan
The Discover Pension Plan generally provides retirement benefits that are based on each participant’s years of credited service prior to 2009
and on compensation specified in the Discover Pension Plan. The Company’s policy is to
(1)
(1)(2)(3)(4)
(1)
-117-
Table of Contents
fund at least the amounts sufficient to meet minimum funding requirements under the Employee Retirement Income Security Act of 1974, as amended.
Net periodic benefit cost (income) is recorded in employee compensation and benefits within the consolidated statements of income. For this plan, the
net periodic benefit cost was immaterial for all periods presented.
The Company measures the funded status of the defined benefit pension plan as the difference between the fair value of plan assets and the
projected benefit obligation and recognizes that amount as either an asset or liability in the consolidated statements of financial condition as
appropriate. As of December 31, 2024 and 2023, the over-funded status related to the defined benefit pension plan recorded in other assets was $5
million and $14 million, respectively. Expected benefit payments from the Discover Pension Plan for each of the next five years range from $29 million
and $33 million annually.
Discover 401(k) Plan
Under the Discover 401(k) Plan, eligible U.S. employees receive 401(k) matching contributions. Eligible employees also receive fixed employer
contributions. The pretax expense associated with the Company contributions for the years ended December 31, 2024, 2023 and 2022 was $137
million, $128 million and $104 million, respectively.
12. Common and Preferred Stock
Common Stock Repurchase Program
During the year ended December 31, 2024, there were no share repurchases. In accordance with the Merger Agreement with Capital One, the
Company paused share repurchases through the completion of the merger.
Preferred Stock
The table below presents a summary of the Company's non-cumulative perpetual preferred stock that is outstanding at December 31, 2024
(dollars in millions, except per depositary share amounts):
Series
Description
Initial Issuance
Date
Liquidation
Preference and
Redemption Price
per Depositary
Share
Per Annum Dividend
Rate in effect at
December 31, 2024
Total Depositary Shares
Authorized, Issued and
Outstanding
Carrying Value
December 31,
2024
December 31,
2023
December 31,
2024
December 31,
2023
C
Fixed-to-Floating Rate
10/31/2017
$
1,000
5.500 %
570,000
570,000
$
563
$
563
D
Fixed-Rate Reset
6/22/2020
$
1,000
6.125 %
500,000
500,000
493
493
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 1/100 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 Term SOFR plus a spread of 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%.
(1)
(2)(3)(4)
(2)(5)(6)
th
-118-
Table of Contents
13. Accumulated Other Comprehensive Income
Changes in each component of 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 Year Ended December 31, 2024
Balance at December 31, 2023
$
(37)
$
(8)
$
(180)
$
(225)
Net change
(49)
(12)
(10)
(71)
Balance at December 31, 2024
$
(86)
$
(20)
$
(190)
$
(296)
For the Year Ended December 31, 2023
Balance at December 31, 2022
$
(136)
$
(14)
$
(189)
$
(339)
Net change
99
6
9
114
Balance at December 31, 2023
$
(37)
$
(8)
$
(180)
$
(225)
For the Year Ended December 31, 2022
Balance at December 31, 2021
$
114
$
(9)
$
(199)
$
(94)
Net change
(250)
(5)
10
(245)
Balance at December 31, 2022
$
(136)
$
(14)
$
(189)
$
(339)
-119-
Table of Contents
The following table presents each component of OCI before reclassifications and amounts reclassified from AOCI for each component of OCI
before- and after-tax (dollars in millions):
Before Tax
Tax Benefit
(Expense)
Net of Tax
For the Year Ended December 31, 2024
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period
$
(66)
$
17
$
(49)
Net change
$
(66)
$
17
$
(49)
Cash Flow Hedges
Net unrealized losses arising during the period
$
(152)
$
37
$
(115)
Amounts reclassified from AOCI
136
(33)
103
Net change
$
(16)
$
4
$
(12)
Pension Plan
Unrealized losses arising during the period
$
(13)
$
3
$
(10)
Net change
$
(13)
$
3
$
(10)
For the Year Ended December 31, 2023
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period
$
131
$
(32)
$
99
Net change
$
131
$
(32)
$
99
Cash Flow Hedges
Net unrealized losses arising during the period
$
(74)
$
18
$
(56)
Amounts reclassified from AOCI
82
(20)
62
Net change
$
8
$
(2)
$
6
Pension Plan
Unrealized gains arising during the period
$
12
$
(3)
$
9
Net change
$
12
$
(3)
$
9
For the Year Ended December 31, 2022
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period
$
(331)
$
81
$
(250)
Net change
$
(331)
$
81
$
(250)
Cash Flow Hedges
Net unrealized losses arising during the period
$
(13)
$
3
$
(10)
Amounts reclassified from AOCI
4
1
5
Net change
$
(9)
$
4
$
(5)
Pension Plan
Unrealized gains arising during the period
$
13
$
(3)
$
10
Net change
$
13
$
(3)
$
10
-120-
Table of Contents
14. Other Expense
Total other expense includes the following components (dollars in millions):
For the Years Ended December 31,
2024
2023
2022
Fraud losses and other charges
$
122
$
131
$
149
Postage
123
115
97
Credit-related inquiry fees
49
40
31
Supplies
38
38
35
Other expense
597
479
228
Total other expense
$
929
$
803
$
540
15. Income Taxes
Income tax expense consisted of the following (dollars in millions):
For the Years Ended December 31,
2024
2023
2022
Current
U.S. federal
$
1,136
$
1,254
$
1,465
U.S. state and local
241
258
312
Total
1,377
1,512
1,777
Deferred
U.S. federal
144
(595)
(398)
U.S. state and local
18
(76)
(54)
Total
162
(671)
(452)
Income tax expense
$
1,539
$
841
$
1,325
The following table reconciles the Company’s effective tax rate to the U.S. federal statutory income tax rate:
For the Years Ended December 31,
2024
2023
2022
U.S. federal statutory income tax rate
21.0 %
21.0 %
21.0 %
U.S. state, local and other income taxes, net of U.S. federal income tax benefits
3.6
3.5
3.4
Accrual for nondeductible penalties
1.2
—
—
Tax credits
(0.5)
(2.1)
(1.3)
Other
—
0.7
0.4
Effective income tax rate
25.3 %
23.1 %
23.5 %
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are
provided to reduce deferred tax assets to an amount that is more likely than not to be realized. The Company evaluates the likelihood of realizing its
deferred tax assets by estimating sources of future taxable income and the impact of tax planning strategies.
-121-
Table of Contents
Significant components of the Company’s net deferred income taxes, which are included in other assets in the Company’s consolidated
statements of financial condition, were as follows (dollars in millions):
December 31,
2024
2023
Deferred tax assets
Allowance for credit losses
$
2,011
$
2,245
Card product misclassification liability
296
282
Customer fees and rewards
284
236
Other
217
172
Total deferred tax assets before valuation allowance
2,808
2,935
Valuation allowance
(1)
(1)
Total deferred tax assets, net of valuation allowance
2,807
2,934
Deferred tax liabilities
Deferred loan origination costs
(24)
(40)
Accretion income
(85)
(39)
Other
(6)
(8)
Total deferred tax liabilities
(115)
(87)
Net deferred tax assets
$
2,692
$
2,847
A reconciliation of beginning and ending unrecognized tax benefits is as follows (dollars in millions):
For the Years Ended December 31,
2024
2023
2022
Balance at beginning of period
$
18
$
19
$
39
Additions
Current year tax positions
3
4
4
Prior year tax positions
2
—
1
Reductions
Prior year tax positions
(3)
(1)
(20)
Settlements with taxing authorities
(1)
(1)
—
Expired statute of limitations
(4)
(3)
(5)
Balance at end of period
$
15
$
18
$
19
(1)
For the years ended December 31, 2024, 2023 and 2022, amounts included $14 million, $18 million and $18 million, respectively, of unrecognized tax benefits, which, if recognized, would favorably affect the
effective tax rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest
and penalties related to unrecognized tax benefits were $1 million and $2 million, respectively, for the years ended December 31, 2024 and 2023.
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, 2021 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.
The Company has an immaterial amount of state net operating loss carryforwards that are subject to a partial valuation allowance as of
December 31, 2024 and 2023.
(1)
-122-
Table of Contents
16. Earnings Per Share
The following table presents the calculation of basic and diluted EPS (dollars and shares in millions, except per share amounts):
For the Years Ended December 31,
2024
2023
2022
Numerator
Net income
$
4,535
$
2,796
$
4,316
Preferred stock dividends
(62)
(62)
(62)
Net income available to common stockholders
4,473
2,734
4,254
Income allocated to participating securities
(27)
(19)
(26)
Net income allocated to common stockholders
$
4,446
$
2,715
$
4,228
Denominator
Weighted-average shares of common stock outstanding
251
254
277
Effect of dilutive common stock equivalents
—
—
1
Weighted-average shares of common stock outstanding and common stock equivalents
251
254
278
Basic earnings per common share
$
17.72
$
10.71
$
15.25
Diluted earnings per common share
$
17.72
$
10.70
$
15.23
Anti-dilutive securities were not material and had no impact on the computation of diluted EPS for the years ended December 31, 2024, 2023
and 2022.
17. 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.
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 elected to phase in
the impact over three years beginning in 2022 and ending December 31, 2024. Accordingly, the Company's Common Equity Tier 1 ("CET1") capital
ratios have been higher than they otherwise would have been.
As of December 31, 2024 and 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.
-123-
Table of Contents
The following table shows the actual capital amounts and ratios of DFS and Discover Bank and comparisons of each to the regulatory minimum
and “well-capitalized” requirements (dollars in millions):
Actual
Minimum Capital
Requirements
Capital Requirements
To Be Classified as
Well-Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2024
Total capital (to risk-weighted assets)
Discover Financial Services
$
20,420
16.5 %
$
9,892
≥8.0%
$
12,365
≥10.0%
Discover Bank
$
17,311
14.2 %
$
9,755
≥8.0%
$
12,193
≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services
$
18,503
15.0 %
$
7,419
≥6.0%
$
7,419
≥6.0%
Discover Bank
$
14,665
12.0 %
$
7,316
≥6.0%
$
9,755
≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services
$
18,503
12.3 %
$
6,003
≥4.0%
N/A
N/A
Discover Bank
$
14,665
9.9 %
$
5,933
≥4.0%
$
7,417
≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services
$
17,448
14.1 %
$
5,564
≥4.5%
N/A
N/A
Discover Bank
$
14,665
12.0 %
$
5,487
≥4.5%
$
7,926
≥6.5%
December 31, 2023
Total capital (to risk-weighted assets)
Discover Financial Services
$
17,399
13.2 %
$
10,509
≥8.0%
$
13,137
≥10.0%
Discover Bank
$
16,409
12.7 %
$
10,381
≥8.0%
$
12,976
≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services
$
15,279
11.6 %
$
7,882
≥6.0%
$
7,882
≥6.0%
Discover Bank
$
13,459
10.4 %
$
7,786
≥6.0%
$
10,381
≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services
$
15,279
10.3 %
$
5,915
≥4.0%
N/A
N/A
Discover Bank
$
13,459
9.2 %
$
5,833
≥4.0%
$
7,292
≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services
$
14,223
10.8 %
$
5,911
≥4.5%
N/A
N/A
Discover Bank
$
13,459
10.4 %
$
5,839
≥4.5%
$
8,435
≥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.
The amount of dividends that a bank may pay in any year is subject to certain regulatory restrictions. Under the current banking regulations, a
bank may not pay dividends if such a payment would leave the bank inadequately capitalized. Discover Bank paid dividends of $2.6 billion, $1.7 billion
and $4.0 billion in the years ended December 31, 2024, 2023 and 2022, respectively, to DFS.
18. 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.
(1)
(2)
(2)
-124-
Table of Contents
Commitments
Unused Credit Arrangements
At December 31, 2024, the Company had unused credit arrangements for loans of approximately $232.6 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 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.
Contingencies
See Note 19: 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.
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, 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 consolidated
statements of financial condition. The Company has not recorded any incremental contingent liability associated with its secured borrowing
representations and warranties. Management believes that the probability of having to replace, repurchase or sell assets pledged as collateral under
secured borrowing arrangements, including an early amortization event, is low.
Counterparty Settlement Guarantees
Diners Club and DFS Services LLC (on behalf of PULSE) have various counterparty exposures, which are listed below:
•
Merchant Guarantee. Diners Club has entered into contractual relationships with certain international merchants, which generally include
travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their
customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment
obligation to one of these merchants.
•
ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains
counterparty exposure if an issuer fails to fulfill its settlement obligation.
•
Global Network Alliance Guarantee. Discover Network, Diners Club and PULSE have entered into contractual relationships with certain
international payment networks in which DFS Services LLC retains the counterparty exposure if a network fails to fulfill its settlement
obligation.
-125-
Table of Contents
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.
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 $120 million as of December 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 December 31, 2024,
the Company had not recorded any contingent liability in the consolidated statements of financial 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 years ended
December 31, 2024, 2023 and 2022.
The maximum potential amount of obligations of the Discover Network arising from such contingent obligations is estimated to be the portion of
the total Discover Network transaction volume processed to date for which timely and valid disputes may be raised under applicable law and relevant
issuer and customer agreements. There is no limitation on the maximum amount the Company may be liable to pay to issuers. However, the Company
believes that such amount is not representative of the Company’s actual potential loss exposure based on the Company’s historical experience. The
actual amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes
may include or result in disputed transactions.
The following table summarizes certain information regarding merchant chargeback guarantees (dollars in millions):
For the Years Ended December 31,
2024
2023
2022
Aggregate sales transaction volume
$
245,958
$
257,611
$
256,237
(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 consolidated financial statements for merchant chargeback guarantees as of
December 31, 2024 and 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 December 31, 2024 and 2023, the Company had escrow
(1)
-126-
Table of Contents
deposits and settlement withholdings of $11 million and $10 million, respectively, which are recorded in interest-bearing deposit accounts and accrued
expenses and other liabilities on the Company’s consolidated statements of financial condition.
19. 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, 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 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 consent orders with the Consumer Financial Protection Bureau (“CFPB”) 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 a liability for legal and regulatory matters when those matters
create loss contingencies that are both probable and estimable. Except as discussed below regarding the card product misclassification matter, other
litigation and regulatory settlement-related expenses were immaterial for the years ended December 31, 2024, 2023 and 2022.
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 $70 million as of December 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
and regulatory 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 consolidated financial condition, operating results and cash flows for a particular future period, depending
on, among other things, the level of the Company’s income for such period.
In July 2015, the Company announced that its subsidiaries, Discover Bank, The Student Loan Corporation and Discover Products Inc. (the
“Discover Subsidiaries”), agreed to a consent order with the CFPB with respect to certain private student loan servicing practices (the “2015 Order”).
The 2015 Order expired in July 2020. In December 2020, the Discover Subsidiaries agreed to a consent order (the “2020 Order”) with the CFPB
resolving the agency’s investigation into Discover Bank’s compliance with the 2015 Order. In connection with the 2020 Order, Discover is required to
implement a redress and compliance plan and must pay at least $10 million in consumer redress to consumers who may have been harmed and has
paid a $25 million civil money penalty to the CFPB.
-127-
Table of Contents
On September 25, 2023, following the consent of the Board of Directors of Discover Bank, the FDIC issued a consent order (the “2023 Order”) to
Discover Bank. The 2023 Order addressed shortcomings in Discover Bank’s compliance management system for consumer protection laws and
related matters. 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.
Management and the Board are committed to meeting all the requirements of the 2023 Order. Discover Bank has been 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 by the required deadlines for review and feedback. The actions completed to date, taken together with actions previously
undertaken to improve and enhance its compliance management system and enhance related corporate governance, address multiple consent order
objectives, however, many provisions require longer term implementation. Depending on regulatory feedback, the timing of approvals and
sustainability periods, necessary work is not likely to be completed until later in 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 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. On
December 6, 2024, plaintiffs and the Company reached an agreement on the terms of a class-wide settlement to resolve the claims against the
Company. The parties finalized a settlement agreement on February 14, 2025, and that settlement must now be approved by the court.
Card Product Misclassification
As of December 31, 2024, the balance of the Company’s counterparty restitution liability was $1.2 billion, reflecting additional accruals for
interest on the overcharges committed to as part of the counterparty restitution plan approved by the Board of Directors in the third quarter of 2023,
additional concessions agreed to as part of the class action settlement negotiations through the fourth quarter of 2024 and settlement disbursements
made year-to-date. As reported in the Company’s Current Report on Form 8-K filed on July 3, 2024, the Company and certain of its subsidiaries
entered into a settlement agreement to resolve putative class actions filed on behalf of merchants allegedly affected by the card product
misclassification. The settlement agreement, which is subject to court approval, would resolve claims by parties affected by the card product
misclassification (merchants, merchants acquirers and other intermediaries). The Company expects all payments under the settlement agreement to
be covered by the $1.2 billion liability. Substantially all of the liability represents amounts payable to or on behalf of impacted merchants, merchant
acquirers and other intermediaries in settlement of the card product misclassification matter, with $26 million of that balance representing provision for
legal fees and expenses payable to plaintiffs’ counsel. On August 27, 2024, plaintiffs moved for preliminary approval, and on October 22, 2024, the
court entered an order granting preliminary approval. Subsequently, the parties to the putative class action entered into a revised settlement
agreement which resulted in minor adjustments to the restitution liability in the fourth quarter of 2024. On January 22, 2025, plaintiffs moved for
preliminary approval of the revised settlement agreement. The liability does not include any potential regulatory fines or penalties, or the cost of
administering the distribution of funds to affected parties.
The following table summarizes the change in the Company’s counterparty restitution liability pertaining to the card product misclassification
(dollars in millions):
For the Year Ended
December 31, 2024
Balance at December 31, 2023
$
1,159
Provision for refund of overcharges
—
Provision for interest on overcharges
56
Provision for other settlement concessions
85
Disbursements
(76)
Balance at December 31, 2024
$
1,224
The Company remains in discussion with its various regulators regarding the card product misclassification. During 2024, the Company
recognized approximately $290 million, recorded in other expense on the consolidated statements of income for the year ended December 31, 2024,
representing the Company’s current estimate of potential
-128-
Table of Contents
penalties to be imposed by its various regulators related to this matter. Actual penalties imposed are subject to further discussion with the Company’s
various regulators and may be more or less than such amount.
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 a shareholder derivative action. The Company is also cooperating with an SEC 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 December 31, 2024.
20. 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. ASC Topic 820, Fair Value Measurement, provides a three-level hierarchy for classifying the inputs to valuation
techniques used to measure fair value of financial instruments based on whether the inputs are observable or unobservable. It also requires certain
disclosures about those measurements. The three-level valuation hierarchy is as follows:
•
Level 1: Fair values determined by Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access.
•
Level 2: Fair values determined by Level 2 inputs are those that utilize inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive
markets, quoted prices for the identical assets in an inactive market and inputs other than quoted prices that are observable for the asset or
liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company evaluates factors such as
the frequency of transactions, the size of the bid-ask spread and the significance of adjustments made when considering transactions
involving similar assets or liabilities to assess the relevance of those observed prices. If relevant and observable prices are available, the fair
values of the related assets or liabilities would be classified as Level 2.
•
Level 3: Fair values determined by Level 3 inputs are those based on unobservable inputs and include situations where there is little, if any,
market activity for the asset or liability being valued. In instances where the inputs used to measure fair value may fall into different levels of
the fair value hierarchy, the level in the fair value hierarchy in which the measurements are classified is based on the lowest level input that
is significant to the fair value measurement in its entirety. Accordingly, the Company may utilize both observable and unobservable inputs in
determining the fair values of financial instruments classified within the Level 3 category.
The Company evaluates the classification of each fair value measurement within the hierarchy at least quarterly.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and involves
consideration of factors specific to the asset or liability. Furthermore, certain techniques used to measure fair value involve some degree of judgment
and, as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange.
-129-
Table of Contents
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are as follows (dollars in millions):
Quoted Price in Active
Markets
for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
Balance at December 31, 2024
Assets
Fair value - OCI
Other short-term investments
$
5,423
$
—
$
—
$
5,423
U.S. Treasury securities
$
13,988
$
—
$
—
$
13,988
Residential mortgage-backed securities - Agency
—
371
—
371
Available-for-sale investment securities
$
13,988
$
371
$
—
$
14,359
Derivative financial instruments - cash flow hedges
$
—
$
1
$
—
$
1
Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges
$
—
$
1
$
—
$
1
Balance at December 31, 2023
Assets
Fair value - OCI
U.S. Treasury and U.S. GSE securities
$
12,928
$
9
$
—
$
12,937
Residential mortgage-backed securities - Agency
—
465
—
465
Available-for-sale investment securities
$
12,928
$
474
$
—
$
13,402
Derivative financial instruments - cash flow hedges
$
—
$
2
$
—
$
2
Fair value - Net income
Marketable equity securities
$
1
$
—
$
—
$
1
Derivative financial instruments - fair value hedges
$
—
$
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 consolidated statements of
financial condition.
Other Short-Term Investments
Other short-term investments consist of U.S. Treasury bills with contractual maturities greater than 90 days but less than one year at the time of
acquisition. The fair value estimates of these investments are classified as Level 1 based on quoted market prices for the same securities.
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.
(1)
(1)
(1)
(1)
-130-
Table of Contents
At December 31, 2024, amounts reported in RMBS reflect U.S. government agency obligations issued by Ginnie Mae, Fannie Mae and Freddie
Mac with an aggregate par value of $388 million, a weighted-average coupon of 4.12% and a weighted-average remaining maturity of four years.
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 (or receipts) 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 foreign exchange forward contracts
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 for the
years ended December 31, 2024 and 2023.
-131-
Table of Contents
Financial Instruments Measured at Other Than Fair Value
The following tables disclose the estimated fair value of the Company’s financial assets and financial liabilities that are not required to be carried
at fair value (dollars in millions):
Balance at December 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
Amortized cost
Residential mortgage-backed securities - Agency
$
—
$
247
$
—
$
247
$
271
Held-to-maturity investment securities
$
—
$
247
$
—
$
247
$
271
Net loan receivables
$
—
$
—
$
120,422
$
120,422
$
112,795
Carrying value approximates fair value
Cash and cash equivalents
$
8,474
$
—
$
—
$
8,474
$
8,474
Restricted cash
$
25
$
—
$
—
$
25
$
25
Accrued interest receivables
$
—
$
998
$
—
$
998
$
998
Liabilities
Amortized cost
Time deposits
$
—
$
42,228
$
—
$
42,228
$
41,950
Long-term borrowings - owed to securitization investors
$
—
$
8,456
$
—
$
8,456
$
8,475
Other long-term borrowings
—
7,891
—
7,891
7,778
Long-term borrowings
$
—
$
16,347
$
—
$
16,347
$
16,253
Carrying value approximates fair value
Accrued interest payables
$
—
$
315
$
—
$
315
$
315
Balance at December 31, 2023
Assets
Amortized cost
Residential mortgage-backed securities - Agency
$
—
$
234
$
—
$
234
$
253
Held-to-maturity investment securities
$
—
$
234
$
—
$
234
$
253
Net loan receivables
$
—
$
—
$
126,940
$
126,940
$
119,126
Carrying value approximates fair value
Cash and cash equivalents
$
11,685
$
—
$
—
$
11,685
$
11,685
Restricted cash
$
43
$
—
$
—
$
43
$
43
Accrued interest receivables
$
—
$
1,450
$
—
$
1,450
$
1,450
Liabilities
Amortized cost
Time deposits
$
—
$
45,333
$
—
$
45,333
$
45,240
Short-term borrowings
$
—
$
750
$
—
$
750
$
750
Long-term borrowings - owed to securitization investors
$
—
$
10,770
$
65
$
10,835
$
10,993
Other long-term borrowings
—
9,469
—
9,469
9,588
Long-term borrowings
$
—
$
20,239
$
65
$
20,304
$
20,581
Carrying value approximates fair value
Accrued interest payables
$
—
$
421
$
—
$
421
$
421
(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 consolidated statements of financial
condition.
(3) Excludes deposits without contractually defined maturities for all periods presented.
(1)
(2)
(3)
(1)
(2)
(1)
(2)
(3)
(1)
(2)
-132-
Table of Contents
21. 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 20: 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 consolidated statements of financial
condition. Collateral amounts recorded in the 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 December 31, 2024 and 2023, the Company’s outstanding cash flow hedges primarily relate to interest receipts from credit card
receivables and had an initial maximum period of 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 December 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 $14 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 and generally provide substantial offset to one another.
-133-
Table of Contents
Derivatives Not Designated as Hedges
Foreign Exchange Forward Contracts
The Company has foreign exchange forward contracts that are economic hedges and are not designated as accounting hedges. The Company
enters into foreign exchange forward contracts to manage foreign currency risk. Changes in the fair value of these contracts are recorded in other
income on the 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):
December 31,
2024
2023
Notional
Amount
Number of
Outstanding
Derivative
Contracts
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Derivatives designated as hedges
Interest rate swaps — cash flow hedge
$
17,750
20
$
1
$
1
$
10,650
$
2
$
—
Interest rate swaps — fair value hedge
$
15,371
19
—
—
$
8,650
2
—
Derivatives not designated as hedges
Foreign exchange forward contracts
$
28
4
—
—
$
29
—
—
Total gross derivative assets/liabilities
1
1
4
—
Less: collateral held/posted
—
(1)
—
—
Total net derivative assets/liabilities
$
1
$
—
$
4
$
—
(1)
The foreign exchange forward contracts have notional amounts of EUR 1 million, GBP 3 million, SGD 1 million and INR 1.8 billion as of December 31, 2024, and notional amounts of EUR 6 million, GBP 6
million, SGD 1 million, INR 1.1 billion and AUD 2 million as of December 31, 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 December 31, 2024, the Company had one outstanding contract with a total notional amount of $65 million and an immaterial fair 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):
December 31,
2024
2023
Carrying Amount of
Hedged Liabilities
Cumulative Amount of Fair
Value Hedging Adjustment
(Decreasing) the Carrying
Amount of Hedged
Liabilities
Carrying Amount of
Hedged Liabilities
Cumulative Amount of Fair
Value Hedging Adjustment
(Decreasing) the Carrying
Amount of Hedged
Liabilities
Long-term borrowings
$
15,324
$
(8)
$
8,620
$
—
(1)
The balance includes $5 million and $12 million of cumulative hedging adjustments related to discontinued hedging relationships as of December 31, 2024 and 2023, respectively.
(1)
(2)
(3)
(1)
(1)
-134-
Table of Contents
The following table summarizes the impact of the derivative instruments on income and indicates where within the consolidated financial
statements such impact is reported (dollars in millions):
Location and Amount of (Losses) Gains Recognized on the Consolidated Statements of
Income
Interest Expense
Deposits
Long-Term
Borrowings
Interest Income
(Credit Card)
Other Income
Other Expense
For the Year Ended December 31, 2024
Total amounts of income and expense line items presented in the consolidated
statements of income, where the effects of fair value or cash flow hedges are
recorded
$
(4,772)
$
(933)
$
16,109
$
763
$
929
The effects of cash flow and fair value hedging
Gains (losses) on cash flow hedging relationships
Amounts reclassified from OCI into earnings
$
—
$
9
$
(158)
$
—
$
—
Gains on discontinued cash flow hedging relationships
Amounts reclassified from OCI into earnings
$
—
$
—
$
—
$
—
$
13
(Losses) gains on fair value hedging relationships
(Losses) gains on hedged items
$
(19)
$
21
$
—
$
—
$
—
(Losses) gains on interest rate swaps
(1)
(158)
—
—
—
Total (losses) gains on fair value hedging relationships
$
(20)
$
(137)
$
—
$
—
$
—
For the Year Ended December 31, 2023
Total amounts of income and expense line items presented in the consolidated
statements of income, where the effects of fair value or cash flow hedges are
recorded
$
(3,886)
$
(855)
$
14,438
$
85
$
803
The effects of cash flow and fair value hedging
Gains (losses) on cash flow hedging relationships
Amounts reclassified from OCI into earnings
$
—
$
9
$
(91)
$
—
$
—
Gains (losses) on fair value hedging relationships
Gains (losses) on hedged items
$
—
$
(19)
$
—
$
—
$
—
Gains (losses) on interest rate swaps
—
(80)
—
—
—
Total gains (losses) on fair value hedging relationships
$
—
$
(99)
$
—
$
—
$
—
For the Year Ended December 31, 2022
Total amounts of income and expense line items presented in the consolidated
statements of income, where the effects of fair value or cash flow hedges are
recorded
$
(1,257)
$
(606)
$
10,632
$
75
$
540
The effects of cash flow and fair value hedging
Gains (losses) on cash flow hedging relationships
Amounts reclassified from OCI into earnings
$
—
$
(2)
$
(2)
$
—
$
—
Gains (losses) on fair value hedging relationships
Gains on hedged items
$
—
$
66
$
—
$
—
$
—
Gains (losses) on interest rate swaps
—
(70)
—
—
—
Total gains (losses) on fair value hedging relationships
$
—
$
(4)
$
—
$
—
$
—
The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges
$
—
$
—
$
—
$
1
$
—
For the impact of the derivative instruments on OCI, see Note 13: Accumulated Other Comprehensive Income.
-135-
Table of Contents
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.
22. 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 (prior to the sale of that portfolio), personal loans, home loans 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 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 Company’s CODM is the Chief Executive Officer. The CODM reviews financial results on a regular basis to assess total company and line of
business performance. The information reviewed, including plan-to-actual comparisons, ratio analysis and other relevant metrics is then used to inform
decisions impacting the Company’s reportable segments, including evaluating expense budgets for lines of business which comprise those reportable
segments. The business segment reporting provided to and used by the Company’s 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 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 CODM.
-136-
Table of Contents
The following table presents segment data (dollars in millions):
Digital Banking
Payment Services
Total
For the Year Ended December 31, 2024
Interest income
Credit card loans
$
16,109
$
—
$
16,109
Private student loans
800
—
800
Personal loans
1,402
—
1,402
Home loans
525
—
525
Other loans
2
—
2
Other interest income
1,182
—
1,182
Total interest income
20,020
—
20,020
Interest expense
5,724
—
5,724
Net interest income
14,296
—
14,296
Provision for credit losses
4,911
—
4,911
Other income
2,902
712
3,614
Other expense
Employee compensation and benefits
2,739
85
2,824
Marketing and business development
1,055
15
1,070
Information processing and communications
704
31
735
Professional fees
1,231
43
1,274
Premises and equipment
90
3
93
Other expense
911
18
929
Total other expense
6,730
195
6,925
Income before income taxes
$
5,557
$
517
$
6,074
For the Year Ended December 31, 2023
Interest income
Credit card loans
$
14,438
$
—
$
14,438
Private student loans
1,033
—
1,033
Personal loans
1,156
—
1,156
Home loans
324
—
324
Other loans
2
—
2
Other interest income
892
—
892
Total interest income
17,845
—
17,845
Interest expense
4,746
—
4,746
Net interest income
13,099
—
13,099
Provision for credit losses
6,018
—
6,018
Other income
2,245
450
2,695
Other expense
Employee compensation and benefits
2,356
78
2,434
Marketing and business development
1,147
17
1,164
Information processing and communications
582
26
608
Professional fees
991
50
1,041
Premises and equipment
86
3
89
Other expense
783
20
803
Total other expense
5,945
194
6,139
Income before income taxes
$
3,381
$
256
$
3,637
(1)
(1)
-137-
Table of Contents
Digital Banking
Payment Services
Total
For the Year Ended December 31, 2022
Interest income
Credit card loans
$
10,632
$
—
$
10,632
Private student loans
831
—
831
Personal loans
872
—
872
Home loans
165
—
165
Other loans
2
—
2
Other interest income
362
—
362
Total interest income
12,864
—
12,864
Interest expense
1,865
—
1,865
Net interest income
10,999
—
10,999
Provision for credit losses
2,359
—
2,359
Other income
2,041
176
2,217
Other expense
Employee compensation and benefits
2,068
71
2,139
Marketing and business development
1,020
15
1,035
Information processing and communications
485
28
513
Professional fees
838
33
871
Premises and equipment
115
3
118
Other expense
523
17
540
Total other expense
5,049
167
5,216
Income before income taxes
$
5,632
$
9
$
5,641
(1) Financial information provided to the CODM for the Digital Banking segment included total direct expenses of $2.7 billion, $2.8 billion and $2.4 billion and total allocated expenses of $4.0 billion, $3.1 billion and
$2.6 billion for the years ended December 31, 2024, 2023 and 2022, respectively. For the Payment Services segment, that information included $124 million, $117 million and $109 million in total direct
expenses and $71 million, $77 million and $58 million in total allocated expenses for the years ended December 31, 2024, 2023 and 2022, respectively.
(1)
-138-
Table of Contents
23. 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 Year Ended December 31, 2024
Other income subject to ASC 606
Discount and interchange revenue, net
$
1,417
$
103
$
1,520
Protection products revenue
169
—
169
Transaction processing revenue
—
345
345
Other income
498
265
763
Total other income subject to ASC 606
2,084
713
2,797
Other income not subject to ASC 606
Loan fee income
819
—
819
Losses on equity investments
(1)
(1)
(2)
Total other income (loss) not subject to ASC 606
818
(1)
817
Total other income by operating segment
$
2,902
$
712
$
3,614
For the Year Ended December 31, 2023
Other income subject to ASC 606
Discount and interchange revenue, net
$
1,294
$
87
$
1,381
Protection products revenue
172
—
172
Transaction processing revenue
—
303
303
Other income
16
69
85
Total other income subject to ASC 606
1,482
459
1,941
Other income not subject to ASC 606
Loan fee income
763
—
763
Gains (losses) on equity investments
—
(9)
(9)
Total other income not subject to ASC 606
763
(9)
754
Total other income by operating segment
$
2,245
$
450
$
2,695
For the Year Ended December 31, 2022
Other income subject to ASC 606
Discount and interchange revenue, net
$
1,224
$
79
$
1,303
Protection products revenue
172
—
172
Transaction processing revenue
—
249
249
Other income
11
64
75
Total other income subject to ASC 606
1,407
392
1,799
Other income not subject to ASC 606
Loan fee income
632
—
632
Gains (losses) on equity investments
2
(216)
(214)
Total other income not subject to ASC 606
634
(216)
418
Total other income by operating segment
$
2,041
$
176
$
2,217
(1) Net of rewards, including Cashback Bonus rewards, of $3.0 billion, $3.1 billion and $3.0 billion for the years ended December 31, 2024, 2023 and 2022, respectively.
(2) Excludes $7 million, $15 million and $10 million deposit product fees that are reported within net interest income for the years ended December 31, 2024, 2023 and 2022, respectively.
For a detailed description of the Company’s significant revenue recognition accounting policies, see Note 2: Summary of Significant Accounting
Policies.
(1)
(2)
(1)
(2)
(1)
(2)
-139-
Table of Contents
24. Related Party Transactions
In the ordinary course of business, the Company offers consumer financial products to its directors, executive officers and certain members of
their families. These products are offered on substantially the same terms as those prevailing at the time for comparable transactions with unrelated
parties and these receivables are included in the loan receivables in the Company’s consolidated statements of financial condition. They were not
material to the Company’s financial position or results of operations.
25. Parent Company Condensed Financial Information
The following Parent Company financial statements are provided in accordance with SEC rules, which require such disclosure when the
restricted net assets of consolidated subsidiaries exceed 25% of consolidated net assets.
Discover Financial Services
(Parent Company Only)
Condensed Statements of Financial Condition
(dollars in millions)
December 31,
2024
2023
Assets
Cash and cash equivalents
$
5,209
$
3,509
Restricted cash
100
75
Notes receivable from subsidiaries
1,745
1,650
Investment in bank subsidiary
14,022
12,340
Investments in non-bank subsidiaries
976
974
Other assets
994
871
Total assets
$
23,046
$
19,419
Liabilities and Stockholders’ Equity
Non-interest-bearing deposit accounts
$
3
$
2
Short-term borrowings from subsidiaries
693
390
Long-term borrowings
3,971
4,469
Accrued expenses and other liabilities
453
323
Total liabilities
5,120
5,184
Stockholders’ equity
17,926
14,235
Total liabilities and stockholders’ equity
$
23,046
$
19,419
(1)
The Parent Company had $5.2 billion and $3.5 billion in a money market deposit account at Discover Bank as of December 31, 2024 and 2023, respectively, which is included in cash and cash equivalents.
These funds are available to the Parent for liquidity purposes.
(2)
The Parent Company had a balance of $1.3 billion representing advances to Discover Bank as of December 31, 2024 and 2023, which is included in notes receivable from subsidiaries.
(1)
(2)
-140-
Table of Contents
Discover Financial Services
(Parent Company Only)
Condensed Statements of Comprehensive Income
(dollars in millions)
For the Years Ended December 31,
2024
2023
2022
Interest income
$
293
$
240
$
98
Interest expense
280
189
189
Net interest income (expense)
13
51
(91)
Dividends from bank subsidiary
2,600
1,700
4,000
Dividends from non-bank subsidiaries
260
11
688
Other income
—
4
—
Total income
2,873
1,766
4,597
Other expense (income)
179
(2)
6
Income before income tax benefit and equity in undistributed net income of subsidiaries
2,694
1,768
4,591
Income tax benefit (expense)
19
(7)
25
Equity in undistributed net income of subsidiaries
1,822
1,035
(300)
Net income
4,535
2,796
4,316
Other comprehensive (loss) income, net
(71)
114
(245)
Comprehensive income
$
4,464
$
2,910
$
4,071
-141-
Table of Contents
Discover Financial Services
(Parent Company Only)
Condensed Statements of Cash Flows
(dollars in millions)
For the Years Ended December 31,
2024
2023
2022
Cash flows provided by operating activities
Net income
$
4,535
$
2,796
$
4,316
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiaries
(1,822)
(1,035)
300
Non-cash transfer to (from) subsidiary
40
(11)
(188)
Stock-based compensation expense
85
74
89
Deferred income taxes
(12)
2
(8)
Depreciation and amortization
5
4
32
Net gains on investments and other assets
—
(4)
—
Changes in assets and liabilities:
Increase in other assets
(107)
(65)
(143)
Increase (decrease) in accrued expenses and other liabilities
136
(41)
27
Net cash provided by operating activities
2,860
1,720
4,425
Cash flows (used for) provided by investing activities
Return of capital from sale of subsidiary
—
2
—
(Increase) decrease in loans to subsidiaries
(95)
109
(982)
Proceeds from sale of subsidiary
—
3
—
Purchases of premises and equipment
(1)
—
—
Net cash (used for) provided by investing activities
(96)
114
(982)
Cash flows used for financing activities
Net increase (decrease) in short-term borrowings from subsidiaries
303
275
(324)
Proceeds from issuance of common stock
13
12
10
Proceeds from issuance of long-term borrowings
—
993
740
Maturities and repayment of long-term borrowings
(502)
(15)
(834)
Purchases of treasury stock
(83)
(1,938)
(2,359)
Net increase in deposits
1
—
—
Dividends paid on common and preferred stock
(771)
(752)
(703)
Net cash used for financing activities
(1,039)
(1,425)
(3,470)
Increase (decrease) in cash, cash equivalents and restricted cash
1,725
409
(27)
Cash, cash equivalents and restricted cash, at beginning of period
3,584
3,175
3,202
Cash, cash equivalents and restricted cash, at end of period
$
5,309
$
3,584
$
3,175
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents
$
5,209
$
3,509
$
3,155
Restricted cash
100
75
20
Cash, cash equivalents and restricted cash, at end of period
$
5,309
$
3,584
$
3,175
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest expense
$
280
$
175
$
159
Income taxes, net of income tax refunds
$
(25)
$
22
$
(39)
-142-
Table of Contents
26. Subsequent Events
On February 18, 2025, approval of the Merger Agreement was obtained from the Company’s shareholders and Capital One’s shareholders. For
more information, refer to the Company’s Current Report on Form 8-K filed with the SEC on February 18, 2025.
-143-
Table of Contents
Glossary of Acronyms
•
AFS: Available-For-Sale
•
AI: Artificial Intelligence
•
ALCO: Asset and Liability Management Committee
•
AOCI: Accumulated Other Comprehensive Income (Loss)
•
ASC: Accounting Standards Codification
•
ASU: Accounting Standards Update
•
ATM: Automated Teller Machine
•
BCBS: Basel Committee on Banking Supervision
•
CCAR: Comprehensive Capital Analysis and Review
•
CCPA: California Consumer Privacy Act
•
CECL: Current Expected Credit Losses
•
CEO: Chief Executive Officer
•
CET1: Common Equity Tier 1
•
CFO: Chief Financial Officer
•
CFPB: Consumer Financial Protection Bureau
•
CHCC: Compensation and Human Capital Committee
•
CIO: Chief Information Officer
•
CISO: Chief Information Security Officer
•
CODM: Chief Operating Decision Maker
•
COSO: Committee of Sponsoring Organizations of the
Treadway Commission
•
CPPA: California Privacy Protection Agency
•
CRM: Corporate Risk Management
•
CRO: Chief Risk Officer
•
DCENT: Discover Card Execution Note Trust
•
DCMT: Discover Card Master Trust I
•
DFS: Discover Financial Services
•
DRR: Designated Reserve Ratio
•
EPS: Earnings Per Share
•
ERM: Enterprise Risk Management
•
ESG: Environmental, Social and Governance
•
EWI: Early Warning Indicator
•
FASB: Financial Accounting Standards Board
•
FDIA: Federal Deposit Insurance Act
•
FDIC: Federal Deposit Insurance Corporation
•
FFIEC: Federal Financial Institutions Examination Council
•
FHLB: Federal Home Loan Bank
•
FRB: Federal Reserve Board
•
GAAP: Accounting Principles Generally Accepted in the
United States
•
GLBA: Gramm-Leach-Bliley Act
•
HTM: Held-To-Maturity
•
KRI: Key Risk Indicator
•
LFI: Large Financial Institution
•
NPI: Nonpublic Personal Information
•
OCC: Office of the Comptroller of the Currency
•
OCI: Other Comprehensive Income (Loss)
•
OFAC: Office of Foreign Assets Control
•
ORO: Operational Risk Oversight
•
PCAOB: Public Company Accounting Oversight Board
•
POS: Point-of-Sale
•
PSU: Performance Stock Unit
•
Repo: Repurchase Agreement
•
RMBS: Residential Mortgage-Backed Securities
•
RSU: Restricted Stock Unit
•
SCB: Stress Capital Buffer
•
SEC: Securities and Exchange Commission
•
SOFR: Secured Overnight Financing Rate
•
TIRC: Technology and Information Risk Committee
•
UDAAP: Unfair, Deceptive or Abusive Acts or Practices
•
U.S.: United States of America
•
U.S. GSE: Government-sponsored Enterprise of the U.S.
•
VIE: Variable Interest Entity
•
VP-ISTR: VP, Information Security and Technology Risk
-144-
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), 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 CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our CEO and CFO
concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Remediation of Previously Disclosed Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As most
recently disclosed in our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2024, our management concluded that our
disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting first disclosed in
our Form 10-K/A for the period ended December 31, 2023.
To remediate the identified material weaknesses, the Company took the following measures consistent with those disclosed within “Item 9A.
Controls and Procedures — Remediation Plan and Status” in our Form 10-K/A for the period ended December 31, 2023:
Control Environment
•
The Company appointed new individuals in key roles including the CEO and other leadership roles.
•
The Company appointed a new Head of Ethics and Conduct who is responsible for the oversight of an enterprise-wide Ethics and Conduct
Program to establish clear expectations in desired behavior.
•
The Board approved an updated consolidated Code of Conduct and Business Ethics applicable to all employees and directors. In addition,
the Board approved a new code of Ethics for Senior Financial Officers, which emphasized the importance of ethics and compliance and the
expectation that the Company’s leaders set the tone at the top.
•
The Company created a new Escalation Policy that set escalation principles and described the types of matters that should be escalated and
addressed various escalation paths, including up to the Board.
•
The Company updated the Issue Management Policy and related standard to identify, escalate and remediate issues timely.
•
The Company made improvements to the Integrity Hotline Policy to emphasize the Board and management’s support and expectation of
ethical employee conduct.
Card Product Misclassification
Management has taken the following steps to ensure the identified control deficiencies were remediated through the implementation of the
following internal control activities:
•
To address the deficiency related to the control gap in the tiering of Discover Bank-issued credit cards, we designed and implemented a
combination of manual and automated controls to mitigate the risk that credit cards are placed in incorrect pricing tiers.
-145-
Table of Contents
•
To address the deficiency related to the misapplication of GAAP, in concert with the amendments of the Company’s historical financial
statements, management performed an additional instance of the control and selected a methodology which we believe is in accordance
with GAAP.
These initiatives, together with others, have resulted in significant improvements in our internal control framework, particularly in our overall
control environment, as well as control activities related to card classification. As relevant controls have been designed, implemented, and operated for
a sufficient period of time to address the previously disclosed material weaknesses, management, including our CEO and CFO, has concluded the
material weaknesses have been remediated as of December 31, 2024.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in
Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company. Our internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of
human error, the circumvention or overriding of the system and reasonable resource constraints. Because of its inherent limitations, our internal control
over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2024. In making this assessment,
management used the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on management’s assessments and those criteria, management has concluded that our internal control over financial
reporting was effective as of December 31, 2024.
The effectiveness of our internal control over financial reporting as of December 31, 2024, has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, and the firm’s report on this matter is included in Item 8 of this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
Other than as outlined above, 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.
Item 9B. 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).
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
-146-
Table of Contents
Part III.
Part III | Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our executive officers is included under the heading “Information About Our Executive Officers” in Item 1 of this annual
report on Form 10-K. Other information required by this Item will be included in an amendment to this annual report on Form 10-K filed in accordance
with General Instructions G(3).
Our Code of Conduct and Business Ethics applies to all directors, officers and employees, including our Chief Executive Officer and our Chief
Financial Officer. You can find our Code of Conduct and Business Ethics on our internet site, www.discover.com. We will post any amendments to the
Code of Conduct and Business Ethics and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock
Exchange, on our internet site.
We have adopted an insider trading policy governing the purchase, sale, and other dispositions of the Company’s securities by the Company
and its directors, officers, and employees. A copy of the Company’s Insider Trading Policy is filed as an exhibit to this annual report on Form 10-K.
Item 11. Executive Compensation
Information required by this Item will be included in an amendment to this annual report on Form 10-K filed in accordance with General
Instructions G(3).
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information related to the compensation plans under which our equity securities are authorized for issuance as of December 31, 2024, is set
forth in the table below.
Plan Category
Number of securities to be
issued upon exercise of
outstanding warrants and
rights
Weighted-average exercise
price of outstanding warrants
and rights
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
1,587,664
N/A
39,854,192
Equity compensation plans not approved by security holders
N/A
N/A
N/A
Total
1,587,664
N/A
39,854,192
(1)
Includes 1,327,017 vested and unvested RSUs and 260,647 vested and unvested PSUs that can be converted to up to 1.5 shares per each unit dependent on the performance factor.
Other information required by this Item will be included in an amendment to this annual report on Form 10-K filed in accordance with General
Instructions G(3).
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item will be included in an amendment to this annual report on Form 10-K filed in accordance with General
Instructions G(3).
Item 14. Principal Accounting Fees and Services
Information required by this Item will be included in an amendment to this annual report on Form 10-K filed in accordance with General
Instructions G(3).
(1)
-147-
Table of Contents
Part IV.
Part IV | Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Form 10-K:
1. Consolidated Financial Statements
The consolidated financial statements required to be filed in this annual report on Form 10-K are listed below and appear on pages 84 through
143 herein.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
80
Consolidated Statements of Financial Condition as of December 31, 2024 and 2023
84
Consolidated Statements of Income for the years ended December 31, 2024, 2023 and 2022
85
Consolidated Statements of Comprehensive Income for the years ended December 31, 2024, 2023 and 2022
86
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2024, 2023 and 2022
87
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023 and 2022
88
Notes to the Consolidated Financial Statements
89
2. Financial Statement Schedules
Separate financial statement schedules have been omitted either because they are not applicable or because the required information is
included in the consolidated financial statements.
3. Exhibits
See the Exhibit Index below for a list of the exhibits being filed or furnished with or incorporated by reference into this annual report on Form 10-
K.
Exhibit Index
Exhibit
Number
Description
2.1*
Agreement and Plan of Merger, dated as of February 19, 2024, by and among Discover Financial Services, Capital One Financial
Corporation and Vega Merger Sub, Inc. (filed as Exhibit 2.1 to Discover Financial Services’ Current Report on Form 8-K filed on
February 22, 2024 and incorporated herein by reference thereto).
3.1
Restated Certificate of Incorporation of Discover Financial Services (filed as Exhibit 3.2 to Discover Financial Services’ Current
Report on Form 8-K filed on May 21, 2019 and incorporated herein by reference thereto).
3.2
Amended and Restated By-Laws of Discover Financial Services, as amended and restated on October 26, 2023 (filed as Exhibit 3.1
to Discover Financial Services’ Quarterly Report on Form 10-Q filed on October 26, 2023 and incorporated herein by reference
thereto).
3.3
Certificate of Elimination of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Discover Financial Services (filed as
Exhibit 3.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on June 26, 2012 and incorporated herein by
reference thereto).
3.4
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover
Financial Services’ Current Report on Form 8-K filed on October 16, 2012 and incorporated herein by reference thereto).
3.5
Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (filed as Exhibit 3.1 to
Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto).
-148-
Table of Contents
Exhibit
Number
Description
3.6
Certificate of Elimination of the Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover
Financial Services’ Current Report on Form 8-K filed on December 4, 2017 and incorporated herein by reference thereto).
3.7
Certificate of Designations of Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (filed as Exhibit 3.1 to Discover
Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).
4.1
Description of Discover Financial Services’ Securities.
4.2
Senior Indenture, dated as of June 12, 2007, by and between Discover Financial Services and U.S. Bank National Association, as
trustee (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 12, 2007 and incorporated
herein by reference thereto).
4.3
Subordinated Indenture, dated as of September 8, 2015, by and between Discover Financial Services and U.S. Bank National
Association (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on September 8, 2015 and
incorporated herein by reference thereto).
4.4
Second Supplemental Indenture, dated as of November 2, 2023, between the Company and U.S. Bank Trust Company, National
Association (filed as Exhibit 4.4 to Discover Financial Services’ Report on Form 10-K filed on February 23, 2024 and incorporated
herein by reference thereto).
4.5
Deposit Agreement (Series C), dated October 31, 2017 (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-
K filed on October 31, 2017 and incorporated herein by reference thereto).
4.6
Form of Certificate Representing the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (filed as Exhibit 4.2
to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto).
4.7
Deposit Agreement (Series D), dated June 22, 2020 (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K
filed on June 22, 2020 and incorporated herein by reference thereto).
4.8
Form of Certificate Representing the Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (filed as Exhibit 4.2 to
Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).
4.9
Other instruments defining the rights of holders of long-term debt securities of Discover Financial Services and its subsidiaries are
omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Discover Financial Services agrees to furnish copies of these
instruments to the SEC upon request.
10.1
Amended and Restated Trust Agreement, dated as of December 22, 2015, between Discover Funding LLC, as Beneficiary, and
Wilmington Trust Company, as Owner Trustee (filed as Exhibit 4.6 to Discover Bank’s Current Report on Form 8-K filed on December
23, 2015 and incorporated herein by reference thereto).
10.2
Third Amended and Restated Pooling and Servicing Agreement, dated as of December 22, 2015, between Discover Bank, as Master
Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.2 to
Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.3
Amended and Restated Series Supplement for Series 2007-CC, dated as of December 22, 2015, among Discover Bank, as Master
Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.3 to
Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.4†
Directors’ Compensation Plan of Discover Financial Services (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on
Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto).
10.5†
Discover Financial Services Directors’ Compensation Plan, as amended and restated as of January 20, 2011 (filed as Exhibit A to the
Discover Financial Services’ definitive proxy statement filed on February 18, 2011 and incorporated herein by reference thereto).
10.6†
Amendment No. 2 to the Discover Financial Services Directors’ Compensation Plan, effective as of December 1, 2011 (filed as Exhibit
10.10 to the Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2012 and incorporated herein by
reference thereto).
-149-
Table of Contents
Exhibit
Number
Description
10.7†
Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on
Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto).
10.8†
Amendment No. 1 to Discover Financial Services Employee Stock Purchase Plan, effective as of May 1, 2008 (filed as Exhibit 10.12
to Discover Financial Services’ Annual Report on Form 10-K filed on January 28, 2009 and incorporated herein by reference thereto).
10.9†
Amendment No. 2 to Discover Financial Services Employee Stock Purchase Plan, effective as of December 1, 2009 (filed as Exhibit
10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 9, 2010 and incorporated herein by reference
thereto).
10.10†
Amendment No. 3 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.3 to Discover Financial
Services’ Quarterly Report on Form 10-Q filed on September 28, 2011 and incorporated herein by reference thereto).
10.11
Collateral Certificate Transfer Agreement, dated as of July 26, 2007 between Discover Bank, as Depositor and Discover Card
Execution Note Trust (filed as Exhibit 4.4 to Discover Bank’s Current Report on Form 8-K filed on July 27, 2007 and incorporated
herein by reference thereto).
10.12
Amended and Restated Indenture, dated as of December 22, 2015, between Discover Card Execution Note Trust, as Issuer, and U.S.
Bank National Association, as Indenture Trustee (filed as Exhibit 4.4 to Discover Bank’s Current Report on Form 8-K filed on
December 23, 2015 and incorporated herein by reference thereto).
10.13
Second Amended and Restated Indenture Supplement for the Discover Series Notes, dated as of December 22, 2015, between
Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.5 to
Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.14
Omnibus Amendment to Indenture Supplement and Terms Documents, dated as of July 2, 2009, between Discover Card Execution
Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.1 to Discover Bank’s Current
Report on Form 8-K filed on July 6, 2009 and incorporated herein by reference thereto).
10.15†
Amendment No. 3 to the Directors’ Compensation Plan of Discover Financial Services, effective as of July 1, 2013 (filed as Exhibit
10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 30, 2013 and incorporated herein by reference
thereto).
10.16†
Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as an attachment to Discover Financial
Services’ Proxy Statement on Schedule 14A filed on March 19, 2014 and incorporated herein by reference thereto).
10.17†
Amendment No. 4 to the Directors’ Compensation Plan of Discover Financial Services, effective as of May 7, 2014 (filed as Exhibit
10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on
August 1, 2014 and incorporated herein by reference thereto).
10.18†
Amendment No. 4 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.1 to Discover Financial
Services’ Quarterly Report on Form 10-Q filed on October 29, 2015 and incorporated herein by reference thereto).
10.19
Receivables Sale and Contribution Agreement, dated as of December 22, 2015 between Discover Bank and Discover Funding LLC
(filed as Exhibit 4.1 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference
thereto).
10.20†
Amendment No. 5 to Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2017 (filed as Exhibit
10.54 to Discover Financial Services’ Annual Report on Form 10-K filed on February 23, 2017 and incorporated herein by reference
thereto).
10.21†
Form 2018 Award Certificate for Restricted Stock Units under Discover Financial Services Director’s Compensation Plan (filed as
Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by
reference thereto).
10.22†
Amendment No. 6 to the Directors’ Compensation Plan of Discover Financial Services, effective as of February 22, 2018 (filed as
Exhibit 10.5 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by
reference thereto).
-150-
Table of Contents
Exhibit
Number
Description
10.23†
Amendment No. 7 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2019 (filed as
Exhibit 10.62 to Discover Financial Services’ Annual Report on Form 10-K filed on February 20, 2019 and incorporated herein by
reference thereto).
10.24†
Amendment No. 8 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2019 (filed as
Exhibit 10.63 to Discover Financial Services’ Annual Report on Form 10-K filed on February 20, 2019 and incorporated herein by
reference thereto).
10.25†
Amendment No. 9 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2022 (filed as
Exhibit 10.58 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2022 and incorporated herein by
reference thereto).
10.26†
Amendment No. 10 to the Directors’ Compensation Plan of Discover Financial Services, effective as of December 14, 2022 (filed as
Exhibit 10.59 to Discover Financial Services’ Annual Report on Form 10-K filed on February 23, 2023 and incorporated herein by
reference thereto).
10.27†
Amendment No. 11 to the Directors’ Compensation Plan of Discover Financial Services, effective as of October 25, 2023 (filed as
Exhibit 10.43 to Discover Financial Services’ Annual Report on Form 10-K filed on February 23, 2024 and incorporated herein by
reference thereto).
10.28†
Discover Financial Services Directors’ Compensation Plan, as amended and restated effective December 12, 2024.
10.29†
Discover Financial Services Directors’ Voluntary Nonqualified Deferred Compensation Plan, effective as of April 10, 2008 (filed as
Exhibit 10.44 to Discover Financial Services’ Annual Report on Form 10-K filed on February 23, 2024 and incorporated herein by
reference thereto).
10.30†
Form 2021 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus
Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 4, 2021 and
incorporated herein by reference thereto).
10.31†
Form 2021 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus
Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 4, 2021 and
incorporated herein by reference thereto).
10.32†
Form 2022 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus
Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 28, 2022 and
incorporated herein by reference thereto).
10.33†
Form 2022 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus
Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 28, 2022 and
incorporated herein by reference thereto).
10.34†
Form 2022 Special Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014
Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 28, 2022
and incorporated herein by reference thereto).
10.35†
Form 2023 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus
Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 25, 2023 and
incorporated herein by reference thereto).
10.36†
Form 2023 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus
Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 25, 2023 and
incorporated herein by reference thereto).
10.37†
Form 2023 Special Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014
Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 25, 2023
and incorporated herein by reference thereto).
10.38†
Discover Financial Services 2023 Omnibus Incentive Plan (filed as Annex B to Discover Financial Services' Proxy Statement filed on
March 17, 2023 and incorporated herein by reference thereto).
10.39†
Form 2023 Special Award Certificate for Restricted Stock Units under Discover Financial Services 2023 Omnibus Incentive Plan (filed
as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 28, 2023 and incorporated herein by
reference thereto).
-151-
Table of Contents
Exhibit
Number
Description
10.40†
Summary of Employment Terms of John B. Owen.
10.41†
Letter Agreement, dated as of December 7, 2023 between Discover Financial Services and Michael Rhodes (filed as Exhibit 10.1 to
Discover Financial Services’ Current Report on Form 8-K filed on December 11, 2023 and incorporated herein by reference thereto).
10.42†
Form 2024 Award Certificate for Restricted Stock Units under Discover Financial Services 2023 Omnibus Incentive Plan (filed as
Exhibit 10.60 to Discover Financial Services’ Report on Form 10-K filed on February 23, 2024 and incorporated herein by reference
thereto).
10.43†
Form 2024 Award Certificate for Performance Stock Units under Discover Financial Services 2023 Omnibus Incentive Plan (filed as
Exhibit 10.61 to Discover Financial Services’ Report on Form 10-K filed on February 23, 2024 and incorporated herein by reference
thereto).
10.44†
Form 2024 Special Award Certificate for Restricted Stock Units under Discover Financial Services 2023 Omnibus Incentive Plan (filed
as Exhibit 10.62 to Discover Financial Services’ Report on Form 10-K filed on February 23, 2024 and incorporated herein by
reference thereto).
10.45†
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 (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May
1, 2024 and incorporated herein by reference thereto).
10.46†
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 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on
May 1, 2024 and incorporated herein by reference thereto).
10.47†
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 (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on
May 1, 2024 and incorporated herein by reference thereto).
10.48†
Letter Agreement with Michael G. Rhodes, dated as of March 27, 2024 between Discover Financial Services and Michael G. Rhodes
(filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on March 27, 2024 and incorporated herein by
reference thereto).
10.49†
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).
10.50†
Special Award Certificate for Restricted Stock Units under the Discover Financial Services 2023 Omnibus Incentive Plan for J.
Michael Shepherd granted on April 1, 2024 (filed as Exhibit 10.6 to Discover Financial Services’ Quarterly Report on Form 10-Q filed
on May 1, 2024 and incorporated herein by reference thereto).
10.51†
Discover Financial Services Change in Control Severance Policy, as amended and restated on May 3, 2024 (filed as Exhibit 10.1 to
Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 31, 2024 and incorporated herein by reference thereto).
10.52†
Form Merger Retention Agreement (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July
31, 2024 and incorporated herein by reference thereto).
10.53†
Purchase Agreement, dated July 17, 2024, by and between Discover Bank and Santiago Holdings, LP (filed as Exhibit 10.1 to
Discover Financial Services' Current Report on Form 8-K filed on July 17, 2024 and incorporated herein by reference thereto).
10.54†
Amendment No. 5 to Discover Financial Services Employee Stock Purchase Plan, effective August 1, 2024 (filed as Exhibit 10.1 to
Discover Financial Services’ Quarterly Report on Form 10-Q filed on December 23, 2024 and incorporated herein by reference
thereto).
10.55†
Letter Agreement, dated as of September 1, 2024, between Discover Financial Services and Hope Mehlman (filed as Exhibit 10.2 to
Discover Financial Services’ Quarterly Report on Form 10-Q filed on December 23, 2024 and incorporated herein by reference
thereto).
-152-
Table of Contents
Exhibit
Number
Description
10.56†
Amendment to Letter Agreement, dated as of November 26, 2024, between Discover Financial Services and Hope Mehlman (filed as
Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on December 23, 2024 and incorporated herein by
reference thereto).
10.57†
Form 2025 Award Certificate for Restricted Stock Units under Discover Financial Services 2023 Omnibus Incentive Plan.
10.58†
Form 2025 Special Award Certificate for Restricted Stock Units under Discover Financial Services 2023 Omnibus Incentive Plan.
10.59†
Discover Financial Services Severance Plan (Amended and Restated 2024).
10.60†
Form Acknowledgement Letter.
10.61†
Form Repayment Agreement for Certain Compensation Paid in 2024.
10.62†
Summary of Cash Award for J. Michael Shepherd.
19
Discover Financial Services’ Insider Trading Policy.
21
Subsidiaries of the Registrant.
23
Consent of Independent Registered Public Accounting Firm.
24
Powers of Attorney (included on signature page).
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.
97†
Discover Financial Services Compensation Recoupment Policy (filed as Exhibit 97 to Discover Financial Services’ Report on Form
10-K filed on February 23, 2024 and incorporated herein by reference thereto).
101
Interactive Data File — the following financial statements from Discover Financial Services Annual Report on Form 10-K formatted in
inline XBRL: (1) Consolidated Statements of Financial Condition, (2) Consolidated Statements of Income, (3) Consolidated
Statements of Comprehensive Income, (4) Consolidated Statements of Changes in Stockholders' Equity, (5) Consolidated
Statements of Cash Flows and (6) Notes to the Consolidated Financial Statements.
104
Cover Page Interactive Data File — the cover page from Discover Financial Services Annual Report on Form 10-K formatted in inline
XBRL and contained in Exhibit 101.
* Exhibits and schedules have been omitted pursuant to Items 601(a)(5) or 601(b)(2) of Regulation S-K. A copy of any omitted exhibit or schedule will be furnished supplementally to the SEC upon request; provided,
however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any document so furnished.
† Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 15(b) of this report.
Item 16. Form 10-K Summary
None.
-153-
Table of Contents
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Discover Financial Services
(Registrant)
By:
/s/ JOHN T. GREENE
John T. Greene
Executive Vice President, Chief Financial Officer
Date: February 20, 2025
-154-
Table of Contents
Power of Attorney
We, the undersigned, hereby severally constitute Kelly R. Welsh, Piers A. Fennell and Efie Vainikos, and each of them singly, our true and lawful
attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the
annual report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys to any and all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on February 20, 2025.
Signature
Title
/s/ J. MICHAEL SHEPHERD
Interim Chief Executive Officer and President, Director
J. Michael Shepherd
/s/ JOHN T. GREENE
Executive Vice President, Chief Financial Officer (Principal Financial Officer)
John T. Greene
/s/ SHIFRA C. KOLSKY
Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)
Shifra C. Kolsky
/s/ THOMAS G. MAHERAS
Chairman of the Board
Thomas G. Maheras
/s/ CANDACE H. DUNCAN
Director
Candace H. Duncan
/s/ JOSEPH F. EAZOR
Director
Joseph F. Eazor
/s/ KATHY L. LONOWSKI
Director
Kathy L. Lonowski
/s/ DANIELA O’LEARY-GILL
Director
Daniela O’Leary-Gill
/s/ JOHN B. OWEN
Director
John B. Owen
/s/ DAVID L. RAWLINSON II
Director
David L. Rawlinson II
/s/ BEVERLEY A. SIBBLIES
Director
Beverley A. Sibblies
/s/ JENNIFER L. WONG
Director
Jennifer L. Wong
-155-
Exhibit 4.1
DESCRIPTION OF SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF
THE SECURITIES EXCHANGE ACT OF 1934
The following summary describes our common stock, par value $0.01 per share, of Discover Financial Services, which is
the only security of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934. In this summary,
the terms “we” and “our” refer to Discover Financial Services and its consolidated subsidiaries, unless the context requires
otherwise.
DESCRIPTION OF COMMON STOCK
The summary describes the material terms of our common stock and is not complete. This summary is qualified in its
entirety by reference to applicable Delaware law, our amended and restated certificate of incorporation (our “Certificate of
Incorporation”) and our amended and restated bylaws (our “Bylaws”). For a complete description of our common stock, we
refer you to our Certificate of Incorporation and Bylaws, which have been filed with the Securities and Exchange Commission
and are incorporated by reference as exhibits to this Annual Report on Form 10-K.
Authorized Capitalization
Our authorized common stock consists of 2,000,000,000 shares of common stock, par value $0.01 per share, and
200,000,000 shares of preferred stock, par value $0.01 per share. The preferred stock is issuable in one or more series, with
rights, preferences, and privileges as established by the Board of Directors of the Company without stockholder approval,
including voting, dividend, redemption, liquidation, conversion and other rights. As of December 31, 2024, 251,339,484
shares of our common stock were outstanding, and 5,700 shares of our Series C and 5,000 shares of our Series D preferred
stock (together with our Series C preferred stock, our "Existing Preferred Stock") were outstanding.
Description of Common Stock
General. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of our preferred stock, including our Existing Preferred Stock.
Voting Rights. Except as otherwise may be provided in our Certificate of Incorporation or in a certificate of designation
for any series of preferred stock, the holders of our common stock are entitled to one vote per share on all matters to be
voted on by stockholders. Subject to the rights of holder of each series of our Existing Preferred Stock to elect two additional
members of our Board if we fail to pay, or declare and set apart for payment, dividends on outstanding shares of such series
of our Existing Preferred Stock for six quarterly dividend periods, holders of common stock have the exclusive right to vote for
the election of directors and for all other purposes. Holders of shares of common stock are not entitled to cumulate their votes
in the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority of the votes
entitled to be cast by the holders of common stock present in person or represented by proxy, voting together as a single
class, subject to any voting rights granted to holders of any preferred stock.
Dividend Rights. Holders of common stock will share equally on a pro rata basis in any dividends as may be declared by
our board of directors out of funds legally available for that
purpose, subject to any preferential rights of holders of any outstanding shares of preferred stock, including the rights of the
holders of our Existing Preferred Stock to non-cumulative cash dividends based on their respective liquidation preferences
and at the applicable dividend rate, and any other class or series of stock having preference over the common stock as to
dividends. While either series of Existing Preferred Stock is outstanding, unless the full dividends for the preceding dividend
period on all outstanding shares of Existing Preferred Stock has been declared and paid or declared and a sum sufficient for
the payment thereof has been set aside, subject to certain exceptions, no dividends will be declared or paid or set aside for
payment and no distribution will be declared or made or set aside for payment on any stock junior to the Existing Preferred
Stock (including or common stock) and no shares of the junior stock shall be repurchased, redeemed or otherwise
repurchased by us, subject to certain exceptions.
Preemptive Rights. No shares of common stock are subject to redemption or have preemptive rights to purchase
additional shares of common stock or other securities of our company. There are no other subscription rights or conversion
rights, and there are no sinking fund provisions applicable to our common stock.
Other Rights. Upon voluntary or involuntary liquidation, dissolution or winding up of our company, after payment in full of
the amounts required to be paid to creditors and holders of any preferred stock, including our Existing Preferred Stock, that
may be then outstanding, all holders of common stock are entitled to share equally on a pro rata basis in all remaining assets.
As of December 31, 2024, the aggregate liquidation preference of our Existing Preferred Stock was $1,070,000,000.
Listing. Our shares of common stock are listed on the New York Stock Exchange under the ticker “DFS.”
Transfer Agent and Registrar. The transfer agent and registrar for our common stock is Computershare.
Anti-Takeover Effects of Our Amended and Restated Certificate of Incorporation and Bylaws, Delaware Law and
Federal Banking Law
Some provisions of Delaware law and our Certificate of Incorporation and Bylaws could make the following more difficult:
•
acquisition of us by means of a tender offer or merger;
•
acquisition of us by means of a proxy contest or otherwise; or
•
removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover
bids. These provisions also are designed to encourage persons seeking to acquire control of us to first negotiate with our
board of directors. We believe that the benefits of the potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure our company outweigh the disadvantages of discouraging those proposals
because negotiation of them could result in an improvement of their terms.
Stockholder Action by Written Consent. Subject to the rights of holders of any series of preferred stock or any other
series or class of stock, any action required or permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of stockholders and may not be effected by any consent in writing in lieu of a meeting.
Amendments to our Governing Documents. The amendment of any provision of our Certificate of Incorporation requires
approval by our board of directors and a majority vote of stockholders. Any amendment to our bylaws requires the approval of
either a majority of our board of directors or holders of a majority of the voting power of the then outstanding shares of our
company entitled to vote generally in the election of our board of directors.
Stockholder Meetings. Our Bylaws provide that, subject to the rights of holders of any series of preferred stock or any
other series or class of stock as set forth in our Certificate of Incorporation, special meetings of our stockholders may be
called only by our secretary at the direction of and pursuant to a resolution of our board of directors or at the written request
of stockholders who have, or who are acting on behalf of beneficial owners who have, an aggregate “net long position” of at
least 25% of the common stock as of the ownership record date and who otherwise comply with the requirements of our
bylaws; provided that each such stockholder, or beneficial owner directing such stockholder, must have held such “net long
position” included in such aggregate amount continuously for the one-year period ending on the ownership record date and
must continue to hold such "net long position" through the date of the conclusion of the special meeting.
Requirements for Advance Notification of Stockholder Nominations and Proposals. Our Bylaws establish advance notice
procedures with respect to stockholder proposals and nomination of candidates for election as directors.
Delaware Anti-Takeover Law. Our Certificate of Incorporation does not exempt us from the application of Section 203 of
the Delaware General Corporation Law, an anti-takeover law.
In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an
interested stockholder for a period of three years following the date the person became an interested stockholder, unless the
business combination or the transaction in which the person became an interested stockholder is approved in a prescribed
manner. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. Generally, an “interested stockholder” is a person that, together with affiliates
and associates, owns, or within three years prior to the determination of interested stockholder status, did own, 15% or more
of a corporation’s voting stock. This may have an anti-takeover effect with respect to transactions not approved in advance by
our board of directors, including discouraging attempts that might result in a premium over the market price for the shares of
our common stock.
No Cumulative Voting. Our amended and restated certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors.
Undesignated Preferred Stock. The authorization of our undesignated preferred stock makes it possible for our board of
directors to issue our preferred stock with voting or other rights or preferences that could impede the success of any attempt
to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes of
control of our management.
Federal Banking Law. The Change in Bank Control Act of 1978, as amended, prohibits a person or group of persons
from acquiring “control” of a bank holding company unless:
•
the Federal Reserve has been given 60 days’ prior written notice of such proposed acquisition containing the
information requested by the Federal Reserve; and
•
within that time period the Federal Reserve has not issued a notice disapproving the
proposed acquisition or extending the period during which such a disapproval may be issued.
An acquisition may be made prior to the expiration of the disapproval period if the Federal Reserve issues written notice
of its intent not to disapprove the action. An acquirer is conclusively deemed to have acquired control if it owns, controls, or
has the power to vote 25 percent or more of a class of voting securities. In addition, under a rebuttable presumption
established by the Federal Reserve, the acquisition of 10% or more of a class of voting securities of a bank holding company
with securities registered under Section 12 of the Exchange Act, such as us, would be presumed to constitute the acquisition
of control. In addition, any “company” would be required to obtain the approval of the Federal Reserve under the Bank
Holding Company Act of 1956, as amended, before acquiring 25% (5% in the case of an acquiror that is, or is deemed to be,
a bank holding company) or more of any class of voting securities, or a lesser number of shares if the acquirer otherwise is
deemed to have control over us by the Federal Reserve, and may be subject to ongoing regulation and supervision as a bank
holding company.
Exhibit 10.28
DISCOVER FINANCIAL SERVICES
DIRECTORS’ COMPENSATION PLAN
Amended and Restated Effective December 12, 2024
Section 1. Purpose
Discover Financial Services, a Delaware corporation (the “Company”), hereby adopts the Discover Financial Services Directors’
Compensation Plan (the “Plan”). The purpose of the Plan is to set forth the annual compensation for non-employee directors and to
promote the long-term growth and financial success of the Company by attracting, motivating, and retaining non-employee directors of
outstanding ability and assisting the Company in promoting a greater identity of interest between the Company’s non-employee directors
and its stockholders.
Capitalized terms used herein without definition have the meanings ascribed thereto in Section 20.
Section 2. Eligibility
Only directors of the Company who are not employees of the Company or any affiliate of the Company (the “Eligible Directors”) are
eligible to participate in the Plan; provided, that if any director becomes an employee after beginning to participate in the Plan and while
continuing to serve as a director, such director shall remain an Eligible Director.
Section 3. Plan Operation
a.
Administration. The Plan requires no discretionary action by any administrative body with regard to any transaction under the
Plan. To the extent, if any, that questions of administration arise, these shall be resolved by the Board. The Board may, in its
discretion, delegate to the Chief Financial Officer, the Chief Legal Officer, the Secretary of the Company or to one or more officers
of the Company any or all authority and responsibility to act pursuant to the Plan. All references to the “Plan Administrators” in
the Plan shall refer to the Board, or the Chief Financial Officer, the Chief Legal Officer, the Secretary or to one or more officers of
the Company if the Board has delegated its authority pursuant to this Section 3(a). The determination of the Plan Administrators on
all matters within their authority relating to the Plan shall be conclusive.
b. No Liability. The Plan Administrators shall not be liable for any action or determination made in good faith with respect to the Plan
or any award hereunder, and the Company shall indemnify and hold harmless the Plan Administrators from all losses and expenses
(including reasonable attorneys’ fees) arising from the assertion or judicial determination of any such liability.
Section 4. Shares of Stock Subject to the Plan
a.
Stock. Awards under the Plan shall relate to shares of Stock.
b. Shares Available for Awards. Subject to Section 4(c) (relating to adjustments upon changes in capitalization), as of any date the
total number of shares of Stock with respect to which awards may be granted under the Plan shall be equal to the excess (if any) of
(i) 1,000,000 shares over (ii) the sum of (A) the number of shares subject to outstanding awards granted under the Plan, and (B) the
number of shares previously issued pursuant to the Plan. In accordance with (and without limitation upon) the preceding sentence,
shares of Stock covered by awards granted under the Plan that are canceled or expire unexercised shall again become available for
awards under the Plan. Shares of Stock that are issuable pursuant to the awards granted under the Plan shall be authorized and
unissued shares, treasury shares or shares of Stock purchased by, or on behalf of, the Company in open-market transactions.
c.
Adjustments. In the event of any merger, reorganization, recapitalization, consolidation, sale or other distribution of substantially
all of the assets of the Company, any stock dividend, split, spin-off, split-up, split-off, distribution of cash, securities or other
property by the Company, or other change in the Company’s corporate structure affecting the Stock, then the following shall be
automatically adjusted in order to prevent dilution or enlargement of the benefits or potential benefits intended to be awarded
under the Plan:
i.
the aggregate number of shares of Stock reserved for issuance under the Plan,
ii. the number and, if applicable, type of shares of Stock subject to outstanding awards,
iii. the number of Restricted Stock Units credited pursuant to Section 5(a) of the Plan, and
iv. the number of shares to be granted pursuant to any other automatic awards that may be provided for under the Plan in the
future.
d. Types of Awards. The Company’s stockholders approved the Plan on June 13, 2007. The types of awards authorized by the
stockholders under the Plan are Retainers and Restricted Stock Units.
Section 5. Initial and Annual Awards of Restricted Stock Units
a.
Awards Granted
i.
Initial Awards. A person who becomes an Eligible Director prior to December 31, 2007 shall be entitled to receive a
number of Restricted Stock Units equal to the number obtained by dividing $350,000 by the Fair Market Value of a share
of Stock on the date of grant; provided, that if such a person is elected, appointed or otherwise becomes an Eligible
Director after the date of the spin-off of the Company from Morgan Stanley, the initial equity award provided for in this
Section 5(a)(i) shall be adjusted on a pro-rata basis by multiplying such award by a fraction where the numerator is twenty-
four (24) minus the number of months
between the date of such spin-off and the date that such person becomes an Eligible Director and the denominator is
twenty-four (24).
ii. Subsequent Awards. As of the date of each Annual Meeting, each Eligible Director, including, without limitation, any
Eligible Director who becomes a member of the Board by reason of being elected to the Board at such Annual Meeting,
shall be entitled to receive a number of Restricted Stock Units equal to the number obtained by dividing $190,000 by the
Fair Market Value of a share of Stock on such day; provided, that such Eligible Director continues to serve as a director of
the Company after such Annual Meeting. Notwithstanding the foregoing, if a person becomes an Eligible Director on a date
other than the date of an Annual Meeting, the equity award provided for in this Section 5(a)(ii) shall be granted on the date
that such person becomes an Eligible Director, using the Fair Market Value of a share of Stock on such date; provided, that
such award shall be adjusted on a pro-rata basis by multiplying such award by a fraction where the numerator is the number
of months between the date that such person becomes an Eligible Director and the date of the next Annual Meeting and the
denominator is twelve (12).
b. Agreements. Each Restricted Stock Unit granted pursuant to this Section 5 shall be evidenced by an agreement in such form as the
Plan Administrators prescribes from time to time and shall comply with the following terms and conditions:
i.
Restriction Period. Restricted Stock Units granted pursuant to Section 5(a)(i) shall be subject to a restriction period
whereby 50% of such units shall vest on the first anniversary of the date of grant and the remaining units shall vest on the
second anniversary of the date of grant. Each grant of Restricted Stock Units pursuant to Section 5(a)(ii) shall vest on the
earlier of the first anniversary of the date of grant or immediately prior to the first annual meeting of shareholders following
the date of grant. Notwithstanding the foregoing, the Plan Administrators, in their discretion, may specify in the agreement
circumstances under which the award shall become immediately transferable and nonforfeitable or under which the award
shall be forfeited.
ii. Effect of Termination. Unless provided otherwise in the applicable agreement, if an Eligible Director’s service as a director
of the Company terminates for a reason other than for Cause, then any Restricted Stock Unit granted to such Eligible
Director shall vest following the date of such Eligible Director’s termination of service in accordance with the following
provisions:
A. Disability or Death. If an Eligible Director’s service terminates by reason of Disability or death, all Restricted Stock
Units granted under the Plan to such Eligible Director shall become fully vested.
B. Other. If an Eligible Director’s service terminates for any other reason, all Restricted Stock Units granted under the
Plan to such Eligible Director shall be immediately cancelled and forfeited.
iii. Effect of Change in Control. Unless provided otherwise in the applicable agreement, all Restricted Stock Units granted
under the Plan to an Eligible Director shall become fully vested upon a Change in Control.
iv. Rights and Provisions Applicable to Restricted Stock Units. The agreement relating to a Restricted Stock Unit shall specify
whether the holder thereof shall be entitled to receive, on a current or deferred basis, dividend equivalents, or the deemed
reinvestment of any deferred dividend equivalents, with respect to the number of shares of common stock subject to such
award. Prior to the settlement of a Restricted Stock Unit, the holder thereof shall not have any rights as a stockholder of the
Company with respect to the shares of Stock subject to such award, except to the extent that the Plan Administrators, in
their sole discretion, may grant dividend equivalents on Restricted Stock Units which are settled in shares of Stock. No
shares of Stock and no certificates or other indicia of ownership representing shares of Stock that are subject to a Restricted
Stock Unit shall be issued upon the grant of a Restricted Stock Unit. Instead, shares of Stock subject to Restricted Stock
Units and the certificates or other indicia of ownership representing such shares of Stock shall be distributed only at the
time of settlement of such Restricted Stock Units in accordance with the terms and conditions of this Plan and the
agreements relating to such Restricted Stock Units.
c.
Limitation on Transfer. Restricted Stock Units may not be sold, transferred, pledged, assigned, or otherwise conveyed by an
Eligible Director.
d. Deferral of Awards. Each Eligible Director may elect to defer an award of Restricted Stock Units in accordance with Section 6.
Section 6. Deferral Elections
a.
Deferral Procedures. The Plan Administrators may permit the deferral of any Retainer or award granted under this Plan, subject to
the rules and procedures as it may establish, in accordance with the requirements of Section 409A of the Internal Revenue Code of
1986, as amended, (the “Code”) and the regulations promulgated thereunder (“Section 409A”) or other applicable law, and which
may include provisions for the payment or crediting of dividend equivalents, on a current or deferred basis, or the deemed
reinvestment of any deferred dividend equivalents, with respect to the number of shares Stock subject to such award.
b. Time and Form of Payment for RSU Deferrals. Subject to Section 6(c), any award of Restricted Stock Units which is deferred in
accordance with the rules and procedures described in Section 6(a), to the extent vested, will be paid out in a single distribution of
Stock within seventy-five (75) days of the date the Eligible Director separates from service with the Board; provided, that in no
event will the Eligible Director have the right to designate the taxable year of payment.
c.
Section 409A. This Plan shall be interpreted to ensure that the payments contemplated hereby are exempt from, or comply with,
Section 409A; provided, that nothing in this Plan shall be interpreted or construed to transfer any liability for any tax (including a
tax
or penalty due as a result of a failure to comply with Section 409A) from the Eligible Director to the Company or to any other
individual or entity. Notwithstanding Section 6(b) above, if the Eligible Director is a “Specified Employee” (as defined in Section
409A) as of the date of the Eligible Director’s separation from service, distribution of the Eligible Director’s deferrals will
commence on or as soon as administratively practicable following the date that is six (6) months after the Eligible Director’s
separation from service, except to the extent earlier payment is permitted by Section 409A. Any payment by the Company to the
Eligible Director under this Plan that is subject to Section 409A and that is contingent on a separation from service, termination of
employment, or other similar term is contingent on a “separation from service” within the meaning of Section 409A.
Section 7. Retainer and Other Fees
a.
Board Members. Each Eligible Director shall be entitled to an Annual Retainer of $105,000.
b. Independent Chair and Committee Chairpersons. Effective January 1, 2024, each Eligible Director who is the (i) Independent
Chair shall be entitled to an annual retainer of $210,000; (ii) Audit Committee Chair shall be entitled to an annual Committee
Chair fee of $45,000; (iii) Compensation and Leadership Development Committee Chair shall be entitled to an annual Committee
Chair fee of $30,000; (iv) Nominating, Governance and Public Responsibility Committee Chair shall be entitled to an annual
Committee Chair fee of $25,000; and (v) Risk Oversight Committee Chair shall be entitled to an annual Committee Chair fee of
$40,000. Effective October 25, 2023, the Eligible Director who served as the Audit Committee Chair as of such date shall be
entitled to an additional one-time fee of $35,000.
c.
Committee Members. Effective January 1, 2024, each Eligible Director, other than the Committee Chairperson, of the (i) Audit
Committee shall be entitled to an annual Committee Member fee of $20,000; (ii) Compensation and Leadership Development
Committee shall be entitled to an annual Committee Member fee of $15,000; (iii) Nominating, Governance and Public
Responsibility Committee shall be entitled to an annual Committee Member fee of $15,000; and (iv) Risk Oversight Committee
shall be entitled to an annual Committee Member fee of $20,000. Effective October 25, 2023, the following Eligible Directors,
other than the Committee Chairperson of the Audit Committee, shall be entitled to an additional one-time fee of $30,000: (A) each
Eligible Director of the Audit Committee as of October 25, 2023, and (B) each Eligible Director who does not qualify under
subsection (A) but served on the Audit Committee as of May 12, 2023.
d. Reserved.
e.
Special Committee. In addition to the Annual Retainer and fees provided for in Section 7(a) through Section 7(c) above, each
Eligible Director who is a Member of the Special Committee formed on June 16, 2022, shall be entitled to a one-time committee
member fee of $20,000.
f.
Special Committee 2023. In addition to the annual retainer and fees provided for in Section 7(a) through Section 7(e) above,
effective as of July 1, 2023, the Eligible Director who is the Chair of the Special Committee formed on June 30, 2023, shall be
entitled to an annual Committee Chair fee of $30,000, and each Eligible Director, other than the Committee Chairperson, of such
Special Committee shall be entitled to an annual Committee Member fee of $20,000.
g. Meeting Fees. Effective January 1, 2024, each Eligible Director of the (i) Board shall be entitled to an additional fee of $1,500 for
each Board meeting held in excess of twelve (12) meetings in a calendar year; (ii) Audit Committee shall be entitled to an
additional fee of $1,500 for each Audit Committee meeting held in excess of twelve (12) meetings in a calendar year; (iii)
Compensation and Leadership Development Committee shall be entitled to an additional fee of $1,500 for each Compensation and
Leadership Development Committee meeting held in excess of ten (10) meetings in a calendar year; (iv) Nominating, Governance
and Public Responsibility Committee shall be entitled to an additional fee of $1,500 for each Nominating, Governance and Public
Responsibility Committee meeting held in excess of ten (10) meetings in a calendar year; (v) Risk Oversight Committee shall be
entitled to an additional fee of $1,500 for each Risk Oversight Committee meeting held in excess of ten (10) meetings in a calendar
year; and (vi) Special Committee 2023 shall be entitled to an additional fee of $1,500 for each Special Committee 2023 meeting
held in excess of twelve (12) meetings in a calendar year.
h. Timing of Payment. The Annual Retainer and other fees provided for in this Section 7 will be paid to the Eligible Director by no
later than March 15th of the year after the year in which the applicable fees are earned unless the Eligible Director timely elects to
defer the fees under the Discover Financial Services Directors’ Voluntary Nonqualified Deferred Compensation Plan or any other
deferral plan or procedures established by the Board.
Section 8. Fair Market Value
“Fair Market Value” shall mean, with respect to each share of Stock for any day:
a.
if the Stock is listed for trading on the New York Stock Exchange, the closing price, regular way, of the Stock as reported on the
New York Stock Exchange Composite Tape, rounded up to the nearest whole cent, or if no such reported sale of the Stock has
occurred on such date, on the most recent date such a reported sale occurred; or
b. if the Stock is not so listed, but is listed on another national securities exchange or on the Nasdaq Global Market (“Nasdaq”), the
closing price, regular way, of the Stock on such exchange or Nasdaq, rounded up to the nearest whole cent, as the case may be, on
the date on which the largest number of shares of Stock have been traded in the aggregate on the preceding twenty trading days, or,
if no such reported sale of the Stock has occurred on such date on such exchange or Nasdaq, as the case may be, on the most recent
date on which such a reported sale occurred on such exchange or Nasdaq, as the case may be; or
c.
if the Stock is not listed for trading on a national securities exchange or Nasdaq, the average of the closing bid and ask prices as
reported by the National Association of Securities Dealers, rounded up to the nearest whole cent, or, if no such prices shall have
been so reported for such date, on the most recent date for which such prices were so reported.
Section 9. Issuance of Stock
a.
Restrictions on Transferability. All shares of Stock delivered under the Plan shall be subject to such stop-transfer orders and other
restrictions as the Company may deem advisable or legally necessary under any applicable laws, statutes, rules, regulations, and
other legal requirements, including, without limitation, those of any stock exchange upon which the Stock is then listed and any
applicable federal, state, or foreign securities law.
b. Compliance with Laws. Anything to the contrary herein notwithstanding, the Company shall not be required to issue any shares of
Stock under the Plan if, in the opinion of legal counsel to the Company, the issuance and delivery of such shares would constitute a
violation by the Eligible Director or the Company of any applicable law or regulation of any governmental authority, including,
without limitation, federal and state securities laws, or the regulations of any stock exchanges on which the Company’s securities
may then be listed.
Section 10. Withholding Taxes
The Company may require as a condition of delivery of any shares of Stock that the Eligible Director remit (a) in cash, (b) by tendering
(or attesting to the ownership of) shares of Stock, where the Company determines such action will not result in unfavorable accounting
treatment, or (c) by the Company withholding shares of Stock, an amount sufficient to satisfy all applicable foreign, federal, state, local
and other governmental withholding tax requirements relating thereto (if any) and any or all indebtedness or other obligation of the
Eligible Director to the Company or any of its subsidiaries. Any shares tendered or withheld pursuant to this Section 10 will be valued at
Fair Market Value on the relevant payment or exercise date, as applicable.
Section 11. Plan Amendments and Termination
The Board may suspend or terminate the Plan at any time, in whole or in part. Termination of the Plan shall not adversely affect the rights
of Eligible Directors with respect to outstanding awards granted pursuant to this Plan.
The Board may also alter, amend, or modify the Plan at any time. These amendments may include (but are not limited to) changes that the
Board considers necessary or advisable as a result of changes in, or the adoption or interpretation of, any law, regulation, ruling, judicial
decision or accounting standards (collectively, “Legal Requirements”). The Board may not amend or modify the Plan in a manner that
would materially impair an Eligible Director’s rights in any outstanding award granted pursuant to this Plan without the Eligible
Director’s consent; provided, that the Board may, without an Eligible Director’s consent, amend or modify the Plan in any manner that it
considers necessary or advisable to comply with any Legal Requirement or
to ensure that awards granted pursuant to the Plan are not subject to Federal, state or local income tax prior to payment.
Notwithstanding the foregoing, if any provision of this Plan would, in the reasonable, good faith judgment of the Company, result in or
likely result in the imposition on any Eligible Director or any other person of any tax, interest or penalty under Section 409A of the Code,
the Company may unilaterally amend or reform this Plan or any provision hereof, without the consent of any Eligible Director, in the
manner that the Company reasonably and in good faith determines to be necessary or advisable to avoid the imposition of such tax,
interest or penalty; provided, that any such amendment or reformation shall, to the maximum extent the Company reasonably and in good
faith determines to be possible, retain the economic and tax benefits to the Eligible Directors hereunder while not materially increasing the
cost to the Company of providing such benefits to the Eligible Directors.
Section 12. Listing, Registration and Legal Compliance
If the Plan Administrators at any time determine that any Consent (as hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any award under the Plan, the issuance or purchase of shares or other rights hereunder or the taking of any
other action hereunder (each such action being hereinafter referred to as a “Plan Action”), then such Plan Action shall not be taken, in
whole or in part, unless and until such Consent has been effected or obtained. The term “Consent” as used herein with respect to any Plan
Action means (a) the listing, registrations or qualifications in respect thereof upon any securities exchange or under any foreign, federal,
state or local law, rule or regulation, (b) any and all consents, clearances and approvals in respect of a Plan Action by any governmental or
other regulatory bodies, or (c) any and all written agreements and representations by an Eligible Director with respect to the disposition of
Stock or with respect to any other matter, which the Plan Administrators deems necessary or desirable in order to comply with the terms of
any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or
registration be made.
Section 13. Right Reserved
Nothing in the Plan shall confer upon any Eligible Director the right to continue as a director of the Company or affect any right that the
Company or any Eligible Director may have to terminate the service of such Eligible Director.
Section 14. Rights as a Stockholder
An Eligible Director shall not, by reason of any Restricted Stock Unit or any other award hereunder, have any rights as a stockholder of
the Company until Stock has been issued to such Eligible Director.
Section 15. Unfunded Plan
The Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish
any fiduciary relationship between the Company and any Eligible Director or other person. To the extent any person holds any rights by
virtue of a
pending grant or deferral under the Plan, such rights shall be no greater than the rights of an unsecured general creditor of the Company.
Section 16. Governing Law
The Plan shall be governed by the laws of the State of Delaware applicable to agreements made and to be performed entirely within such
state.
Section 17. Severability
If any part of the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall
not invalidate any portion of the Plan not declared to be unlawful or invalid. Any Section or part of a Section so declared to be unlawful or
invalid shall, if possible, be construed in a manner that will give effect to the terms of such Section or part of a Section to the fullest extent
possible while remaining lawful and valid.
Section 18. Notices
All notices and other communications hereunder shall be given in writing and shall be deemed given when personally delivered against
receipt or five days after having been mailed by registered or certified mail, postage prepaid, return receipt requested, addressed as
follows; (a) if to the Company: Discover Financial Services, 2500 Lake Cook Road, Riverwoods, IL 60015, Attention: Corporate
Secretary; and (b) if to an Eligible Director, at the Eligible Director’s principal residential address last furnished to the Company. Either
party may, by notice, change the address to which notice to such party is to be given.
Section 19. Section Headings
The Section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of said
Sections.
Section 20. Definitions
As used in the Plan, the following terms shall have the meanings indicated below:
a.
“Annual Meeting” means an annual meeting of the Company’s stockholders.
b. “Annual Retainer” means an annual cash retainer for services as a member of the Board.
c.
“Board” means the board of directors of the Company.
d. “Cause” means, with respect to any Eligible Director termination of service on the Board on account of any act of (i) fraud or
intentional misrepresentation, or (ii) embezzlement, misappropriation or conversion of assets or opportunities of the Company or
any affiliate.
e.
“Change in Control” means, except as provided otherwise below, the first to occur of any of the following events:
i.
any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as
such term is modified in Sections 13(d) and 14(d) of the Exchange Act), other than (A) any employee plan established by
the Company or any of its subsidiaries, (B) any group of employees holding shares subject to agreements relating to the
voting of such shares, (C) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange
Act), (D) an underwriter temporarily holding securities pursuant to an offering of such securities, or (E) a corporation
owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of
the Company, is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such person any securities acquired directly from the Company or its affiliates other than
in connection with the acquisition by the Company or its affiliates of a business) representing 30% or more of either the
total fair market value or total voting power of the stock of the Company;
ii. a change in the composition of the Board such that individuals who, as of the date of the award, constitute the Board (the
“Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, that any individual
becoming a member of the Board subsequent to the date of the award whose election, or nomination for election by the
Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest
with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on
behalf of a person other than the Board;
iii. the consummation of a merger or consolidation of the Company with any other corporation or other entity, or the issuance
of voting securities in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the
Company) pursuant to applicable stock exchange requirements, other than (A) a merger or consolidation which results in
the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with
the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of
its subsidiaries, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity
or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger of consolidation effected
to implement a recapitalization of the Company (or similar transaction) in which no person (determined pursuant to Section
20(e)(i) above) is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such person any securities acquired directly from the Company or its affiliates other than
in connection with the acquisition by the Company or its affiliates of a business) representing 30% or more of either the
then outstanding shares of the Company’s
common stock or the combined voting power of the Company’s then outstanding voting securities; or
iv. the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the
Company of all or substantially all of the Company’s assets to an entity, at least 50% of the combined voting power of the
voting securities of which are owned by persons in substantially the same proportions as their ownership of the Company
immediately prior to such sale.
Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or
series of integrated transactions immediately following which the record holders of the Company’s common stock immediately prior
to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns
substantially all of the assets of the Company immediately prior to such transaction or series of transactions.
f.
“Code” has the meaning set forth in Section 6.
g. “Committee Retainer” means an annual cash retainer for services as a member of any committee of the Board.
h. “Company” has the meaning set forth in Section 1.
i.
“Consent” has the meaning set forth in Section 12.
j.
“Disability” means a “permanent and total disability” as defined in Section 22(e)(3) of the Code.
k. “Eligible Directors” has the meaning set forth in Section 2.
l.
“Exchange Act” has the meaning set for in Section 20.
m. “Fair Market Value” has the meaning set forth in Section 8.
n. “Incumbent Board” has the meaning set forth in Section 20.
o. “Lead Director Retainer” means an annual cash retainer for services as the lead director of the Board.
p. “Legal Requirements” has the meaning set forth in Section 11.
q. “Nasdaq” has the meaning set forth in Section 8.
r.
“Normal Retirement” means the termination of service on the Board for retirement at or after attaining age 65, other than
termination for Cause, Disability, or death.
s.
“Plan” has the meaning set forth in Section 1.
t.
“Plan Action” has the meaning set forth in Section 12.
u. “Restricted Stock Units” means the right to receive one share of Stock or the Fair Market Value thereof in cash for each unit
awarded subject to the expiration of a specified restriction period and subject to any additional restrictions that may be contained in
the agreement relating thereto.
v. “Retainer” means the Annual Retainer, the Committee Retainer and/or the Lead Director Retainer, as applicable.
w. “Section 409A” has the meaning set forth in Section 6(a).
x. “Specified Employee” has the meaning set forth in Section 6(c).
y. “Stock” means the Company’s common stock, par value $0.01 per share, and any other shares into which such stock shall
thereafter be changed by reason of any merger, reorganization, recapitalization, consolidation, split-up, combination of shares or
similar event as set forth in and in accordance with Section 4.
Exhibit 10.40
Summary of Employment Terms of John B. Owen
On August 13, 2023, the Board of Directors (the “Board”) of Discover Financial Services (the “Company”) appointed John B. Owen as
Interim Chief Executive Officer and Interim President of the Company and Interim President of Discover Bank, effective August 14, 2023.
In connection therewith, the following compensation arrangements were approved:
1. Base salary of $950,000, to be paid in accordance with the Company’s ordinary payroll practices beginning August 15, 2023; and
2. A special restricted stock unit award with a value of $500,000, to vest on the earlier of (i) the date on which the Company’s
permanent successor to Mr. Owen’s predecessor begins employment and (2) the one-year anniversary of the award’s grant date.
Exhibit 10.57
Discover Financial Services
2023 Omnibus Incentive Plan
2025 Award Certificate for Restricted Stock Units
This Award Certificate describes the terms and conditions under which you are being granted an Award of Restricted Stock Units (“RSUs”) under the
Discover Financial Services 2023 Omnibus Incentive Plan (the “Plan”), which constitutes part of your discretionary long-term incentive compensation.
This Award Certificate applies only to Awards granted hereunder and other Awards are governed by terms of the applicable Award Certificate.
A copy of the Plan can be found on the E*TRADE website at www.etrade.com, or such other vendor as the Company may choose to administer the
Plan. Capitalized terms under this Award Certificate have the meanings ascribed in the Plan unless otherwise stated herein.
The full terms of your Award are set out in this Award Certificate, the Plan and any applicable policy adopted by the Committee or its delegate in
respect of the Plan and Awards thereunder that is applicable to this Award. In the event of a conflict between the Plan and this Award Certificate, the
terms of the Plan control.
Award Recipient
%%FIRST_NAME%-% %%LAST_NAME%-%
Employee / Participant
ID
%%EMPLOYEE_IDENTIFIER%-%
Issuer
Discover Financial Services
Award Type
Restricted Stock Units (RSUs)
Date of the Award
%%OPTION_DATE,'Month DD, YYYY'%-%
Number of Awarded
Units
%%TOTAL_SHARES_GRANTED,'999,999,999'%-%
RSUs
Vesting
Except as otherwise set forth in this Award Certificate, your RSUs will vest as follows provided you remain continuously Employed by
the Company through the applicable below Scheduled Vesting Date:
Number of Shares Vesting Date
%%SHARES_PERIOD1,'999,999,999'%-% %%VEST_DATE_PERIOD1,'Month DD, YYYY'%-%
%%SHARES_PERIOD2,'999,999,999'%-% %%VEST_DATE_PERIOD2,'Month DD, YYYY'%-%
%%SHARES_PERIOD3,'999,999,999'%-% %%VEST_DATE_PERIOD3,'Month DD, YYYY'%-%
Settlement
Your awards will be converted and settled in Shares pursuant to Section 8 of the Plan and Section 1(b) of this Award Certificate unless
your primary place of employment is located outside the United States in which case your shares may be settled in cash in accordance
with the requirements for your local jurisdiction. See the “International Supplement” included herein as Appendix A, for additional
information.
Restrictive Covenants,
Clawback, Risk
Reviews, Investigations,
and Misconduct
Pursuant to Section 8 of this Award Certificate, your Award may be subject to (i) forfeiture, cancellation and/or repayment triggered in the
event of your violation of a restrictive covenant, including non-solicitation and non-competition requirements, more fully described in
this Award Certificate, (ii) clawback (including in the event of certain restatements of the Company’s financial performance) in
accordance with any clawback or recoupment policy in effect as of the Date of the Award, including the Discover Compensation
Recoupment Policy, (iii) forfeiture if you are subject to a risk review or forfeiture, cancellation and/or repayment if you are subject to an
investigation, and (iv) recovery, recoupment, or forfeiture if you engage in "misconduct" as defined in the Discover Incentive
Compensation Clawback Policy.
Non-U.S. Employees
If you are Employed outside the United States, please reference the “International Supplement” included herein as Appendix A, which
contains supplemental terms and conditions for your RSU Award.
You will earn RSUs included in your RSU Award only if you (1) remain in continuous Employment through the applicable
Scheduled Vesting Dates (subject to limited exceptions set forth herein), (2) are not found to be subject to the forfeiture, cancellation, or
clawback provisions set forth in Section 8 below, and (3) satisfy obligations you owe to the Company as set forth in Section 10 below. If
the Company deems appropriate and in its sole discretion, the Company may require you to provide a written certification or other
evidence, from time to time, to confirm that none of the circumstances described in Section 8 below exist or have occurred, including
upon a termination of Employment and/or during a specified period of time prior to the applicable Scheduled Vesting Dates. If you fail to
timely provide any required certification or other evidence, the Company may cancel your RSU Award. It is your responsibility to provide
the Human Resources Department with your up-to-date contact information.
1.
Vesting Schedule; Conversion.
(a)
Vesting Schedule. Your RSUs will vest according to the Scheduled Vesting Dates set forth in this Award
Certificate, provided you remain continuously Employed through such dates, unless earlier vesting is required pursuant to Section 4, 5 or
6 of this Award Certificate.
(b)
Conversion.
(1)
Except as otherwise provided in this Award Certificate, each of your vested RSUs will convert to one Share
on or as soon as administratively practicable following the applicable Scheduled Vesting Date.
(2)
Subject to the provisions of the Plan and this Award Certificate, as well as any transfer restrictions imposed
by the Company or applicable pursuant to securities laws, Shares to which you are entitled following conversion of RSUs under
any provision of this Award Certificate shall be delivered to you (or your beneficiary or estate, as applicable) as soon as
administratively practicable after the Scheduled Vesting Date, unless earlier delivery is required pursuant to Section 4, 5, or 6 of
this Award Certificate.
(c)
Accelerated Conversion. The Committee, in its sole discretion, may determine that any RSUs may be converted to
Shares prior to the Scheduled Vesting Date subject to compliance with all Legal Requirements, including Section 409A.
(d)
Rule of Construction for Timing of Conversion. Whenever this Award Certificate provides for RSUs to convert
to Shares on the Scheduled Vesting Date or upon an accelerated or different specified event or date, such conversion will be considered to
have been timely made, and neither you nor any of your beneficiaries nor your estate shall have any claim against the Company for
damages based on a delay in conversion of your RSUs (or delivery of Shares following conversion), and the Company shall have no
liability to you (or to any of your beneficiaries or your estate) in respect of any such delay, as long as conversion is made by December 31
of the year in which occurs the Scheduled Vesting Date or such other specified event or date or, if later, by the 15th day of the third
calendar month following such specified event or date.
2.
Special Provisions for Certain “Specified Employees”.
Notwithstanding anything to the contrary in this Award Certificate, if Discover reasonably considers you to be one of its “specified
employees” as defined in Section 409A at the time of the termination of your Employment, any RSUs that constitute deferred
compensation under Section 409A that are payable upon termination of Employment will not
convert to Shares or be delivered to you until the date that is six months after the termination of your Employment (or the date of your
death, if such event occurs earlier).
3.
Dividend Equivalent Payments.
Until your RSUs convert to Shares and subject to your continued Employment through the applicable payment date, if Discover
pays a regular or ordinary cash dividend on its common stock, you will be paid a dividend equivalent for your vested and unvested RSUs.
No dividend equivalents will be paid to you on any canceled RSUs. Discover, in its discretion, will decide on the form of payment and
may pay dividend equivalents in Shares, in cash or in a combination thereof. Discover will pay the dividend equivalents as soon as
administratively practicable (and in any event within thirty (30) days) after Discover pays the corresponding dividend on its Stock.
4.
Death; Disability; Retirement.
The following special vesting and payment terms apply to your RSUs:
(a)
Death. If your Employment terminates due to your death, all RSUs subject to this Award Certificate will vest,
convert to Shares and be delivered to your beneficiary or your estate on or as soon as administratively practicable after your date of death.
(b)
Disability. If your Employment terminates due to Disability, all RSUs subject to this Award Certificate will vest,
convert to Shares and be delivered to you on or as soon as administratively practicable after your termination due to Disability.
(c)
Retirement. If your Employment terminates due to Retirement, the number of RSUs that will vest upon your
Retirement (to the extent not already vested) will be determined by multiplying the RSUs subject to this Award Certificate by the Pro
Ration Fraction, calculated through the date your Employment terminates. These RSUs will vest and convert to Shares and be delivered to
you on or as soon as administratively practicable after your termination due to Retirement provided that the Company may require you to
sign (and do not revoke) an agreement and release of claims satisfactory to the Company and be delivered to you on or as soon as
administratively practicable after your termination pursuant to this section, with such release to become effective pursuant to its terms
within sixty (60) days following your termination of employment or such other date specified by the Company and permitted under
Section 409A.
5.
Termination Due to Reduction in Force; Position Elimination; or Increase/Addition of Skills Required for Current
Position.
If the Company terminates your Employment due to a reduction in force, an elimination of your position, or as a result of an
increase or addition of skills required of your current position, each as determined by the Company in its sole discretion, the number of
RSUs that will vest upon the termination of your Employment (to the extent not already vested) will be determined by multiplying the
RSUs subject to this Award Certificate by the Pro Ration Fraction, calculated through the date your Employment terminates. These RSUs
will vest and convert to Shares as soon as administratively practicable following your termination of Employment, provided that you sign
(and do not revoke) an agreement and release of claims satisfactory to the Company and be delivered to you on or as soon as
administratively practicable after your termination pursuant to this section, with such release to become effective pursuant to
its terms within sixty (60) days following your termination of employment or such other date specified by the Company as permitted
under Section 409A.
6.
Change in Control.
(a)
Termination in Connection with Change in Control. If the Company terminates your Employment other than for
Cause, or if you terminate your Employment for Good Reason, within six months prior to or within twenty-four (24) months after a
Change in Control, your RSUs will immediately vest and convert to Shares on the later of the date of a Change in Control or the date of
your termination following a Change in Control, as applicable and be delivered as soon as administratively practicable thereafter.
(b)
Stock Consideration. In the event of a Change in Control which results from a transaction pursuant to which the
shareholders of Discover receive shares of common stock of an acquiring entity that are registered under Section 12 of the Exchange Act,
unless otherwise determined by the Committee, in its sole discretion prior to such Change in Control, there shall be substituted for each
Share subject to this Award Certificate the number and class of shares of common stock of the acquiring entity into which each
outstanding Share shall be converted pursuant to such Change in Control transaction, and this Award Certificate shall otherwise continue
in effect.
(c)
Non-stock Consideration. In the event of a Change in Control which results from a transaction pursuant to which
the shareholders of Discover receive consideration other than shares of common stock of the acquiring entity that are registered under
Section 12 of the Exchange Act, the value of the RSUs hereunder shall, unless otherwise determined by the Committee, in its sole
discretion prior to such Change in Control, be converted into a right to receive the cash or other consideration received by the shareholders
of Discover in such transaction, and this Award Certificate shall otherwise continue in effect.
7.
Termination of Employment.
Your unvested RSUs will be forfeited and canceled if your Employment terminates for any reason other than under the
circumstances set forth in Section 4, 5 or 6 of this Award Certificate.
8.
Forfeiture/Cancellation/Clawback of RSU Awards Under Certain Circumstances.
(a)
Breach of Restrictive Covenants. RSUs are not earned until the applicable Scheduled Vesting Date and will be
canceled prior to the applicable Scheduled Vesting Date under any of the circumstances set forth below. Although you will become the
beneficial owner of Shares following conversion of your RSUs, the Company may, upon notice, issue a transfer restriction with respect
to your Shares following conversion of your RSUs pending any investigation or other review that impacts the determination as to
whether the RSUs are or may be cancellable under the circumstances set forth below. The Shares underlying such RSUs shall be
forfeited and recoverable in the event the Company determines that the RSUs were cancellable under the circumstances set forth below.
Notwithstanding any provision of this Award Certificate to the contrary and subject to Section 8(h) below, in the event that at any time
prior to one year after the termination of your Employment or service with the Company, you (i) engage in Wrongful Solicitation, (ii)
breach your obligations to the Company under a confidentiality, intellectual property or other restrictive covenant, or (iii) for those
participants classified by the Company as an officer of Discover Financial Services or one of its Subsidiaries on the date of grant,
engage in Competitive Activity, with respect to each such incidence of violation and to the maximum extent permitted by applicable law,
you shall be required to:
(1)
pay to the Company an amount in cash equal to the value of the Shares that vested and converted on or after,
or within one year prior to, your termination of Employment, which value shall be determined by the Company, in its sole
discretion, and shall include an amount for tax adjustments appropriate to reflect your obligation to repay such amounts due to
your breach of the restrictive covenants; or
(2)
transfer to the Company the number of Shares that vested and converted on or after, or within one year prior
to, your termination of Employment, plus an amount calculated by the Company, in its sole discretion, for tax adjustments
appropriate to reflect your obligation to transfer such common stock due to your breach of the restrictive covenants.
In the event of multiple incidences of breach of this provision of the Award Certificate (e.g., in the event of violation of the non-
solicitation provision following engaging in Competitive Activity), the repayment amount will be additive for each incidence of
violation, not to exceed two times the amount calculated under paragraph 8(a)(1) and (2) above. If you engage in Wrongful Solicitation
or engage in a Competing Activity, in addition to the remedies described in Section 8(a), the Company may also take such action at
equity or in law as it deems appropriate to enforce the provisions of the applicable restrictive covenant, including pursuing injunctive
relief.
The Company recommends that before accepting this Award Certificate, you consult with an attorney of your choice regarding the
restrictive covenants described herein. You acknowledge that you have been provided at least fourteen (14) calendar days to review the
applicable restrictive covenants prior to having to accept the award.
(b)
Restatement of Financial Statements. The Award and any cash payment or Shares delivered pursuant to the
Award are subject to forfeiture, recovery by the Company or other action pursuant to any clawback or recoupment policy in effect as of
the Date of the Award, including without limitation, the Discover Compensation Recoupment Policy.
(1) Pursuant to the Discover Compensation Recoupment Policy (to the extent you are subject to such policy), in
the event and to the extent the Committee reasonably determines that the performance considered by the Committee, and on the
basis of which the amount of RSUs were granted or converted to Shares, was based on Discover’s material noncompliance with
any financial reporting requirement under the securities laws or Company policy which requires Discover to file a restatement of
its financial statements within three years of the Date of the Award, you will be required to comply with paragraphs (1) and (2) (as
applicable) below to repay to the Company an amount equal to the number of RSUs which were granted or the Shares converted
hereunder less the number of RSUs that would have been granted or the number of Shares that would have been converted had
your RSUs been granted or converted based on compliance with any such financial reporting requirement under the securities laws
or Company policy (such number of RSUs, the “Clawback RSUs,” to be determined in each case by the Committee in its sole
discretion and before satisfaction of tax or other withholding obligations pursuant to Section 9):
(A) You shall forfeit a number of RSUs hereunder equal to the Clawback RSUs. In the event such forfeited
RSUs are less than the Clawback RSUs, then you shall comply with the following paragraph 2.
(B) You shall be required to:
(i) pay to the Company an amount in cash equal to the value of the Shares that vested and
converted hereunder, which value shall be determined using a valuation method established by the
Company, in its sole discretion, and shall include an amount for tax adjustments appropriate to reflect your
obligation to repay such amounts due to the restatement of the Company’s financial statements; or
(ii) transfer to the Company the number of Shares that vested and converted hereunder, plus such
amount calculated by the Company, in its sole discretion, for tax adjustments appropriate to reflect your
obligation to repay such amounts due to the restatement of the Company’s financial statements.
(2) By accepting the RSUs you hereby agree and acknowledge that you are obligated to cooperate with and
provide all assistance necessary to the Company to recover or recoup the RSUs or amounts paid under the Plan that are subject to
clawback pursuant to this Award Certificate, applicable securities laws or listing standards or Company policy, including the
Discover Financial Services Compensation Recoupment Policy. Such cooperation and assistance shall include, but is not limited
to, executing, completing and submitting and documentation necessary to recover or recoup any RSUs or amounts paid pursuant to
RSUs.
(c)
Risk Review. For Covered Employees, as defined and identified by the Company, no RSUs will convert to Shares
until the Chief Human Resources Officer receives confirmation from the Chief Risk Officer, or their delegate, that a review has been
conducted in accordance with the Incentive Compensation Risk Management (ICRM) Program at the direction of the Chief Risk Officer,
to determine whether you engaged in any willful or reckless violation of the Company’s risk policies, including the Code of Conduct
and Business Ethics. If the Chief Risk Officer, or their delegate, finds any such violation or breach, then the Company or, in the case of
Covered Employees subject to Section 16 of the Exchange Act, the Committee, may determine that all or a portion of your RSUs will be
forfeited.
(d)
Investigations. In the event that the Company has either commenced an investigation of a matter that you oversaw
or were involved in or has evidence that may require investigation of a matter that you oversaw or were involved in, in either case
concerning a breach of one of the obligations hereunder or a serious violation of Company policy, the Company may freeze your
account and effectuate a transfer restriction such that your converted and delivered RSUs and any shares associated therewith may not
be sold or transferred until such time as the Company reasonably believes the matter to be resolved. If, following the investigation, the
Company determines, in its sole discretion, that you breached one of the obligations hereunder or committed a serious violation of
Company policy, the Company may:
(1) forfeit all or a portion of your RSUs;
(2) require that you pay to the Company an amount in cash equal to the value of the Shares that vested and
converted hereunder, which value shall be determined by the Company, in its sole discretion, and shall include an amount for tax
adjustments appropriate to reflect your obligation to repay such amounts due to the circumstances described in this Section 8(d); or
(3) cancel Shares in your account or require that you transfer to the Company the number of Shares that vested
and converted hereunder, plus an amount calculated by the Company, in its sole discretion, for tax adjustments appropriate to
reflect your obligation to transfer such common stock due to the circumstances described in this Section 8(d).
(e)
Misconduct. In addition to the foregoing, pursuant to the Discover Incentive Compensation Clawback Policy, if
you are a current or former employee with a management level of director or above and you engage in “misconduct” as defined in the
Discover Incentive Compensation Clawback Policy, the Company, in its sole discretion, may recover all or a portion of the RSUs
“received” (as defined in the Discover Incentive Compensation Clawback Policy) by you during the three-year period preceding the date
of your “misconduct” (or such later date on which the Committee becomes aware of your “misconduct” or completes its investigation).
(f)
Other Recoupment or Forfeiture Rights. Notwithstanding the foregoing, any RSUs recovered under any
clawback or recoupment policy, including the Discover Compensation Recoupment Policy and the Discover Incentive Compensation
Clawback Policy, shall count toward any required forfeiture, cancellation, or clawback of RSUs under this Award Certificate and vice
versa.
(g)
Authorization. You authorize the Company to deduct any amount or amounts owed by you pursuant to this Section
8 from any amounts payable by or on behalf of the Company to you, including, without limitation, any amount payable to you as salary,
wages, paid time off, bonus, severance, change in control severance or the conversion of any equity-based award. This right of offset
shall not be an exclusive remedy and the Company’s election not to exercise this right of offset with respect to any amount payable to
you shall not constitute a waiver of this right of offset with respect to any other amount payable to you or any other remedy. You further
acknowledge and authorize the Company to take the actions described in this Section 8, including those described in Section 8(d).
(h)
Non-Contravention. Nothing in this Award Certificate (including with respect to confidential information, trade
secrets, and other obligations) is intended to be or will be construed to prevent, impede or interfere with your right to respond accurately
and fully to any question, inquiry, or request for information regarding your employment with the Company when required by legal
process by a Federal, State or other legal authority, or from initiating communications directly with, or responding to any inquiry from,
or providing truthful testimony and information to, any Federal, State or other regulatory authority in the course of an investigation or
proceeding authorized by law and carried out by such agency. You are not required to contact the Company regarding the subject matter
of any such communications before you engage in such communications. In addition, nothing in this Award Certificate is intended to
restrict your legally protected right to discuss wages, hours or other working conditions with coworkers or in any way limit your rights
under the National Labor Relations Act, any whistleblower law, or other applicable law. You acknowledge that the Company has
provided you notice of your immunity rights under the Defend Trade Secrets Act, which states: “(1) An individual shall not be held
criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that (A) is made (i) in
confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose
of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other
proceeding, if such filing is made under seal; and (2) an individual who files a lawsuit for retaliation by an employer for reporting a
suspected violation of law may disclose a trade secret to the attorney of the individual and use the trade secret information in the court
proceeding, if the individual
(A) files any document containing the trade secret under seal, and (B) does not disclose a trade secret, except pursuant to court order.”
9.
Tax and Other Withholding Obligations.
Subject to rules and procedures established by Discover, you may be eligible to elect to satisfy the tax or other withholding
obligations arising upon conversion of your RSUs or upon any taxable event by paying cash or by having Discover withhold Shares or by
tendering Shares, in each case in an amount sufficient to satisfy the tax or other withholding obligations. Shares withheld or tendered will
be valued using the Fair Market Value of Stock on the date the Award becomes taxable, using a valuation methodology established by
Discover.
10.
Satisfaction of Obligations.
Notwithstanding any other provision of this Award Certificate, the Company may, in its sole discretion, take various actions
affecting your RSUs in order to collect amounts sufficient to satisfy any obligation that you owe to the Company and any tax or other
withholding obligations. The Company’s determination of the amount that you owe the Company shall be conclusive. The Fair Market
Value of Stock for purposes of the following provisions shall be determined using a valuation methodology established by Company. The
actions that may be taken by Discover pursuant to this Section 10 include, but are not limited to, the following:
(a)
Withholding of Shares. Upon conversion of RSUs, including any accelerated conversion pursuant to Sections 4, 5,
or 6 above, or, if later, upon delivery of the Shares, the Company may withhold a number of Shares sufficient to satisfy any obligation
that you owe to the Company and any tax or other withholding obligations whether national, federal, state or local tax withholding
obligations including any social insurance contributions or employment tax obligation. The Company shall determine the number of
Shares to be withheld by dividing the dollar value of your obligation to the Company and any tax or other withholding obligations by the
Fair Market Value of Stock on the date the Award becomes taxable. To the extent that the Company retains any Shares or reduces the
number of RSUs to cover the withholding obligations, it will do so at the applicable minimum statutory rate (or such other rate as will
not cause adverse accounting consequences under the accounting rules then in effect, and is permitted by the Company). Should the
Company withhold in excess of the actual tax withholding obligation, the Company may apply the excess withholding to another
compensation tax liability.
(b)
Netting of Accelerated RSUs. In order to satisfy any taxes due upon an event which is earlier than delivery,
Discover, in its sole discretion, may accelerate the vesting and conversion of all or a portion of your unvested RSUs subject to Section
23 below. The Company shall determine the number of RSUs to be accelerated and converted by dividing the dollar value of your tax
obligations upon such event by the Fair Market Value of Stock on the date the Award becomes taxable. Accelerated and converted RSUs
shall not exceed the value of taxes due upon such event and the resulting Shares will be withheld by the Company.
(c)
Withholding of Other Compensation. Discover may withhold the payment of dividend equivalents on your RSUs
or any other compensation or payments due from Discover to ensure satisfaction of any obligation that you owe the Company or any tax
or other withholding obligations or Discover may permit you to satisfy such tax or other withholding obligation by paying such
obligation in immediately available funds.
(d)
Mobile Employees. You are liable and responsible for all taxes and social insurance contributions owed in
connection with the Award, regardless of any action the Company takes with respect to any tax withholding obligations that arise in
connection with
the Award. The Company does not make any representation or undertaking regarding the tax treatment or the treatment of any tax
withholding in connection with the grant, vesting or payment of the Award. The Company does not commit and is under no obligation to
structure the Award to reduce or eliminate your tax liability. Further, you may be subject to individual income taxation (and possibly
social security or other applicable personal or payroll taxes) in each jurisdiction where you have performed services for the Company
between the Award Date and when the Award vests. Taxes for which you are liable, if applicable, may be withheld and deposited by the
Company in each jurisdiction in which you have performed services regardless of your status as a resident or non-resident in one or
more of the jurisdictions that have a right to impose taxation. You agree that you will comply with all United States and foreign
individual income tax return filing obligations that may be imposed with respect to the Award.
11.
Transfer Restrictions and Investment Representation.
(a)
Nontransferability of Award. You may not sell, pledge, hypothecate, assign or otherwise transfer your RSUs,
other than as provided in Section 12 (which allows you to designate a beneficiary or beneficiaries in the event of your death) or by will or
the laws of descent and distribution.
(b)
Investment Representation. You hereby covenant that (a) any sale of any share acquired upon the vesting of the
Award shall be made either pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities
Act"), and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state
securities laws and (b) you shall comply with all regulations and requirements of any regulatory authority having control of or supervision
over the issuance of the Shares and, in connection therewith, shall execute any documents which the Committee shall in its sole discretion
deem necessary or advisable.
12.
Designation of a Beneficiary.
You may make a revocable designation of beneficiary or beneficiaries to receive all or part of the Shares and any dividend
equivalents credited to you pursuant to Section 3 hereof to be paid or delivered under this Award Certificate in the event of your death.
Absent a designation on file, distributions pursuant to Section 4 will be made to your estate in accordance with applicable law. To make a
beneficiary designation, you must complete and file the online form provided by E*TRADE or such other vendor as the Company may
choose to administer the Plan. If you previously filed a designation of beneficiary form for your equity awards with the Human Resources
Department, such form will also apply to the RSUs granted pursuant to this RSU Award. You may replace or revoke your beneficiary
designation at any time, and the Company will rely on your most recent designation on file for purposes of beneficiary designation.
13.
Ownership and Possession.
(a)
Generally. Except as specified in Section 3 with respect to dividend equivalents, you will not have any rights as a
shareholder with respect to your RSU Awards or the Shares underlying such RSUs prior to the vesting and conversion of your RSUs.
(b)
Following Conversion. Subject to the terms and conditions of this Award Certificate, following the vesting and
conversion of your RSUs and the issuance of the Shares underlying such RSUs in your name, you will be the beneficial owner of the
Shares issued to you, subject to any tax withholding under Section 10, and you will be entitled to all rights of ownership with respect to
such Shares, including voting rights and the right to receive cash or stock dividends or other distributions paid on such Shares.
14.
Securities Law Matters.
Shares issued upon conversion of your RSUs may be subject to restrictions on transfer by virtue of the Securities Act of 1933, as
amended, and the applicable state securities laws. Discover may advise the transfer agent to place a stop order against such shares if it
determines that such an order is necessary or advisable. Because Shares will only be maintained in book-entry form, you will not receive
a stock certificate representing your interest in such Shares.
15.
Compliance with Laws and Regulations.
Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of the Shares issued upon conversion of your
RSUs (whether directly or indirectly, whether or not for value, and whether or not voluntary) must be made in compliance with any
applicable constitution, rule, regulation, or policy of any of the exchanges or associations or other institutions with which the Company or
a Related Employer has membership or other privileges, and any applicable law, or applicable rule or regulation of any governmental
agency, self-regulatory organization or state or federal regulatory body.
16.
No Entitlements.
(a)
No Right to Continued Employment. This RSU Award is not an employment agreement, and nothing in this
Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Company
or your Employment status at a Related Employer, nor does anything herein constitute a promise of continued employment or re-
employment.
(b)
No Right to Future Awards. This RSU Award is discretionary and does not confer on you any right or entitlement
to receive another award of RSUs, any other equity-based award or any other award at any time in the future or in respect of any future
period.
(c)
No Effect on Future Employment Compensation. This RSU Award is discretionary and does not confer on you
any right or entitlement to receive compensation in any specific amount for any future fiscal year, and does not diminish in any way the
Company’s discretion to determine the amount, if any, of your compensation. In addition, this RSU Award is not part of your base salary
or wages and will not be taken into account in determining any other Employment-related rights you may have, such as rights to pension
or severance pay, end of service payments, bonuses, long-service awards or similar payments and in no event shall be considered as
compensation for, or relating in any way to, past services for the Company.
(d)
Termination of Employment. In consideration of the grant of the Award, no claim or entitlement to compensation
or damages shall arise from termination of the Award or diminution in value of the Award or Shares acquired through vesting of the Award
resulting from termination of your Employment (for any reason whatsoever and whether or not in breach of local labor laws) and you
irrevocably release the Company and the Related Employer from any such claim that may arise; if, notwithstanding the foregoing, any
such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Award Certificate, you will be deemed
irrevocably to have waived your entitlement to pursue such claim; and in the event of termination of your Employment (whether or not in
breach of local labor laws), your right to receive the Award and vest in the Award under the Plan, if any, will terminate effective as of the
date that you are no longer actively Employed and will not be extended by any notice period mandated under local law (e.g., active
Employment would not include a period of “garden leave” or similar period pursuant to local law); Discover shall have the exclusive
discretion to determine when you are no longer actively Employed for purposes of your Award.
(e)
Language. If you have received this Award Certificate or any other document related to the Plan translated into a
language other than English and if the translated version is different that the English version, the English version will control.
(f)
Award Terms Control. In the event of any conflict between any terms applicable to equity awards in any
employment agreement, offer letter or other arrangement that you have entered into with the Company and the terms set forth in this
Award Certificate, the latter shall control.
17.
Consents.
Your RSU Award is conditioned upon the Company making of all filings and the receipt of all consents or authorizations required
to comply with, or required to be obtained under, applicable local law.
In accepting this RSU Award, you consent to the collection, use and transfer, in electronic or other form, of your personal data by
and among, as applicable, the Company and any other possible recipients for the purpose of implementing, administering and managing
your participation in the Plan, as well as for the purpose of the Company’s compliance with applicable law, including, without limitation,
Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. You understand that the recipients of your personal
data may be located in the U.S. or elsewhere, and the recipients’ country may have different data privacy laws and protections than your
country. You understand that you may request a list with the names and addresses of any potential recipients of your personal data, view
the personal data, request additional information about the storage of your personal data, require any necessary amendments to your
personal data or refuse or withdraw your consent by contacting your local human resources representative, in any case without cost. You
understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan.
18.
Electronic Delivery and Consent to Electronic Participation.
The Company may, in its sole discretion, decide to deliver any documents related to the RSU Award and participation in the Plan
or future RSU Awards by electronic means. You hereby consent to receive such documents by electronic delivery and to participate in the
Plan through an online or electronic system established and maintained by the Company or another third party designated by the
Company, including the acceptance of RSU Awards and the execution of the RSU agreements through electronic signature. Electronic
acceptance of this Award Certificate through the E*TRADE website, or such other vendor as the Company may choose to administer the
Plan, shall be required and binding on you. Where electronic acceptance may not be permitted under applicable law, the Company may
also request and require your physical signature. Your acceptance affirms your agreement to all the terms and conditions set forth in this
Award Certificate and acceptance of the Award subject thereto. Not providing this acceptance within the timeframe stipulated may result
in the Company forfeiting all or a portion of this Award.
19.
Award Modification.
The Committee reserves the right to modify or amend unilaterally the terms and conditions of your RSUs, without first asking your
consent, or to waive any terms and conditions that operate in favor of Discover. These amendments may include (but are not limited to)
changes that the Committee considers necessary or advisable as a result of changes in any, or the adoption of any new, Legal Requirement.
The Committee may not modify your RSUs in a manner that would materially impair your rights in your RSUs without your consent;
provided, however, that the Committee may, without your consent, amend or modify your RSUs in any
manner that the Committee considers necessary or advisable to comply with or reflect the application of any Legal Requirement or to
ensure that your RSUs are not subject to United States federal, state or local income tax or any equivalent taxes in territories outside the
United States prior to payment. Notwithstanding any provisions of this Award Certificate to the contrary, to the extent you transfer
employment outside of the United States, the Award shall be subject to any special terms and conditions as Discover may need to establish
to comply with local laws, rules, and regulations or to facilitate the operation and administration of the Award and the Plan in the country
to which you transfer employment (or Discover may establish alternative terms and conditions as may be necessary or advisable to
accommodate your transfer). Discover will notify you of any amendment of your RSUs that affects your rights. Any amendment or waiver
of a provision of this Award Certificate (other than any amendment or waiver applicable to all recipients generally), which amendment or
waiver operates in your favor or confers a benefit on you, must be in writing and signed by the Chief Human Resources Officer to be
effective.
20.
Severability.
In the event the Committee determines that any provision of this Award Certificate would cause you to be in constructive receipt
for United States federal or state income tax purposes of any portion of your RSU Award prior to the vesting of such Award, then such
provision will be considered null and void and this Award Certificate will be construed and enforced as if the provision had not been
included in this Award Certificate as of the date such provision was determined to cause you to be in constructive receipt of any portion of
your RSU Award. In addition, in the event that any provision of this Award Certificate shall be held illegal or invalid for any reason, such
illegality or invalidity shall not affect the remaining provisions of this Award Certificate, and this Award Certificate shall be construed and
enforced as if the illegal or invalid provision had not been included.
21.
Successors.
This Award Certificate shall be binding upon and inure to the benefit of any successor or successors of Discover and any person or
persons who shall, upon your death, acquire any rights hereunder in accordance with this Award Certificate or the Plan.
22.
Governing Law.
This Award Certificate and the related legal relations between you and Discover will be governed by and construed in accordance
with the laws of the State of Delaware, without regard to any conflicts or choice of law, rule or principle that might otherwise refer the
interpretation of the RSU Award to the substantive law of another jurisdiction to the maximum extent permitted by applicable law. The
Company and you agree that the jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise
relating to), the Plan or this Award Certificate shall be exclusively in the courts in the State of Illinois, Counties of Cook or Lake,
including the federal courts located therein (should federal jurisdiction exist), and the Company and you hereby submit and consent to said
jurisdiction and venue to the maximum extent permitted by applicable law.
23.
Section 409A.
This Award is intended to be exempt from or comply with Section 409A, and shall be interpreted and construed accordingly, and
each payment hereunder shall be considered a separate payment for purposes of Section 409A. Subject to Section 2, to the extent this
Award Certificate provides for the Award to become vested and be settled upon your termination of employment, the applicable Shares
shall be transferred to you or your beneficiary upon your
"separation from service," within the meaning of Section 409A. To the extent necessary or advisable to comply with Section 409A, with
respect to any provision of this Award Certificate that provides for vested RSUs to convert to Shares on or as soon as administratively
practicable after a specified event or date, such conversion and settlement will be made by the later of the end of the calendar year in
which the specified event or date occurs or the 15 day of the third calendar month following the specified event or date. If any RSUs
constitute deferred compensation under Section 409A and are payable subject to your execution and non-revocation of a release and the
period to consider the release spans two separate taxable years, then the distribution of the RSUs that are conditioned upon such execution
and non-revocation of the release shall be made in the later taxable year.
24.
Defined Terms.
For purposes of this Award Certificate, the following terms shall have the meanings set forth below:
(a)
“Cause” means:
(1)
any act or omission which constitutes a material breach of your obligations to the Company or your failure
or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is
not corrected (other than failure to correct by reason of your incapacity due to Disability) within ten (10) business days after
written notification thereof to you by the Company;
(2)
any act or omission by you that constitutes (i) fraud or intentional misrepresentation, (ii) embezzlement,
misappropriation or conversion of assets of, or business opportunities considered by, the Company or (iii) any other act which has
caused or may reasonably be expected to cause material injury to the interest or business reputation of the Company; or
(3)
your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to
such laws, or rules or regulations of any securities or commodities exchange or association of which the Company is a member or
of any policy of the Company relating to compliance with any of the foregoing.
(b)
“Chief Human Resources Officer” means the chief human resources officer of Discover, any successor chief
human resources officer, or any other individual or committee appointed by the chief executive officer of Discover with the power and
authority of the chief human resources officer.
(c)
“Chief Risk Officer” means the chief risk officer of Discover, any successor chief risk officer, or any other
individual or committee appointed by the chief executive officer of Discover with the power and authority of the chief risk officer.
(d)
“Competitive Activity” means:
(1)
becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director,
independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacity with, a
Competitor, where you will be responsible for providing, or managing or supervising others who are providing, services (i) that are
similar or substantially related to the services that you provided to the Company, or (ii) that you had direct or indirect managerial
or supervisory responsibility for at the Company, or (iii) that call for the application of the same or similar specialized knowledge
or skills as those utilized by you
th
in your services for the Company, in each such case, at any time during the year preceding the termination of your employment
with the Company; or
(2)
either alone or in concert with others, forming, or acquiring a five percent (5%) or greater equity ownership,
voting interest or profit participation in, a Competitor.
(e)
“Competitor” means any corporation, partnership or other entity that engages in (or that owns a significant interest
in any corporation, partnership or other entity that engages in) (1) the business of consumer lending, including, without limitation, credit
card issuance or electronic payment services, or (2) any other business in which you have been involved in or had significant knowledge
of, which has been conducted by the Company at any time during your employment with the Company. For the avoidance of doubt, a
competitor of any entity which results from a corporate transaction involving the Company that constitutes a Change in Control shall be
considered a Competitor for purposes of this Award Certificate.
(f)
“Covered Employee” means an employee who, as of the Date of the Award, has been identified as a covered
employee by Corporate Risk Management.
(g)
“Date of the Award” means the date set forth in this Award Certificate.
(h)
“Disability” means a “permanent and total disability,” as defined in Section 22(e)(3) of the Internal Revenue Code.
(i)
"Discover Compensation Recoupment Policy" refers to the Discover Financial Services Compensation
Recoupment Policy, dated as of October 25, 2023.
(j)
"Discover Incentive Compensation Clawback Policy" refers to the Discover Incentive Compensation Clawback
Policy, effective as of September 3, 2024.
(k)
“Employed” and “Employment” refer to employment with the Company and/or Related Employment.
(l)
“Good Reason” means the occurrence of any of the following upon, or within six (6) months prior to or twenty-
four (24) months after the occurrence of a Change in Control of Discover without your prior written consent:
(1)
any material diminution in your assigned duties, responsibilities and/or authority, including the assignment
to you of any duties, responsibilities or authority inconsistent with the duties, responsibilities and authority assigned to you,
immediately prior to such assignment;
(2)
a material diminution in the authority, duties, or responsibilities of the supervisor to whom you are required
to report;
(3)
any material reduction in your base compensation; provided, however, that Company-initiated across-the-
board reductions in compensation affecting substantially all eligible Company employees shall alone not be considered “Good
Reason,” unless the compensation reductions exceed twenty percent (20%) of your base compensation;
(4)
a material diminution of the budget over which you have authority;
(5)
the Company’s requiring you to be based at a location that (i) is in excess of thirty-five (35) miles from the
location of your principal job location or office immediately prior to the Change in Control, or (ii) results in an increase in your
normal daily commuting time by more than ninety (90) minutes, except for required travel on Company’s business to an extent
substantially consistent with your then present business travel obligations; or
(6)
any other action or inaction that constitutes a material breach by the Company of any agreement pursuant to
which you provide services to the Company.
For purposes of paragraphs (1) through (6) above, the duties, responsibilities and/or authority assigned to you shall be deemed to
be the greatest of those in effect prior to or after the Change in Control. Unless you become Disabled, your right to terminate your
Employment for Good Reason shall not be affected by your incapacity due to physical or mental illness. Your continued Employment
shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason. Notwithstanding the
foregoing, Good Reason shall not exist unless you give the Company written notice thereof within thirty (30) days after its occurrence and
the Company shall not have remedied the action within thirty (30) days after such written notice.
(m) “Internal Revenue Code” means the United States Internal Revenue Code of 1986, as amended, and the rules,
regulations and guidance thereunder.
(n)
“Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance
or other legal requirement (including any foreign legal requirements).
(o)
“Pro Ration Fraction” means a fraction, not to exceed 1.0, the numerator of which is the number of completed
months commencing on the later of (i) the first day of the calendar year of the Date of the Award or (ii) the first day of the month in
which your employment commences and ending on the effective date of your termination of Employment, and the denominator of which
is 12.
(p)
“Related Employment” means your employment with an employer other than the Company (such employer, herein
referred to as a “Related Employer”), provided: (1) you undertake such employment at the written request or with the written consent of
the Chief Human Resources Officer; (2) immediately prior to undertaking such employment you were an employee of the Company or
were engaged in Related Employment (as defined herein); and (3) such employment is recognized by the Company in its discretion as
Related Employment; provided further that the Company may (i) determine at any time in its sole discretion that employment that was
recognized by the Company as Related Employment no longer qualifies as Related Employment, and (ii) condition the designation and
benefits of Related Employment on such terms and conditions as the Company may determine in its sole discretion. The designation of
employment as Related Employment does not give rise to an employment relationship between you and the Company, or otherwise
modify your and the Company’s respective rights and obligations.
(q)
“Retirement” means the termination of your Employment by you or by the Company for any reason other than for
Cause and other than due to your death or Disability, on or after the date on which:
(1)
you have attained age 55; and
(2)
you have attained a combined age and years of service of at least 65 years.
(r)
“Scheduled Vesting Date” means the Scheduled Vesting Dates set forth in Award Certificate as the context requires.
(s)
“Wrongful Solicitation” occurs upon either of the following events:
(1)
while Employed, including during any notice period applicable to you in connection with the termination of
your Employment, or within one year after the termination of your Employment, directly or indirectly in any capacity (including
through any person, corporation, partnership or other business entity of any kind), you hire or solicit, recruit, induce, entice,
influence or encourage any Company employee to leave the Company or become hired or engaged by another firm; provided,
however, that this clause shall apply only to employees with whom you worked or had professional or business contact, or who
worked in or with your business unit, during any notice period applicable to you in connection with the termination of your
Employment or during the one year preceding notice of the termination of your Employment; or
(2)
while Employed, including during any notice period applicable to you in connection with the termination of
your Employment, or within one year after the termination of your Employment, directly or indirectly in any capacity (including
through any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner
attempt to persuade any client or customer, or prospective client or customer, of the Company (i) to discontinue or diminish his,
her or its relationship or prospective relationship with the Company or (ii) to otherwise provide his, her or its business to any
person, corporation, partnership or other business entity which engages in any line of business in which the Company is engaged
(other than the Company); provided, however, that this clause shall apply only to clients or customers, or prospective clients or
customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in
connection with the termination of your Employment or during the one year preceding notice of the termination of your
Employment.
IN WITNESS WHEREOF, Discover has duly executed and delivered this Award Certificate as of the Date of the Award.
DISCOVER FINANCIAL SERVICES
By:
/s/ J. Michael Shepherd
J. Michael Shepherd
Interim Chief Executive Officer and President
APPENDIX A
Discover Financial Services
International Supplement
This International Supplement to the Award Certificate (”International Supplement”) contains supplemental terms and
conditions for the RSU Award (“Equity Award”) to employees of Discover Financial Services (or the relevant affiliated company) located
in certain jurisdictions outside of the United States. The terms included in this International Supplement are intended to ensure compliance
with the laws of the country in which you are Employed or, in certain instances, to make the awards more tax efficient in your country.
You have also received an Award Certificate applicable to your award. The Award Certificate, together with this
International Supplement, collectively set forth the terms and conditions of your Equity Award. To the extent that this International
Supplement amends, deletes or supplements any terms of the Award Certificate, this International Supplement shall control.
Capitalized terms that are used without definition in this International Supplement have the meanings assigned in the Plan
or the Award Certificate.
All Employees Located Outside the United States.
If you are Employed outside of the United States, please note that your Equity Award is offered, issued and administered by
Discover Financial Services, a Delaware corporation, and your local employer is not involved in the grant of awards under such equity
incentive program. All documents related to your Equity Award, including the Award Certificate, this International Supplement and the
link by which you access these documents, originate and are maintained in the United States.
Your Equity Award is made in virtue of your Employment with, and your services performed for, the appropriate entities
within the Company. However, your award does not form part of your entitlement to remuneration or benefits, whether pursuant to any
contract of Employment to which you may be a party or otherwise. Similarly, the existence of a contract of Employment between you and
any entity within the Company shall not confer on you any right or entitlement to participate in the Equity Award or to receive awards
thereunder, or any expectation that you might participate in such equity incentive program or receive additional equity awards in the
future. Your Equity Award, the Award Certificate, and/or this International Supplement does not constitute an employment contract and
does not create an employment relationship or a promise of continued Employment for any period of time.
In addition, your Equity Award is not part of your base salary or wages and will not be taken into account (except to the
extent otherwise required by local law) in determining any other employment-related rights you may have, such as rights to pension or
severance pay.
Whether or not you have a contract of Employment with any entity within the Company, your rights and obligations under
the terms of your office or Employment shall not be affected by your receipt of the Equity Award. By accepting your receipt of the Equity
Award, you waive any and all rights to compensation or damages for any loss of the Equity Award in the event of your termination of your
office or Employment for any reason whatsoever. This waiver applies whether or not such termination amounts to a wrongful or unfair
dismissal.
You may be subject to applicable exchange control, currency control or similar financial laws that may affect your
transactions with respect to your equity award, including without limitation, your ability to bring shares of Discover Financial Services
common stock into your jurisdiction or to receive the proceeds of a sale of Discover Financial Services common stock in your jurisdiction.
Moreover, you may be subject to certain notification, approval and/or repatriation obligations with respect to securities and funds you
receive in connection with your awards. In addition the Company is not responsible for any foreign exchange fluctuations that change the
value of your RSU Award. You are encouraged to consult your advisors to ascertain whether any restrictions or obligations apply to
you.
Your Equity Award has not been authorized or approved by any applicable securities authorities and may have been offered
pursuant to an exemption from registration in your local jurisdiction. Similarly, no prospectus or similar offering or registration document
has been prepared, authorized or approved by any applicable securities authorities in your jurisdiction. The grant of awards is being made
only to employees of the Company and does not constitute and is not intended to be an offering to the public. For this reason, you must
keep all award documents you receive, including but not limited to this International Supplement and the Award Certificate, confidential
and you may not distribute or otherwise make public any award documents without the prior written consent of the Company. Moreover,
you may not reproduce (in whole or in part) any award documents you receive. In addition, the shares of Company common stock you
acquire upon vesting and conversion of your Equity Award may be subject to applicable restrictions on resale in your local jurisdiction.
You are encouraged to consult your advisors to ascertain whether any restrictions or obligations apply to you.
Employees in China.
If you are employed in China or are a Chinese national on international assignment outside of China for the Company, but
your Equity Award was made in China and/or you will be taxed there, your Equity Award will be settled in cash. Rather than convert
awards to shares pursuant to Section 1 of the Award Certificate and Sections 4 through 6 of the Award Certificate, the Company will
convert your Equity Award to cash and the Company or your local employer will deliver the cash payment to you. You consent to this cash
conversion in exchange for the Equity Award. All other terms and conditions of the Plan and the Award Certificate will otherwise apply to
your Equity Award.
Employees in the United Kingdom or European Union.
If you are employed in the United Kingdom (or the European Union), the Company will act in accordance with the Data
Protection Act of 2018 as amended from time to time and the General Data Protection Regulation as amended from time to time as
applicable regarding any personal information which you provide to it in connection with your Equity Award (including the amount of the
award) and you acknowledge the need for the processing of such personal information in order to facilitate your participation in such
equity incentive program, for any purposes required by law or regulation, or for any other legitimate business purpose. By accepting your
Equity Award, you acknowledge that from time to time, for the purposes described above, your personal information may be stored and
processed by and disclosed and transferred to other offices and companies within the Company and to third parties, some of which are
situated outside of the European Union and may not offer as high a level of protection for personal information as countries within the
European Union.
The following provision applies in lieu of that contained in the Award Certificate for employees in the United Kingdom and
European Union.
Section 24(q)
"Retirement" means the termination of your Employment by reason of your retirement as agreed with the Company or your Related
Employer.
The following provisions apply in lieu of those contained in the Award Certificate for employees in the United Kingdom.
Section 8(a)
The forfeiture, cancellation and/or clawback circumstances and events set forth in this Section 8 are designed, among other things,
to incentivize compliance with the Company’s policies (including, without limitation, the Company’s risk policies and Code of Conduct
and Business Ethics), to protect the Company’s interests in non-public, confidential and/or proprietary information, products, trade secrets,
customer relationships, workforce stability, and other legitimate business interests, and to ensure an orderly transition of responsibilities.
This Section 8 shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate
specifically provide that the circumstances set forth in this Section 8 no longer apply).
(a)
Conditions. Notwithstanding your satisfaction of the vesting conditions of this Award Certificate, RSUs are not
earned: (1) until the applicable Scheduled Vesting Date; and (2) unless the conditions set forth in this section 8(a) below are met.
Although you will become the beneficial owner of Shares following conversion of your RSUs, the Company may, upon notice, issue a
transfer restriction with respect to your Shares following conversion of your RSUs pending any investigation or other review that
impacts the determination as to whether the RSUs meet the conditions set forth below. The Shares underlying such RSUs shall not
legally vest in you and shall be forfeited and recoverable in the event the Company determines that the conditions set forth in this
section 8(a) below are not met. Notwithstanding any provision of this Award Certificate to the contrary, in order for legal ownership of
the Shares to fully vest in you it is a strict condition that you must not (i) at any time prior to one year after the termination of your
Employment or service with the Company misuse the Company’s confidential, proprietary information and/or intellectual property, as
defined in your employment contract, the Company Code of Conduct and Business Ethics, and/or any other relevant agreements or
policies issued to you, (ii) at any time prior to one year (less any period spent on "garden leave") after the termination of your
Employment or service with the Company (y) engage in Wrongful Solicitation or (z) for those Participants classified by the Company as
an officer of Discover Financial Services or one of its Subsidiaries on the date of grant, engage in Competitive Activity. If the conditions
above are not met, you will:
(1)
pay to the Company an amount in cash equal to the value of the Shares that vested and converted on or after,
or within one year prior to, your termination of Employment, which value shall be determined by the Company, in its sole
discretion, and shall include an amount for tax adjustments appropriate to reflect your obligation to repay such amounts due to you
not meeting the conditions above; or
(2)
transfer to the Company the number of Shares that vested and converted on or after, or within one year prior
to, your termination of Employment, plus an amount calculated by the Company, in its sole discretion, for tax adjustments
appropriate to reflect your obligation to transfer such common stock due to you not meeting the conditions above.
Section 24(e), (f) and (r)
(e)“Competitive Activity” means:
(1)
becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director,
independent contractor, consultant, advisor, representative or agent of, a Competitor, where you will be responsible for providing,
or managing or supervising others who are providing, services (i) that are similar or substantially related to the services that you
provided to the Company, or (ii) that you had direct or indirect managerial or supervisory responsibility for at the Company, or
(iii) that call for the application of the same or similar specialized knowledge or skills as those utilized by you in your services for
the Company, in each such case, at any time during the one year preceding the termination of your Employment; or
(2)
either alone or in concert with others, forming, or acquiring a five percent (5%) or greater equity ownership,
voting interest or profit participation in, a Competitor.
(i)
“Competitor” means any corporation, partnership or other entity that engages in (or that owns a significant interest
in any corporation, partnership or other entity that engages in) (1) the business of consumer lending, including, without limitation, credit
card issuance or electronic payment services, or (2) any other business which you have been materially involved in or had significant
knowledge of, which has been conducted by the Company at any time during the one year preceding the termination of your
Employment. For the avoidance of doubt, a competitor of any entity which results from a corporate transaction involving the Company
that constitutes a Change in Control shall be considered a Competitor for purposes of this Award Certificate.
(r) “Wrongful Solicitation” occurs upon either of the following events:
(1)
while Employed, including during any notice period applicable to you in connection with the termination of
your Employment, and within one year after the termination of your Employment (less any period spent on "garden leave"),
directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind),
you hire or solicit, recruit, induce, entice, influence or encourage any Company employee to leave the Company or become hired
or engaged by another firm with the intention of such individual working for or providing services to any Competitor; provided,
however, that this clause shall apply only to employees of the Company who had access to confidential information of the
Company and (i) were employed at the level of officer or above, or (ii) who worked in or with your business unit or (iii) for whom
you had direct or indirect responsibility, and in each case with whom you had material contact in the course of your Employment,
at any time during the one year preceding the termination of your Employment; or
(2)
while Employed, including during any notice period applicable to you in connection with the termination of
your Employment, and within one year after the termination of your Employment (less any period on "garden leave"), directly or
indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you solicit
or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Company (i)
to discontinue or diminish his, her or its relationship or prospective relationship with the Company or (ii) to otherwise provide his,
her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which
the Company is engaged (other than the Company); provided, however, that this clause shall apply only to clients or customers, or
prospective clients or customers, that you worked
for on an actual or prospective project or assignment during the one year preceding the termination of your Employment.
Your employer will have made available to you a privacy notice which will contain further details relating to the processing and use of
your personal information.
* * *
The Company recommends that you seek advice of your tax advisors regarding the tax treatment of your awards.
Exhibit 10.58
Discover Financial Services
2023 Omnibus Incentive Plan
2025 Award Certificate for Restricted Stock Units
This Award Certificate describes the terms and conditions under which you are being granted an Award of Restricted Stock Units (“RSUs”) under the
Discover Financial Services 2023 Omnibus Incentive Plan (the “Plan”), which constitutes part of your discretionary long-term incentive compensation.
This Award Certificate applies only to Awards granted hereunder and other Awards are governed by terms of the applicable Award Certificate.
A copy of the Plan can be found on the E*TRADE website at www.etrade.com, or such other vendor as the Company may choose to administer the
Plan. Capitalized terms under this Award Certificate have the meanings ascribed in the Plan unless otherwise stated herein.
The full terms of your Award are set out in this Award Certificate, the Plan and any applicable policy adopted by the Committee or its delegate in
respect of the Plan and Awards thereunder that is applicable to this Award. In the event of a conflict between the Plan and this Award Certificate, the
terms of the Plan control.
Award Recipient
%%FIRST_NAME%-% %%LAST_NAME%-%
Employee / Participant
ID
%%EMPLOYEE_IDENTIFIER%-%
Issuer
Discover Financial Services
Award Type
Restricted Stock Units (RSUs)
Date of the Award
%%OPTION_DATE,'Month DD, YYYY'%-%
Number of Awarded
Units
%%TOTAL_SHARES_GRANTED,'999,999,999'%-%
RSUs
Vesting
Except as otherwise set forth in this Award Certificate, your RSUs will vest as follows provided you remain continuously Employed by
the Company through the applicable below Scheduled Vesting Date:
Number of Shares
Vesting Date
%%SHARES_PERIOD1,'999,999,999'%-%
%%VEST_DATE_PERIOD1,'Month DD, YYYY'%-%
%%SHARES_PERIOD2,'999,999,999'%-%
%%VEST_DATE_PERIOD2,'Month DD, YYYY'%-%
%%SHARES_PERIOD3,'999,999,999'%-%
%%VEST_DATE_PERIOD3,'Month DD, YYYY'%-%
%%SHARES_PERIOD4,'999,999,999'%-%
%%VEST_DATE_PERIOD4,'Month DD, YYYY'%-%
%%SHARES_PERIOD5,'999,999,999'%-%
%%VEST_DATE_PERIOD5,'Month DD, YYYY'%-%
Settlement
Your awards will be converted and settled in Shares pursuant to Section 8 of the Plan and Section 1(b) of this Award Certificate unless
your primary place of employment is located outside the United States in which case your shares may be settled in cash in accordance
with the requirements for your local jurisdiction. See the "International Supplement," included herein as Appendix A, for additional
information.
Restrictive Covenants,
Clawback, Risk
Reviews, Investigations,
and Misconduct
Pursuant to Section 8 of this Award Certificate, your Award may be subject to (i) forfeiture, cancellation and/or repayment triggered in the
event of your violation of a restrictive covenant, including non-solicitation and non-competition requirements, more fully described in
this Award Certificate, (ii) clawback (including in the event of certain restatements of the Company’s financial performance) in
accordance with any clawback or recoupment policy in effect as of the Date of the Award, including the Discover Compensation
Recoupment Policy, (iii) forfeiture if you are subject to a risk review or forfeiture, cancellation and/or repayment if you are subject to an
investigation, and (iv) recovery, recoupment, or forfeiture if you engage in "misconduct" as defined in the Discover Incentive
Compensation Clawback Policy.
Non-U.S. Employees
If you are Employed outside the United States, please reference the “International Supplement” included herein as Appendix A, which
contains supplemental terms and conditions for your RSU Award.
You will earn RSUs included in your RSU Award only if you (1) remain in continuous Employment through the applicable
Scheduled Vesting Dates (subject to limited exceptions set forth herein), (2) are not found to be subject to the forfeiture, cancellation, or
clawback provisions set forth in Section 8 below, and (3) satisfy obligations you owe to the Company as set forth in Section 10 below. If
the Company deems appropriate and in its sole discretion, the Company may require you to provide a written certification or other
evidence, from time to time, to confirm that none of the circumstances described in Section 8 below exist or have occurred, including
upon a termination of Employment and/or during a specified period of time prior to the applicable Scheduled Vesting Dates. If you fail to
timely provide any required certification or other evidence, the Company may cancel your RSU Award. It is your responsibility to provide
the Human Resources Department with your up-to-date contact information.
1.
Vesting Schedule; Conversion.
(a)
Vesting Schedule. Your RSUs will vest according to the Scheduled Vesting Dates set forth in this Award
Certificate, provided you remain continuously Employed through such dates, unless earlier vesting is required pursuant to Section 4, 5 or
6 of this Award Certificate.
(b)
Conversion.
(1)
Except as otherwise provided in this Award Certificate, each of your vested RSUs will convert to one Share
on or as soon as administratively practicable following the applicable Scheduled Vesting Date.
(2)
Subject to the provisions of the Plan and this Award Certificate, as well as any transfer restrictions imposed
by the Company or applicable pursuant to securities laws, Shares to which you are entitled following conversion of RSUs under
any provision of this Award Certificate shall be delivered to you (or your beneficiary or estate, as applicable) as soon as
administratively practicable after the Scheduled Vesting Date, unless earlier delivery is required pursuant to Section 4, 5, or 6 of
this Award Certificate.
(c)
Accelerated Conversion. The Committee, in its sole discretion, may determine that any RSUs may be converted to
Shares prior to the Scheduled Vesting Date subject to compliance with all Legal Requirements, including Section 409A.
(d)
Rule of Construction for Timing of Conversion. Whenever this Award Certificate provides for RSUs to convert
to Shares on the Scheduled Vesting Date or upon an accelerated or different specified event or date, such conversion will be considered to
have been timely made, and neither you nor any of your beneficiaries nor your estate shall have any claim against the Company for
damages based on a delay in conversion of your RSUs (or delivery of Shares following conversion), and the Company shall have no
liability to you (or to any of your beneficiaries or your estate) in respect of any such delay, as long as conversion is made by December 31
of the year in which occurs the Scheduled Vesting Date or such other specified event or date or, if later, by the 15th day of the third
calendar month following such specified event or date.
2.
Special Provisions for Certain “Specified Employees”.
Notwithstanding anything to the contrary in this Award Certificate, if Discover reasonably considers you to be one of its “specified
employees” as defined in Section 409A at the time of the termination of your Employment, any RSUs that constitute deferred
compensation under Section 409A that are payable upon termination of Employment will not
convert to Shares or be delivered to you until the date that is six months after the termination of your Employment (or the date of your
death, if such event occurs earlier).
3.
Dividend Equivalent Payments.
Until your RSUs convert to Shares and subject to your continued Employment through the applicable payment date, if Discover
pays a regular or ordinary cash dividend on its common stock, you will be paid a dividend equivalent for your vested and unvested RSUs.
No dividend equivalents will be paid to you on any canceled RSUs. Discover, in its discretion, will decide on the form of payment and
may pay dividend equivalents in Shares, in cash or in a combination thereof. Discover will pay the dividend equivalents as soon as
administratively practicable (and in any event within thirty (30) days) after Discover pays the corresponding dividend on its Stock.
4.
Death; Disability.
The following special vesting and payment terms apply to your RSUs:
(a)
Death. If your Employment terminates due to your death, all RSUs subject to this Award Certificate will vest,
convert to Shares and be delivered to your beneficiary or your estate on or as soon as administratively practicable after your date of death.
(b)
Disability. If your Employment terminates due to Disability, all RSUs subject to this Award Certificate will vest,
convert to Shares and be delivered to you on or as soon as administratively practicable after your termination due to Disability.
5.
Termination Due to Reduction in Force; Position Elimination; or Increase/Addition of Skills Required for Current
Position.
If the Company terminates your Employment due to a reduction in force, an elimination of your position, or as a result of an
increase or addition of skills required of your current position, each as determined by the Company in its sole discretion, the number of
RSUs that will vest upon the termination of your Employment (to the extent not already vested) will be determined by multiplying the
RSUs subject to this Award Certificate by the Pro Ration Fraction, calculated through the date your Employment terminates. These RSUs
will vest and convert to Shares as soon as administratively practicable following your termination of Employment, provided that you sign
(and do not revoke) an agreement and release of claims satisfactory to the Company and be delivered to you on or as soon as
administratively practicable after your termination pursuant to this section, with such release to become effective pursuant to its terms
within sixty (60) days following your termination of employment or such other date specified by the Company as permitted under Section
409A.
6.
Change in Control.
(a)
Termination in Connection with Change in Control. If the Company terminates your Employment other than for
Cause, or if you terminate your Employment for Good Reason, within six months prior to or within twenty-four (24) months after a
Change in Control, your RSUs will immediately vest and convert to Shares on the later of the date of a Change in Control or the date of
your termination following a Change in Control, as applicable and be delivered as soon as administratively practicable thereafter.
(b)
Stock Consideration. In the event of a Change in Control which results from a transaction pursuant to which the
shareholders of Discover receive shares of common stock of an acquiring entity that are registered under Section 12 of the Exchange Act,
unless otherwise determined by the Committee, in its sole discretion prior to such Change in Control,
there shall be substituted for each Share subject to this Award Certificate the number and class of shares of common stock of the acquiring
entity into which each outstanding Share shall be converted pursuant to such Change in Control transaction, and this Award Certificate
shall otherwise continue in effect.
(c)
Non-stock Consideration. In the event of a Change in Control which results from a transaction pursuant to which
the shareholders of Discover receive consideration other than shares of common stock of the acquiring entity that are registered under
Section 12 of the Exchange Act, the value of the RSUs hereunder shall, unless otherwise determined by the Committee, in its sole
discretion prior to such Change in Control, be converted into a right to receive the cash or other consideration received by the shareholders
of Discover in such transaction, and this Award Certificate shall otherwise continue in effect.
7.
Termination of Employment.
Your unvested RSUs will be forfeited and canceled if your Employment terminates for any reason other than under the
circumstances set forth in Section 4, 5 or 6 of this Award Certificate.
8.
Forfeiture/Cancellation/Clawback of RSU Awards Under Certain Circumstances.
(a)
Breach of Restrictive Covenants. RSUs are not earned until the applicable Scheduled Vesting Date and will be
canceled prior to the applicable Scheduled Vesting Date under any of the circumstances set forth below. Although you will become the
beneficial owner of Shares following conversion of your RSUs, the Company may, upon notice, issue a transfer restriction with respect
to your Shares following conversion of your RSUs pending any investigation or other review that impacts the determination as to
whether the RSUs are or may be cancellable under the circumstances set forth below. The Shares underlying such RSUs shall be
forfeited and recoverable in the event the Company determines that the RSUs were cancellable under the circumstances set forth below.
Notwithstanding any provision of this Award Certificate to the contrary and subject to Section 8(h) below, in the event that at any time
prior to one year after the termination of your Employment or service with the Company, you (i) engage in Wrongful Solicitation, (ii)
breach your obligations to the Company under a confidentiality, intellectual property or other restrictive covenant, or (iii) for those
participants classified by the Company as an officer of Discover Financial Services or one of its Subsidiaries on the date of grant,
engage in Competitive Activity, with respect to each such incidence of violation and to the maximum extent permitted by applicable law,
you shall be required to:
(1)
pay to the Company an amount in cash equal to the value of the Shares that vested and converted on or after,
or within one year prior to, your termination of Employment, which value shall be determined by the Company, in its sole
discretion, and shall include an amount for tax adjustments appropriate to reflect your obligation to repay such amounts due to
your breach of the restrictive covenants; or
(2)
transfer to the Company the number of Shares that vested and converted on or after, or within one year prior
to, your termination of Employment, plus an amount calculated by the Company, in its sole discretion, for tax adjustments
appropriate to reflect your obligation to transfer such common stock due to your breach of the restrictive covenants.
In the event of multiple incidences of breach of this provision of the Award Certificate (e.g., in the event of violation of the non-
solicitation provision following engaging in Competitive Activity), the repayment amount will be additive for each incidence of
violation, not to exceed
two times the amount calculated under paragraph 8(a)(1) and (2) above. If you engage in Wrongful Solicitation or engage in a
Competing Activity, in addition to the remedies described in Section 8(a), the Company may also take such action at equity or in law as
it deems appropriate to enforce the provisions of the applicable restrictive covenant, including pursuing injunctive relief.
The Company recommends that before accepting this Award Certificate, you consult with an attorney of your choice regarding the
restrictive covenants described herein. You acknowledge that you have been provided at least fourteen (14) calendar days to review the
applicable restrictive covenants prior to having to accept the award.
(b)
Restatement of Financial Statements. The Award and any cash payment or Shares delivered pursuant to the
Award are subject to forfeiture, recovery by the Company or other action pursuant to any clawback or recoupment policy in effect as of
the Date of the Award, including without limitation, the Discover Compensation Recoupment Policy.
(1) Pursuant to the Discover Compensation Recoupment Policy (to the extent you are subject to such policy), in
the event and to the extent the Committee reasonably determines that the performance considered by the Committee, and on the
basis of which the amount of RSUs were granted or converted to Shares, was based on Discover’s material noncompliance with
any financial reporting requirement under the securities laws or Company policy which requires Discover to file a restatement of
its financial statements within three years of the Date of the Award, you will be required to comply with paragraphs (1) and (2) (as
applicable) below to repay to the Company an amount equal to the number of RSUs which were granted or the Shares converted
hereunder less the number of RSUs that would have been granted or the number of Shares that would have been converted had
your RSUs been granted or converted based on compliance with any such financial reporting requirement under the securities laws
or Company policy (such number of RSUs, the “Clawback RSUs,” to be determined in each case by the Committee in its sole
discretion and before satisfaction of tax or other withholding obligations pursuant to Section 9):
(A) You shall forfeit a number of RSUs hereunder equal to the Clawback RSUs. In the event such forfeited RSUs
are less than the Clawback RSUs, then you shall comply with the following paragraph 2.
(B) You shall be required to:
(i) pay to the Company an amount in cash equal to the value of the Shares that vested and converted
hereunder, which value shall be determined using a valuation method established by the Company, in its sole
discretion, and shall include an amount for tax adjustments appropriate to reflect your obligation to repay such
amounts due to the restatement of the Company’s financial statements; or
(ii) transfer to the Company the number of Shares that vested and converted hereunder, plus such amount
calculated by the Company, in its sole discretion, for tax adjustments appropriate to reflect your obligation to repay
such amounts due to the restatement of the Company’s financial statements.
(2) By accepting the RSUs you hereby agree and acknowledge that you are obligated to cooperate with and
provide all assistance necessary to the Company
to recover or recoup the RSUs or amounts paid under the Plan that are subject to clawback pursuant to this Award Certificate,
applicable securities laws or listing standards or Company policy, including the Discover Financial Services Compensation
Recoupment Policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting and
documentation necessary to recover or recoup any RSUs or amounts paid pursuant to RSUs.
(c)
Risk Review. For Covered Employees, as defined and identified by the Company, no RSUs will convert to Shares
until the Chief Human Resources Officer receives confirmation from the Chief Risk Officer, or their delegate, that a review has been
conducted in accordance with the Incentive Compensation Risk Management (ICRM) Program at the direction of the Chief Risk Officer,
to determine whether you engaged in any willful or reckless violation of the Company’s risk policies, including the Code of Conduct
and Business Ethics. If the Chief Risk Officer, or their delegate, finds any such violation or breach, then the Company or, in the case of
Covered Employees subject to Section 16 of the Exchange Act, the Committee, may determine that all or a portion of your RSUs will be
forfeited.
(d)
Investigations. In the event that the Company has either commenced an investigation of a matter that you oversaw
or were involved in or has evidence that may require investigation of a matter that you oversaw or were involved in, in either case
concerning a breach of one of the obligations hereunder or a serious violation of Company policy, the Company may freeze your
account and effectuate a transfer restriction such that your converted and delivered RSUs and any shares associated therewith may not
be sold or transferred until such time as the Company reasonably believes the matter to be resolved. If, following the investigation, the
Company determines, in its sole discretion, that you breached one of the obligations hereunder or committed a serious violation of
Company policy, the Company may:
(1)
forfeit all or a portion of your RSUs;
(2)
require that you pay to the Company an amount in cash equal to the value of the Shares that vested and
converted hereunder, which value shall be determined by the Company, in its sole discretion, and shall include an amount for tax
adjustments appropriate to reflect your obligation to repay such amounts due to the circumstances described in this Section 8(d); or
(3)
cancel Shares in your account or require that you transfer to the Company the number of Shares that vested
and converted hereunder, plus an amount calculated by the Company, in its sole discretion, for tax adjustments appropriate to
reflect your obligation to transfer such common stock due to the circumstances described in this Section 8(d).
(e)
Misconduct. In addition to the foregoing, pursuant to the Discover Incentive Compensation Clawback Policy, if
you are a current or former employee with a management level of director or above and you engage in “misconduct” as defined in the
Discover Incentive Compensation Clawback Policy, the Company, in its sole discretion, may recover all or a portion of the RSUs
“received” (as defined in the Discover Incentive Compensation Clawback Policy) by you during the three-year period preceding the date
of your “misconduct” (or such later date on which the Committee becomes aware of your “misconduct” or completes its investigation).
(f)
Other Recoupment or Forfeiture Rights. Notwithstanding the foregoing, any RSUs recovered under any
clawback or recoupment policy, including the Discover Compensation Recoupment Policy and the Discover Incentive Compensation
Clawback Policy, shall count toward any required forfeiture, cancellation, or clawback of RSUs under this Award Certificate and vice
versa.
(g)
Authorization. You authorize the Company to deduct any amount or amounts owed by you pursuant to this Section
8 from any amounts payable by or on behalf of the Company to you, including, without limitation, any amount payable to you as salary,
wages, paid time off, bonus, severance, change in control severance or the conversion of any equity-based award. This right of offset
shall not be an exclusive remedy and the Company’s election not to exercise this right of offset with respect to any amount payable to
you shall not constitute a waiver of this right of offset with respect to any other amount payable to you or any other remedy. You further
acknowledge and authorize the Company to take the actions described in this Section 8, including those described in Section 8(d).
(h)
Non-Contravention. Nothing in this Award Certificate (including with respect to confidential information, trade
secrets, and other obligations) is intended to be or will be construed to prevent, impede or interfere with your right to respond accurately
and fully to any question, inquiry or request for information regarding your employment with the Company when required by legal
process by a Federal, State or other legal authority, or from initiating communications directly with, or responding to any inquiry from,
or providing truthful testimony and information to, any Federal, State, or other regulatory authority in the course of an investigation or
proceeding authorized by law and carried out by such agency. You are not required to contact the Company regarding the subject matter
of any such communications before you engage in such communications. In addition, nothing in this Award Certificate is intended to
restrict your legally protected right to discuss wages, hours or other working conditions with coworkers or in any way limit your rights
under the National Labor Relations Act, any whistleblower law, or other applicable law. You acknowledge that the Company has
provided you notice of your immunity rights under the Defend Trade Secrets Act, which states: “(1) An individual shall not be held
criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that (A) is made (i) in
confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose
of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other
proceeding, if such filing is made under seal; and (2) an individual who files a lawsuit for retaliation by an employer for reporting a
suspected violation of law may disclose a trade secret to the attorney of the individual and use the trade secret information in the court
proceeding, if the individual (A) files any document containing the trade secret under seal, and (B) does not disclose a trade secret,
except pursuant to court order.”
9.
Tax and Other Withholding Obligations.
Subject to rules and procedures established by Discover, you may be eligible to elect to satisfy the tax or other withholding
obligations arising upon conversion of your RSUs or upon any taxable event by paying cash or by having Discover withhold Shares or by
tendering Shares, in each case in an amount sufficient to satisfy the tax or other withholding obligations. Shares withheld or tendered will
be valued using the Fair Market Value of Stock on the date the Award becomes taxable, using a valuation methodology established by
Discover.
10.
Satisfaction of Obligations.
Notwithstanding any other provision of this Award Certificate, the Company may, in its sole discretion, take various actions
affecting your RSUs in order to collect amounts sufficient to satisfy any obligation that you owe to the Company and any tax or other
withholding obligations. The Company’s determination of the amount that you owe the Company shall be conclusive. The Fair Market
Value of Stock for purposes of the following provisions shall be determined
using a valuation methodology established by Company. The actions that may be taken by Discover pursuant to this Section 10 include,
but are not limited to, the following:
(a)
Withholding of Shares. Upon conversion of RSUs, including any accelerated conversion pursuant to Sections 4, 5,
or 6 above, or, if later, upon delivery of the Shares, the Company may withhold a number of Shares sufficient to satisfy any obligation
that you owe to the Company and any tax or other withholding obligations whether national, federal, state or local tax withholding
obligations including any social insurance contributions or employment tax obligation. The Company shall determine the number of
Shares to be withheld by dividing the dollar value of your obligation to the Company and any tax or other withholding obligations by the
Fair Market Value of Stock on the date the Award becomes taxable. To the extent that the Company retains any Shares or reduces the
number of RSUs to cover the withholding obligations, it will do so at the applicable minimum statutory rate (or such other rate as will not
cause adverse accounting consequences under the accounting rules then in effect, and is permitted by the Company). Should the Company
withhold in excess of the actual tax withholding obligation, the Company may apply the excess withholding to another compensation tax
liability.
(b)
Netting of Accelerated RSUs. In order to satisfy any taxes due upon an event which is earlier than delivery,
Discover, in its sole discretion, may accelerate the vesting and conversion of all or a portion of your unvested RSUs subject to Section
23 below. The Company shall determine the number of RSUs to be accelerated and converted by dividing the dollar value of your tax
obligations upon such event by the Fair Market Value of Stock on the date the Award becomes taxable. Accelerated and converted RSUs
shall not exceed the value of taxes due upon such event and the resulting Shares will be withheld by the Company.
(c)
Withholding of Other Compensation. Discover may withhold the payment of dividend equivalents on your RSUs
or any other compensation or payments due from Discover to ensure satisfaction of any obligation that you owe the Company or any tax
or other withholding obligations or Discover may permit you to satisfy such tax or other withholding obligation by paying such
obligation in immediately available funds.
(d)
Mobile Employees. You are liable and responsible for all taxes and social insurance contributions owed in
connection with the Award, regardless of any action the Company takes with respect to any tax withholding obligations that arise in
connection with the Award. The Company does not make any representation or undertaking regarding the tax treatment or the treatment
of any tax withholding in connection with the grant, vesting or payment of the Award. The Company does not commit and is under no
obligation to structure the Award to reduce or eliminate your tax liability. Further, you may be subject to individual income taxation (and
possibly social security or other applicable personal or payroll taxes) in each jurisdiction where you have performed services for the
Company between the Award Date and when the Award vests. Taxes for which you are liable, if applicable, may be withheld and
deposited by the Company in each jurisdiction in which you have performed services regardless of your status as a resident or non-
resident in one or more of the jurisdictions that have a right to impose taxation. You agree that you will comply with all United States
and foreign individual income tax return filing obligations that may be imposed with respect to the Award.
11.
Transfer Restrictions and Investment Representation.
(a)
Nontransferability of Award. You may not sell, pledge, hypothecate, assign or otherwise transfer your RSUs,
other than as provided in Section 12 (which allows you to designate a beneficiary or beneficiaries in the event of your death) or by will
or the laws of descent and distribution.
(b)
Investment Representation.You hereby covenant that (a) any sale of any share acquired upon the vesting of the
Award shall be made either pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities
Act”), and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state
securities laws and (b) you shall comply with all regulations and requirements of any regulatory authority having control of or
supervision over the issuance of the Shares and, in connection therewith, shall execute any documents which the Committee shall in its
sole discretion deem necessary or advisable.
12.
Designation of a Beneficiary.
You may make a revocable designation of beneficiary or beneficiaries to receive all or part of the Shares and any dividend
equivalents credited to you pursuant to Section 3 hereof to be paid or delivered under this Award Certificate in the event of your death.
Absent a designation on file, distributions pursuant to Section 4 will be made to your estate in accordance with applicable law. To make a
beneficiary designation, you must complete and file the online form provided by E*TRADE or such other vendor as the Company may
choose to administer the Plan. If you previously filed a designation of beneficiary form for your equity awards with the Human Resources
Department, such form will also apply to the RSUs granted pursuant to this RSU Award. You may replace or revoke your beneficiary
designation at any time, and the Company will rely on your most recent designation on file for purposes of beneficiary designation.
13.
Ownership and Possession.
(a)
Generally. Except as specified in Section 3 with respect to dividend equivalents, you will not have any rights as a
shareholder with respect to your RSU Awards or the Shares underlying such RSUs prior to the vesting and conversion of your RSUs.
(b)
Following Conversion. Subject to the terms and conditions of this Award Certificate, following the vesting and
conversion of your RSUs and the issuance of the Shares underlying such RSUs in your name, you will be the beneficial owner of the
Shares issued to you, subject to any tax withholding under Section 10, and you will be entitled to all rights of ownership with respect to
such Shares, including voting rights and the right to receive cash or stock dividends or other distributions paid on such Shares.
14.
Securities Law Matters.
Shares issued upon conversion of your RSUs may be subject to restrictions on transfer by virtue of the Securities Act of 1933, as
amended, and the applicable state securities laws. Discover may advise the transfer agent to place a stop order against such shares if it
determines that such an order is necessary or advisable. Because Shares will only be maintained in book-entry form, you will not receive
a stock certificate representing your interest in such Shares.
15.
Compliance with Laws and Regulations.
Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of the Shares issued upon conversion of your
RSUs (whether directly or indirectly, whether or not for value, and whether or not voluntary) must be made in compliance with any
applicable constitution, rule, regulation, or policy of any of the exchanges or associations or other institutions with which the Company or
a Related Employer has membership or other privileges, and any applicable law, or applicable rule or regulation of any governmental
agency, self-regulatory organization or state or federal regulatory body.
16.
No Entitlements.
(a)
No Right to Continued Employment. This RSU Award is not an employment agreement, and nothing in this
Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Company
or your Employment status at a Related Employer, nor does anything herein constitute a promise of continued employment or re-
employment.
(b)
No Right to Future Awards. This RSU Award is discretionary and does not confer on you any right or entitlement
to receive another award of RSUs, any other equity-based award or any other award at any time in the future or in respect of any future
period.
(c)
No Effect on Future Employment Compensation. This RSU Award is discretionary and does not confer on you
any right or entitlement to receive compensation in any specific amount for any future fiscal year, and does not diminish in any way the
Company’s discretion to determine the amount, if any, of your compensation. In addition, this RSU Award is not part of your base salary
or wages and will not be taken into account in determining any other Employment-related rights you may have, such as rights to pension
or severance pay, end of service payments, bonuses, long-service awards or similar payments and in no event shall be considered as
compensation for, or relating in any way to, past services for the Company.
(d)
Termination of Employment. In consideration of the grant of the Award, no claim or entitlement to compensation
or damages shall arise from termination of the Award or diminution in value of the Award or Shares acquired through vesting of the Award
resulting from termination of your Employment (for any reason whatsoever and whether or not in breach of local labor laws) and you
irrevocably release the Company and the Related Employer from any such claim that may arise; if, notwithstanding the foregoing, any
such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Award Certificate, you will be deemed
irrevocably to have waived your entitlement to pursue such claim; and in the event of termination of your Employment (whether or not in
breach of local labor laws), your right to receive the Award and vest in the Award under the Plan, if any, will terminate effective as of the
date that you are no longer actively Employed and will not be extended by any notice period mandated under local law (e.g., active
Employment would not include a period of “garden leave” or similar period pursuant to local law); Discover shall have the exclusive
discretion to determine when you are no longer actively Employed for purposes of your Award.
(e)
Language. If you have received this Award Certificate or any other document related to the Plan translated into a
language other than English and if the translated version is different that the English version, the English version will control.
(f)
Award Terms Control. In the event of any conflict between any terms applicable to equity awards in any
employment agreement, offer letter or other arrangement that you have entered into with the Company and the terms set forth in this
Award Certificate, the latter shall control.
17.
Consents.
Your RSU Award is conditioned upon the Company making of all filings and the receipt of all consents or authorizations required
to comply with, or required to be obtained under, applicable local law.
In accepting this RSU Award, you consent to the collection, use and transfer, in electronic or other form, of your personal data by
and among, as applicable, the Company and any other possible recipients for the purpose of implementing, administering and managing
your participation in the Plan, as well as for the purpose of the Company’s compliance with applicable law, including, without limitation,
Section 953(b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. You understand that the recipients of your personal data may be located in the U.S. or elsewhere, and the
recipients’ country may have different data privacy laws and protections than your country. You understand that you may request a list
with the names and addresses of any potential recipients of your personal data, view the personal data, request additional information
about the storage of your personal data, require any necessary amendments to your personal data or refuse or withdraw your consent by
contacting your local human resources representative, in any case without cost. You understand, however, that refusing or withdrawing
your consent may affect your ability to participate in the Plan.
18.
Electronic Delivery and Consent to Electronic Participation.
The Company may, in its sole discretion, decide to deliver any documents related to the RSU Award and participation in the Plan
or future RSU Awards by electronic means. You hereby consent to receive such documents by electronic delivery and to participate in the
Plan through an online or electronic system established and maintained by the Company or another third party designated by the
Company, including the acceptance of RSU Awards and the execution of the RSU agreements through electronic signature. Electronic
acceptance of this Award Certificate through the E*TRADE website, or such other vendor as the Company may choose to administer the
Plan, shall be required and binding on you. Where electronic acceptance may not be permitted under applicable law, the Company may
also request and require your physical signature. Your acceptance affirms your agreement to all the terms and conditions set forth in this
Award Certificate and acceptance of the Award subject thereto. Not providing this acceptance within the timeframe stipulated may result
in the Company forfeiting all or a portion of this Award.
19.
Award Modification.
The Committee reserves the right to modify or amend unilaterally the terms and conditions of your RSUs, without first asking your
consent, or to waive any terms and conditions that operate in favor of Discover. These amendments may include (but are not limited to)
changes that the Committee considers necessary or advisable as a result of changes in any, or the adoption of any new, Legal Requirement.
The Committee may not modify your RSUs in a manner that would materially impair your rights in your RSUs without your consent;
provided, however, that the Committee may, without your consent, amend or modify your RSUs in any manner that the Committee
considers necessary or advisable to comply with or reflect the application of any Legal Requirement or to ensure that your RSUs are not
subject to United States federal, state or local income tax or any equivalent taxes in territories outside the United States prior to payment.
Notwithstanding any provisions of this Award Certificate to the contrary, to the extent you transfer employment outside of the United
States, the Award shall be subject to any special terms and conditions as Discover may need to establish to comply with local laws, rules,
and regulations or to facilitate the operation and administration of the Award and the Plan in the country to which you transfer
employment (or Discover may establish alternative terms and conditions as may be necessary or advisable to accommodate your transfer).
Discover will notify you of any amendment of your RSUs that affects your rights. Any amendment or waiver of a provision of this Award
Certificate (other than any amendment or waiver applicable to all recipients generally), which amendment or waiver operates in your favor
or confers a benefit on you, must be in writing and signed by the Chief Human Resources Officer to be effective.
20.
Severability.
In the event the Committee determines that any provision of this Award Certificate would cause you to be in constructive receipt
for United States federal or state income tax purposes of any portion of your RSU Award prior to the vesting of such Award, then such
provision will be
considered null and void and this Award Certificate will be construed and enforced as if the provision had not been included in this Award
Certificate as of the date such provision was determined to cause you to be in constructive receipt of any portion of your RSU Award. In
addition, in the event that any provision of this Award Certificate shall be held illegal or invalid for any reason, such illegality or invalidity
shall not affect the remaining provisions of this Award Certificate, and this Award Certificate shall be construed and enforced as if the
illegal or invalid provision had not been included.
21.
Successors.
This Award Certificate shall be binding upon and inure to the benefit of any successor or successors of Discover and any person or
persons who shall, upon your death, acquire any rights hereunder in accordance with this Award Certificate or the Plan.
22.
Governing Law.
This Award Certificate and the related legal relations between you and Discover will be governed by and construed in accordance
with the laws of the State of Delaware, without regard to any conflicts or choice of law, rule or principle that might otherwise refer the
interpretation of the RSU Award to the substantive law of another jurisdiction to the maximum extent permitted by applicable law. The
Company and you agree that the jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise
relating to), the Plan or this Award Certificate shall be exclusively in the courts in the State of Illinois, Counties of Cook or Lake,
including the federal courts located therein (should federal jurisdiction exist), and the Company and you hereby submit and consent to said
jurisdiction and venue to the maximum extent permitted by applicable law.
23.
Section 409A.
This Award is intended to be exempt from or comply with Section 409A, and shall be interpreted and construed accordingly, and
each payment hereunder shall be considered a separate payment for purposes of Section 409A. Subject to Section 2, to the extent this
Award Certificate provides for the Award to become vested and be settled upon your termination of employment, the applicable Shares
shall be transferred to you or your beneficiary upon your "separation from service," within the meaning of Section 409A. To the extent
necessary or advisable to comply with Section 409A, with respect to any provision of this Award Certificate that provides for vested RSUs
to convert to Shares on or as soon as administratively practicable after a specified event or date, such conversion and settlement will be
made by the later of the end of the calendar year in which the specified event or date occurs or the 15 day of the third calendar month
following the specified event or date. If any RSUs constitute deferred compensation under Section 409A and are payable subject to your
execution and non-revocation of a release and the period to consider the release spans two separate taxable years, then the distribution of
the RSUs that are conditioned upon such execution and non-revocation of the release shall be made in the later taxable year.
24.
Defined Terms.
For purposes of this Award Certificate, the following terms shall have the meanings set forth below:
(a)
“Cause” means:
(1)
any act or omission which constitutes a material breach of your obligations to the Company or your failure
or refusal to perform satisfactorily any duties
th
reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by
reason of your incapacity due to Disability) within ten (10) business days after written notification thereof to you by the Company;
(2)
any act or omission by you that constitutes (i) fraud or intentional misrepresentation, (ii) embezzlement,
misappropriation or conversion of assets of, or business opportunities considered by, the Company or (iii) any other act which has
caused or may reasonably be expected to cause material injury to the interest or business reputation of the Company; or
(3)
your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to
such laws, or rules or regulations of any securities or commodities exchange or association of which the Company is a member or
of any policy of the Company relating to compliance with any of the foregoing.
(b)
“Chief Human Resources Officer” means the chief human resources officer of Discover, any successor chief
human resources officer, or any other individual or committee appointed by the chief executive officer of Discover with the power
and authority of the chief human resources officer.
(c)
“Chief Risk Officer” means the chief risk officer of Discover, any successor chief risk officer, or any other
individual or committee appointed by the chief executive officer of Discover with the power and authority of the chief risk officer.
(d)
“Competitive Activity” means:
(1)
becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director,
independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacity with, a
Competitor, where you will be responsible for providing, or managing or supervising others who are providing, services (i) that are
similar or substantially related to the services that you provided to the Company, or (ii) that you had direct or indirect managerial
or supervisory responsibility for at the Company, or (iii) that call for the application of the same or similar specialized knowledge
or skills as those utilized by you in your services for the Company, in each such case, at any time during the year preceding the
termination of your employment with the Company; or
(2)
either alone or in concert with others, forming, or acquiring a five percent (5%) or greater equity ownership,
voting interest or profit participation in, a Competitor.
(e)
“Competitor” means any corporation, partnership or other entity that engages in (or that owns a significant interest
in any corporation, partnership or other entity that engages in) (1) the business of consumer lending, including, without limitation, credit
card issuance or electronic payment services, or (2) any other business in which you have been involved in or had significant knowledge
of, which has been conducted by the Company at any time during your employment with the Company. For the avoidance of doubt, a
competitor of any entity which results from a corporate transaction involving the Company that constitutes a Change in Control shall be
considered a Competitor for purposes of this Award Certificate.
(f)
“Covered Employee” means an employee who, as of the Date of the Award, has been identified as a covered
employee by Corporate Risk Management.
(g)
“Date of the Award” means the date set forth in this Award Certificate.
(h)
“Disability” means a “permanent and total disability,” as defined in Section 22(e)(3) of the Internal Revenue Code.
(i)
"Discover Compensation Recoupment Policy" refers to the Discover Financial Services Compensation
Recoupment Policy, dated as of October 25, 2023.
(j)
"Discover Incentive Compensation Clawback Policy" refers to the Discover Incentive Compensation Clawback
Policy, effective as of September 3, 2024.
(k)
“Employed” and “Employment” refer to employment with the Company and/or Related Employment.
(l)
“Good Reason” means the occurrence of any of the following upon, or within six (6) months prior to or twenty-
four (24) months after the occurrence of a Change in Control of Discover without your prior written consent:
(1)
any material diminution in your assigned duties, responsibilities and/or authority, including the assignment
to you of any duties, responsibilities or authority inconsistent with the duties, responsibilities and authority assigned to you,
immediately prior to such assignment;
(2)
a material diminution in the authority, duties, or responsibilities of the supervisor to whom you are required
to report;
(3)
any material reduction in your base compensation; provided, however, that Company-initiated across-the-
board reductions in compensation affecting substantially all eligible Company employees shall alone not be considered “Good
Reason,” unless the compensation reductions exceed twenty percent (20%) of your base compensation;
(4)
a material diminution of the budget over which you have authority;
(5)
the Company’s requiring you to be based at a location that (i) is in excess of thirty-five (35) miles from the
location of your principal job location or office immediately prior to the Change in Control, or (ii) results in an increase in your
normal daily commuting time by more than ninety (90) minutes, except for required travel on Company’s business to an extent
substantially consistent with your then present business travel obligations; or
(6)
any other action or inaction that constitutes a material breach by the Company of any agreement pursuant to
which you provide services to the Company.
For purposes of paragraphs (1) through (6) above, the duties, responsibilities and/or authority assigned to you shall be deemed to
be the greatest of those in effect prior to or after the Change in Control. Unless you become Disabled, your right to terminate your
Employment for Good Reason shall not be affected by your incapacity due to physical or mental illness. Your continued Employment
shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason. Notwithstanding the
foregoing, Good Reason shall not exist unless you give the Company written notice thereof within thirty (30) days after its occurrence and
the Company shall not have remedied the action within thirty (30) days after such written notice.
(m) “Internal Revenue Code” means the United States Internal Revenue Code of 1986, as amended, and the rules,
regulations and guidance thereunder.
(n)
“Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance
or other legal requirement (including any foreign legal requirements).
(o)
“Pro Ration Fraction” means a fraction, not to exceed 1.0, the numerator of which is the number of completed
months commencing on the later of (i) the first day of the calendar year of the Date of the Award or (ii) the first day of the month in
which your employment commences and ending on the effective date of your termination of Employment, and the denominator of which
is 12.
(p)
“Related Employment” means your employment with an employer other than the Company (such employer, herein
referred to as a “Related Employer”), provided: (1) you undertake such employment at the written request or with the written consent of
the Chief Human Resources Officer; (2) immediately prior to undertaking such employment you were an employee of the Company or
were engaged in Related Employment (as defined herein); and (3) such employment is recognized by the Company in its discretion as
Related Employment; provided further that the Company may (i) determine at any time in its sole discretion that employment that was
recognized by the Company as Related Employment no longer qualifies as Related Employment, and (ii) condition the designation and
benefits of Related Employment on such terms and conditions as the Company may determine in its sole discretion. The designation of
employment as Related Employment does not give rise to an employment relationship between you and the Company, or otherwise
modify your and the Company’s respective rights and obligations.
(q)
“Scheduled Vesting Date” means the Scheduled Vesting Dates set forth in Award Certificate as the context requires.
(r)
“Wrongful Solicitation” occurs upon either of the following events:
(1)
while Employed, including during any notice period applicable to you in connection with the termination of
your Employment, or within one year after the termination of your Employment, directly or indirectly in any capacity (including
through any person, corporation, partnership or other business entity of any kind), you hire or solicit, recruit, induce, entice,
influence or encourage any Company employee to leave the Company or become hired or engaged by another firm; provided,
however, that this clause shall apply only to employees with whom you worked or had professional or business contact, or who
worked in or with your business unit, during any notice period applicable to you in connection with the termination of your
Employment or during the one year preceding notice of the termination of your Employment; or
(2)
while Employed, including during any notice period applicable to you in connection with the termination of
your Employment, or within one year after the termination of your Employment, directly or indirectly in any capacity (including
through any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner
attempt to persuade any client or customer, or prospective client or customer, of the Company (i) to discontinue or diminish his,
her or its relationship or prospective relationship with the Company or (ii) to otherwise provide his, her or its business to any
person, corporation, partnership or other business entity which engages in any line of business in which the Company is engaged
(other than the Company); provided, however, that this clause shall apply only to clients or customers, or prospective clients or
customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in
connection with the termination of your Employment or during the one year preceding notice of the termination of your
Employment.
IN WITNESS WHEREOF, Discover has duly executed and delivered this Award Certificate as of the Date of the Award.
DISCOVER FINANCIAL SERVICES
By:
/s/ J. Michael Shepherd
J. Michael Shepherd
Interim Chief Executive Officer and President
APPENDIX A
Discover Financial Services
International Supplement
This International Supplement to the Award Certificate (”International Supplement”) contains supplemental terms and
conditions for the RSU Award (“Equity Award”) to employees of Discover Financial Services (or the relevant affiliated company) located
in certain jurisdictions outside of the United States. The terms included in this International Supplement are intended to ensure compliance
with the laws of the country in which you are Employed or, in certain instances, to make the awards more tax efficient in your country.
You have also received an Award Certificate applicable to your award. The Award Certificate, together with this
International Supplement, collectively set forth the terms and conditions of your Equity Award. To the extent that this International
Supplement amends, deletes or supplements any terms of the Award Certificate, this International Supplement shall control.
Capitalized terms that are used without definition in this International Supplement have the meanings assigned in the Plan
or the Award Certificate.
All Employees Located Outside the United States.
If you are Employed outside of the United States, please note that your Equity Award is offered, issued and administered by
Discover Financial Services, a Delaware corporation, and your local employer is not involved in the grant of awards under such equity
incentive program. All documents related to your Equity Award, including the Award Certificate, this International Supplement and the
link by which you access these documents, originate and are maintained in the United States.
Your Equity Award is made in virtue of your Employment with, and your services performed for, the appropriate entities
within the Company. However, your award does not form part of your entitlement to remuneration or benefits, whether pursuant to any
contract of Employment to which you may be a party or otherwise. Similarly, the existence of a contract of Employment between you and
any entity within the Company shall not confer on you any right or entitlement to participate in the Equity Award or to receive awards
thereunder, or any expectation that you might participate in such equity incentive program or receive additional equity awards in the
future. Your Equity Award, the Award Certificate, and/or this International Supplement does not constitute an employment contract and
does not create an employment relationship or a promise of continued Employment for any period of time.
In addition, your Equity Award is not part of your base salary or wages and will not be taken into account (except to the
extent otherwise required by local law) in determining any other employment-related rights you may have, such as rights to pension or
severance pay.
Whether or not you have a contract of Employment with any entity within the Company, your rights and obligations under
the terms of your office or Employment shall not be affected by your receipt of the Equity Award. By accepting your receipt of the Equity
Award, you waive any and all rights to compensation or damages for any loss of the Equity Award in the event of your termination of your
office or Employment for any reason whatsoever. This waiver applies whether or not such termination amounts to a wrongful or unfair
dismissal.
You may be subject to applicable exchange control, currency control or similar financial laws that may affect your
transactions with respect to your equity award, including without limitation, your ability to bring shares of Discover Financial Services
common stock into your jurisdiction or to receive the proceeds of a sale of Discover Financial Services common stock in your jurisdiction.
Moreover, you may be subject to certain notification, approval and/or repatriation obligations with respect to securities and funds you
receive in connection with your awards. In addition the Company is not responsible for any foreign exchange fluctuations that change the
value of your RSU Award. You are encouraged to consult your advisors to ascertain whether any restrictions or obligations apply to
you.
Your Equity Award has not been authorized or approved by any applicable securities authorities and may have been offered
pursuant to an exemption from registration in your local jurisdiction. Similarly, no prospectus or similar offering or registration document
has been prepared, authorized or approved by any applicable securities authorities in your jurisdiction. The grant of awards is being made
only to employees of the Company and does not constitute and is not intended to be an offering to the public. For this reason, you must
keep all award documents you receive, including but not limited to this International Supplement and the Award Certificate, confidential
and you may not distribute or otherwise make public any award documents without the prior written consent of the Company. Moreover,
you may not reproduce (in whole or in part) any award documents you receive. In addition, the shares of Company common stock you
acquire upon vesting and conversion of your Equity Award may be subject to applicable restrictions on resale in your local jurisdiction.
You are encouraged to consult your advisors to ascertain whether any restrictions or obligations apply to you.
Employees in China.
If you are employed in China or are a Chinese national on international assignment outside of China for the Company, but
your Equity Award was made in China and/or you will be taxed there, your Equity Award will be settled in cash. Rather than convert
awards to shares pursuant to Section 1 of the Award Certificate and Sections 4 through 6 of the Award Certificate, the Company will
convert your Equity Award to cash and the Company or your local employer will deliver the cash payment to you. You consent to this cash
conversion in exchange for the Equity Award. All other terms and conditions of the Plan and the Award Certificate will otherwise apply to
your Equity Award.
Employees in the United Kingdom or European Union.
If you are employed in the United Kingdom (or the European Union), the Company will act in accordance with the Data
Protection Act of 2018 as amended from time to time and the General Data Protection Regulation as amended from time to time as
applicable regarding any personal information which you provide to it in connection with your Equity Award (including the amount of the
award) and you acknowledge the need for the processing of such personal information in order to facilitate your participation in such
equity incentive program, for any purposes required by law or regulation, or for any other legitimate business purpose. By accepting your
Equity Award, you acknowledge that from time to time, for the purposes described above, your personal information may be stored and
processed by and disclosed and transferred to other offices and companies within the Company and to third parties, some of which are
situated outside of the European Union and may not offer as high a level of protection for personal information as countries within the
European Union.
The following provisions apply in lieu of those contained in the Award Certificate for employees in the United Kingdom.
Section 8(a)
The forfeiture, cancellation and/or clawback circumstances and events set forth in this Section 8 are designed, among other things,
to incentivize compliance with the Company’s policies (including, without limitation, the Company’s risk policies and Code of Conduct
and Business Ethics), to protect the Company’s interests in non-public, confidential and/or proprietary information, products, trade secrets,
customer relationships, workforce stability, and other legitimate business interests, and to ensure an orderly transition of responsibilities.
This Section 8 shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate
specifically provide that the circumstances set forth in this Section 8 no longer apply).
(a)
Conditions. Notwithstanding your satisfaction of the vesting conditions of this Award Certificate, RSUs are not
earned: (1) until the applicable Scheduled Vesting Date; and (2) unless the conditions set forth in this section 8(a) below are met.
Although you will become the beneficial owner of Shares following conversion of your RSUs, the Company may, upon notice, issue a
transfer restriction with respect to your Shares following conversion of your RSUs pending any investigation or other review that
impacts the determination as to whether the RSUs meet the conditions set forth below. The Shares underlying such RSUs shall not
legally vest in you and shall be forfeited and recoverable in the event the Company determines that the conditions set forth in this
section 8(a) below are not met. Notwithstanding any provision of this Award Certificate to the contrary, in order for legal ownership of
the Shares to fully vest in you it is a strict condition that you must not (i) at any time prior to one year after the termination of your
Employment or service with the Company misuse the Company’s confidential, proprietary information and/or intellectual property, as
defined in your employment contract, the Company Code of Conduct and Business Ethics, and/or any other relevant agreements or
policies issued to you, (ii) at any time prior to one year (less any period spent on "garden leave") after the termination of your
Employment or service with the Company (y) engage in Wrongful Solicitation, or (z) for those Participants classified by the Company
as an officer of Discover Financial Services or one of its Subsidiaries on the date of grant, engage in Competitive Activity. If the
conditions above are not met, you will:
(1)
pay to the Company an amount in cash equal to the value of the Shares that vested and converted on or after,
or within one year prior to, your termination of Employment, which value shall be determined by the Company, in its sole
discretion, and shall include an amount for tax adjustments appropriate to reflect your obligation to repay such amounts due to you
not meeting the conditions above; or
(2)
transfer to the Company the number of Shares that vested and converted on or after, or within one year prior
to, your termination of Employment, plus an amount calculated by the Company, in its sole discretion, for tax adjustments
appropriate to reflect your obligation to transfer such common stock due to you not meeting the conditions above.
Section 24(e), (f) and (r)
(e)“Competitive Activity” means:
(1)
becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director,
independent contractor, consultant, advisor, representative or agent of, a Competitor, where you will be responsible for providing,
or managing or supervising others who are providing, services (i) that are similar or substantially related to the services that you
provided to the Company, or (ii) that you had direct or indirect managerial or supervisory responsibility for at the Company, or
(iii) that
call for the application of the same or similar specialized knowledge or skills as those utilized by you in your services for the
Company, in each such case, at any time during the one year preceding the termination of your Employment; or
(2)
either alone or in concert with others, forming, or acquiring a five percent (5%) or greater equity ownership,
voting interest or profit participation in, a Competitor.
(i)
“Competitor” means any corporation, partnership or other entity that engages in (or that owns a significant interest
in any corporation, partnership or other entity that engages in) (1) the business of consumer lending, including, without limitation, credit
card issuance or electronic payment services, or (2) any other business which you have been materially involved in or had significant
knowledge of, which has been conducted by the Company at any time during the one year preceding the termination of your
Employment. For the avoidance of doubt, a competitor of any entity which results from a corporate transaction involving the Company
that constitutes a Change in Control shall be considered a Competitor for purposes of this Award Certificate.
(r) “Wrongful Solicitation” occurs upon either of the following events:
(1)
while Employed, including during any notice period applicable to you in connection with the termination of
your Employment, and within one year after the termination of your Employment (less any period spent on "garden leave"),
directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind),
you hire or solicit, recruit, induce, entice, influence or encourage any Company employee to leave the Company or become hired
or engaged by another firm with the intention of such individual working for or providing services to any Competitor; provided,
however, that this clause shall apply only to employees of the Company who had access to confidential information of the
Company and (i) were employed at the level of officer or above, or (ii) who worked in or with your business unit or (iii) for whom
you had direct or indirect responsibility, and in each case with whom you had material contact in the course of your Employment,
at any time during the one year preceding the termination of your Employment; or
(2)
while Employed, including during any notice period applicable to you in connection with the termination of
your Employment, and within one year after the termination of your Employment (less any period on "garden leave"), directly or
indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you solicit
or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Company (i)
to discontinue or diminish his, her or its relationship or prospective relationship with the Company or (ii) to otherwise provide his,
her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which
the Company is engaged (other than the Company); provided, however, that this clause shall apply only to clients or customers, or
prospective clients or customers, that you worked for on an actual or prospective project or assignment during the one year
preceding the termination of your Employment.
Your employer will have made available to you a privacy notice which will contain further details relating to the processing and
use of your personal information.
* * *
The Company recommends that you seek advice of your tax advisors regarding the tax treatment of your awards.
Exhibit 10.59
Severance Plan
Summary Plan Description
2024
The Discover Financial Services Welfare Benefits Plan (Plan) includes a variety of welfare benefits, including the plan
of Discover Financial Services and its domestic affiliates (Discover), regarding severance pay and pay in lieu of notice
of termination (Severance Plan).
The Plan is a “welfare plan” within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and shall be construed in a manner
consistent with such intent. Severance payments made under the Severance Plan are funded entirely from general corporate assets.
This booklet is the Summary Plan Description (SPD) for the Severance Plan as in effect on August 1, 2024, and is the Program Document, as defined under the Plan and describes the
severance benefits offered under the Plan. This SPD explains the applicable terms of the Severance Plan in easy-to-understand language. Additional SPDs are available for other benefits
offered under the Plan, including medical, dental, vision, life, disability, etc. This booklet and certain other documents, including such other SPDs, any applicable insurance contracts,
and any other applicable plan documents together make up the official Plan documents. If there is any conflict between the information in the Plan documents and any other materials,
including any verbal representation, the Plan documents control. Any prior severance plan, policy, guidelines, SPDs or informal practice with respect to the payment of severance,
separation or termination pay are superseded by this document. Discover Financial Services is the Plan sponsor and reserves the right to amend or discontinue the Plan and/or the
Severance Plan at any time in its sole discretion.
You should read the SPD carefully and keep it with your other important papers for future reference.
TABLE OF CONTENTS
COVERED EMPLOYEES ...............................................................................................................4
ELIGIBILITY FOR SEVERANCE PAY .......................................................................................4
AMOUNT OF SEVERANCE PAY .................................................................................................5
REDUCTION OF SEVERANCE PAY ..........................................................................................6
WHEN PAYMENTS ARE MADE .................................................................................................6
RE-EMPLOYMENT FOLLOWING NOTICE OF TERMINATION .......................................6
OUTPLACEMENT ASSISTANCE AND OTHER BENEFITS .................................................6
PAY ...................................................................................................................................................7
ADMINISTRATION OF THE SEVERANCE PLAN .................................................................7
OTHER IMPORTANT INFORMATION ....................................................................................8
YOUR ERISA RIGHTS ................................................................................................................10
CLAIMING BENEFITS ................................................................................................................11
COVERED EMPLOYEES
The following U.S. employees may become eligible to receive severance pay under the Severance Plan:
•
Full-time employees
•
Flex part-time employees
•
Regular part-time employees
•
Part-time employees
(collectively known as “Employee(s)”)
An Employee must be in active employment as shown on the Discover® payroll, on a paid leave of absence or, solely to the extent
required by law, on an unpaid leave of absence in order to be an Employee. Individuals who are: (a) classified by Discover and its
affiliates as non-U.S. benefits-eligible workers, including, but not limited to, interns, summer associates, temporary workers, contingent
workers, as well as individuals classified by Discover and its affiliates as leased workers, independent contractors or consultants,
regardless of whether or not such classification is subsequently upheld for any purpose by a court or Federal, state or local administrative
authority; (b) covered by a collective bargaining agreement with respect to which Discover or an affiliate is a party, unless such agreement
provides for participation in the Severance Plan; or (c) hired in connection with an acquisition agreement entered into on or after January
1, 2008, unless such agreement provides for participation in the Severance Plan, are not eligible to participate in the Severance Plan.
Any individual who is employed as a fixed-term employee is not an Employee and is not eligible to participate in the Severance Plan.
Discover classifies Employees under the Discover Financial Services Employee Classification and Type Policy.
The determination of whether an individual is an Employee shall be made by the Plan Administrator in its sole discretion.
ELIGIBILITY FOR SEVERANCE PAY
An Employee is eligible to receive severance pay if the Employee is involuntarily terminated by notice with a termination date on or after
November 1, 2019 by Discover, as detailed below:
•
Due to an economic release, which is defined as the permanent closing of an office or facility, elimination of a job or position or a
permanent reduction in staff. Whether a release is an economic release shall be conclusively determined by the Plan Administrator
in his/her sole discretion.
•
Due to an increase and/or addition of skills required of an Employee’s current position, as determined by the Plan Administrator.
An Employee shall be ineligible for any benefits under the Severance Plan unless he or she signs a waiver and release agreement in such
form, and within such time, as is acceptable to Discover in its sole discretion. Discover may require more than one waiver and release in
accordance with this paragraph.
An Employee shall be ineligible for any severance pay benefits under the Severance Plan if any of the following apply, each of which
shall be conclusively determined by the Plan Administrator in his/her sole discretion:
•
The Employee applies for an open position with Discover and is offered the job (regardless of grade level or responsibility).
•
The Employee is offered an alternative position, in writing, with Discover prior to the Employee’s planned termination date with
Discover that is:
1. of comparable responsibility, authority and job duties
2. at or above the pay grade, and in all material respects provides the same incentive opportunity other than any Discover-initiated
across-the-board reductions in compensation, including incentive opportunities, affecting substantially all eligible Discover Employees;
and
3. not more than thirty-five (35) miles from the location of the Employee’s job with Discover immediately prior to the involuntary
termination.
• The Employee’s termination results from a merger, acquisition or other form of corporate reorganization, such as a sale or spin-off of
a business unit, and the Employee has been offered a position, in writing, with the acquiring or successor entity or any affiliate prior to the
Employee’s planned termination date that is:
1. of comparable responsibility, authority and job duties
2. at or above the pay grade, and in all material respects provides the same incentive opportunity (other than any Discover-initiated,
across-the-board reductions in compensation, including incentive opportunities, affecting substantially all eligible Discover Employees)
of, and
3. not more than thirty-five (35) miles from the location of the Employee’s job with Discover immediately prior to the involuntary
termination.
•
The Employee has been laid off, and there is a reasonable expectation, in the opinion of Discover, that the Employee’s layoff will
be temporary and that he or she will be recalled to work by Discover within 60 days of the date the Employee is laid off.
•
The Employee is terminated for performance or conduct.
•
The Employee acts to the detriment of Discover after being notified that he/she will be terminated.
•
The Employee voluntarily terminates employment with Discover by quitting, resigning, abandoning his/her job, or has provoked
such termination.
•
The Employee is covered by an individual employment agreement or other contractual arrangement providing for severance
benefits, separation pay, or any other form of termination pay, payments or post termination benefits, or which contains a provision
requiring the individual to be given notice prior to termination.
•
The Employee fails to return all Discover property within seven days following termination of employment (or any shorter period
that may be established by Employee’s business unit), including, but not limited to, files, records, keys, product samples, credit
cards, building access card, computer equipment, fax, answering machines, cell phones and wireless email devices.
•
The Plan Administrator requests that the Employee remain an active Employee for a period of time following notice of termination
during which the Employee continues to perform his/her job duties as required by Discover (working notice period) and the
Employee fails to complete such period.
AMOUNT OF SEVERANCE PAY
Employees eligible for severance pay shall receive an amount based upon the length of the Employee’s service as an Employee (Service)
and employment status at termination.
EMPLOYEES
WEEKS PER YEAR OF SERVICE
MINIMUM WEEKS OF SEVERANCE
NONEXEMPT
2
4
EXEMPT GRADES 1–7
2
4
EXEMPT GRADES 8–9
2
8
DIRECTORS
3
26
VICE PRESIDENT AND ABOVE
3
52
Partial years of Service shall be considered for purposes of calculating severance pay. If an employee is rehired, or otherwise has gaps in
service, only the most current period of service is used for purposes of calculating severance pay.
The maximum severance pay payable under the Severance Plan is 52 weeks.
In addition, Employees eligible for the Corporate Bonus Program will also receive an amount equal to the Employee’s target annual cash
bonus, adjusted on a pro-rata basis by multiplying the target annual cash bonus by a fraction where the numerator is the number of days of
the applicable calendar year through which the Employee was employed by Discover, and the denominator is the number of days of the
applicable calendar year (either 365 or 366 as applicable). This calculation applies to the target annual cash bonus for the year that
includes the date of the Employee’s termination, and for the prior year unless the annual cash bonus for the prior year has been paid by the
date of the Employee’s termination.
REDUCTION OF SEVERANCE PAY
Unless Discover®, in its sole discretion, determines otherwise, severance pay shall be reduced by the amount of any severance or
termination pay, or pay in lieu of notice, paid or required to be paid to the Employee under any applicable law, including the Worker
Adjustment and Retraining Notification Act (WARN) and any similar state laws.
Any severance paid under this Severance Plan may be further reduced to the extent necessary to take into account any outstanding
financial obligations the Employee has to Discover. Any reduction determinations will be made by Discover in its sole discretion.
WHEN PAYMENTS ARE MADE
Upon the acceptance by Discover of the Employee’s fully executed waiver and release agreement in a form acceptable to Discover in its
sole discretion, Discover will pay the severance benefits in a lump sum cash payment to the former Employee within the time frame as
specified in the waiver and release agreement.
Discover shall cause to be withheld from severance payments such Federal and state income taxes, payroll and other applicable taxes, and
deductions as Discover deems appropriate. Taxes
on severance amounts will be withheld using the supplemental rates, which are fixed rates during the applicable year. Exemptions do not
apply to adjust the amount of tax withholdings taken from these payments. In addition, benefit deductions (i.e. 401(k) Plan deferrals) may
not be withheld from your severance pay.
No benefits payable under the Severance Plan can be assigned, pledged, alienated or subject to any lien. As a result, your benefit is not
subject to garnishment, attachment or other creditor’s process.
RE-EMPLOYMENT FOLLOWING NOTICE OF TERMINATION
If an Employee is re-employed by Discover or successor within one year of the Employee’s offer of severance and termination, he/she will
be required to repay to Discover, as a condition to such re-employment the amount of the severance payment received that is in excess of
what would have been received as base salary (as determined by Discover), if the Employee had remained employed by Discover from the
Termination Date through the rehire date. Any re-employment or repayment under this provision will not affect the validity of any
previously executed waiver and release agreement.
OUTPLACEMENT ASSISTANCE AND OTHER BENEFITS
Employees who receive severance pay will have access to the services of an outplacement agency to assist the employee in finding
suitable employment based upon employment status. The outplacement agency will be determined by Discover in its sole discretion.
EMPLOYEES
OUTPLACEMENT SERVICE
NONEXEMPT
3 Months
EXEMPT GRADES 1–7
4 Months
EXEMPT GRADES 8–9
6 Months
DIRECTORS
9 Months
VICE PRESIDENTS AND ABOVE
12 Months
Benefits coverage for Employees and their covered family members will terminate as a result of termination of employment, in
accordance with the terms of each respective employee benefit plan. However, Employees and their covered family members will be
provided with the opportunity to continue as participants at their own expense in Discover® group health plans, pursuant to the terms of
those plans to the extent required by applicable law, including COBRA.
Employees who receive severance benefits will receive an additional severance payment, payable at the same time as severance pay equal
to the applicable premiums for group health plan coverage in place prior to their termination of employment, plus an additional payment
for income taxes multiplied by a continuation period as provided below:
EMPLOYEES
MONTHS OF COBRA PAYMENT
NONEXEMPT
3 Months
EXEMPT GRADES 1–7
4 Months
EXEMPT GRADES 8–9
6 Months
DIRECTORS
9 Months
VICE PRESIDENTS AND ABOVE
12 Months
PAY
For purposes of this Severance Plan, pay used to calculate benefits generally shall be the Employee's annual base or regular pay, and for
Corporate Bonus Program eligible Employees ("bonus-eligible Employees") will also include the applicable target annual cash bonus.
For Employees who work less than full-time, pay will be calculated using base or regular pay averaged over the most recent six full
biweekly pay periods, then annualized, plus for bonus-eligible Employees, will also include the applicable target annual cash bonus.
In the case of Employees compensated on a draw plus commissions-only basis, pay shall mean the Employee’s annual draw or another
amount determined by the Plan Administrator in its sole discretion to reflect a regular pay rate plus, for bonus-eligible Employees, will
also include the applicable target annual cash bonus.
For all Employees, pay shall exclude such items as taxable fringe benefits, equity compensation, incentive pay, bonuses other than under
the Corporate Bonus Program, overtime or other premium pay. The amount of pay considered under the Severance Plan shall be
conclusively determined by the Plan Administrator.
ADMINISTRATION OF THE SEVERANCE PLAN
The Discover Financial Services Employee Benefits Committee (or its delegate) is the Plan Administrator.
The Plan Administrator has authority to control and manage the operation and administration of the Severance Plan and make such rules
and regulations and take such actions to administer the Severance Plan as she/he may deem appropriate, including paying severance
benefits under this Severance Plan, in its sole discretion. The Plan Administrator’s duties are carried out on its behalf by its delegates (who
act in their own capacity as such and not as individual fiduciaries). The Plan Administrator has delegated administrative authority to carry
out its duties to the Director of Employee Relations at Discover. The Plan Administrator may also engage the services of other persons or
organizations, such as actuaries, attorneys, accountants and consultants to render advice and perform services. The Plan Administrator, in
its capacity as “named fiduciary” as defined under Section 402(a)(2) of ERISA, shall have the sole discretionary authority to find facts, to
interpret and construe the terms of the Severance Plan and to determine eligibility for benefits in accordance with the terms of the
Severance Plan. Any construction or interpretation of the Severance Plan’s terms or determination made by the Plan Administrator as to
facts or eligibility for benefits shall be final and binding upon Discover, Employees and their spouses/domestic partners, dependents, heirs,
successors and assigns, unless such construction, interpretation or determination is finally determined by a court of competent jurisdiction
to be arbitrary or capricious.
OTHER IMPORTANT INFORMATION
Administrative Information
The Discover Financial Services Welfare Benefits Plan (the “Plan”) includes a variety of welfare benefits, including the Severance Plan.
The Plan is an unfunded welfare benefit plan, subject to ERISA, providing among other benefits, severance pay benefits. The Plan is
sponsored and maintained by Discover Financial Services.
The Employer Identification Number for Discover Financial Services is 36-2517428. The Severance Plan is part of the Plan. The Plan
Identification Number is 501.
Plan Sponsor
Discover Financial Services
c/o myHR Service Center
Dept. 10820
P.O. Box 64116
The Woodlands, TX 77387-4116
844-DFS-myHR (844-337-6947)
Plan Administrator and Named Fiduciary Discover Financial Services Employee Benefits Committee c/o myHR Service Center
Dept. 10820
P.O. Box 64116
The Woodlands, TX 77387-4116
844-DFS-myHR (844-337-6947)
Agent for Service of Legal Process
The designated agent for the service of legal process is:
Law and Compliance Department
Attn: General Counsel
Discover Financial Services
2500 Lake Cook Road, Riverwoods, IL 60015
Service of legal process also may be made on the plan administrator.
Participating Employers
All majority-owned U.S. subsidiaries and affiliates of Discover® with U.S. employees are employers participating in the Plan except for
certain affiliates acquired after January 1, 2008, which do not participate in the Plan.
The list of participating employers includes:
•
Discover Financial Services
•
Discover Bank
•
Discover Products Inc.
•
Pulse Network LLC
•
DFS Services LLC
•
DFS International Inc.
•
Diners Club International Ltd.
•
The Student Loan Corporation
•
DFS Corporate Services LLC
An updated list of employers participating in the Plan may be obtained by written request to the Plan Administrator at the address shown.
Plan participants and beneficiaries may also receive, upon written request to the Plan Administrator, information as to whether a particular
employer participates in the Plan and, if the employer does participate, the employer’s address.
Severance Plan Funding
The Severance Plan is an unfunded Plan. All severance payments are made from Discover® general assets.
Plan Year
The Plan Year runs from January 1 through December 31.
If the Plan and/or the Severance Plan Is Terminated or Modified
Although Discover and its affiliates expect to continue the Plan and the Severance Plan indefinitely, Discover by action of its Head of
Human Resources, necessarily reserves the right to amend, modify or discontinue the Plan or any benefits under the Plan, including
severance benefits, at any time for any reason or from time to time.
Plan Documents Govern
To the extent there is any inconsistency between the terms of this document or any other document or verbal representation, the terms of
this Plan document govern.
No Guarantee of Employment
Neither this booklet nor participation in the Plan is a guarantee of continued employment.
Discretionary Authority of Plan Administrator and Other Plan Fiduciaries
In carrying out their respective responsibilities under the Plan, the Plan Administrator and other Plan fiduciaries shall have the exclusive
right and discretionary authority to make any findings necessary or appropriate for any purpose under the Plan, including to interpret the
terms of the Plan and to determine eligibility for and entitlement to Plan benefits, including severance benefits under the Severance Plan.
Any interpretation or determination made pursuant to such discretionary authority shall be given full force and effect, unless it can be
shown that the interpretation or determination was arbitrary and capricious.
Indemnification
To the fullest extent permitted by law, Discover and its affiliates will indemnify and hold harmless the Plan Administrator, each member of
the Employee Benefits Committee, the Claims Committee, the Hearing Panel and each other employee, officer and director of Discover or
of any member of the company’s affiliates, to whom fiduciary responsibilities are delegated under the Plan against any cost or expense
(including attorneys’ fees) or liability (including any sum paid in settlement of a claim with the approval of Discover) arising out of any
act or omission to act, except in the case of willful misconduct or lack of good faith. This paragraph shall not supersede any separate
agreement or contract between Discover or an affiliate, the Plan Administrator, the Employee Benefits Committee, the Claims Committee
or the Hearing Panel and any other person to whom fiduciary responsibilities are delegated.
Governing Law
The Plan shall be governed by Federal law, and, to the extent not pre-empted by Federal law, including the Employee Retirement Income
Security Act of 1974, as amended (ERISA), the laws of the State of Illinois.
YOUR ERISA RIGHTS
As a participant in the Plan, you are entitled to certain rights and protections under ERISA. ERISA provides that all Plan participants shall
be entitled to:
Receive Information About Your Plan and Benefits
•
Examine, without charge, at the Plan Administrator’s office and at other specified locations such as work sites, all documents
governing the Plan, and a copy of the latest annual report (Form 5500 Series) filed by the Plan with the U.S. Department of Labor
and available at the Public Disclosure Room of the Employee Benefits Security Administration.
•
Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the Plan, and copies of the
latest annual report (Form 5500 Series) and a copy of the most recent Summary Plan Description. The Plan Administrator may
make a reasonable charge for the copies.
•
Receive a summary of the Plan’s annual financial report. The Plan Administrator is required by law to furnish each participant with
a copy of this summary annual report.
Prudent Action by Plan Fiduciaries
In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of the
Plan. The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you and other
Plan participants and beneficiaries. No one, including your employer or any other person, may fire you or otherwise discriminate against
you in any way to prevent you from obtaining benefits to which you are entitled under the Plan or exercising your rights under ERISA.
Enforce Your Rights
If your claim for a Plan benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of
documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.
Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan or the latest
annual report from the Plan and do not receive them within 30 days, you may file suit in a Federal court. In such a case, the court may
require the Plan Administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials
were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits that is denied or ignored, in
whole or in part, you may file suit in a state or Federal court.
If it should happen that Plan fiduciaries misuse the Plan’s money, or you are discriminated against for asserting your rights, you may seek
assistance from the U.S. Department of Labor, or you may file suit in a Federal court. The court will decide who should pay court costs
and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may
order you to pay these costs and fees, for example, if it finds your claim is frivolous.
Assistance With Your Questions
If you have any questions about the Plan, you should contact your HR Representative. For more information about your rights under
ERISA and other laws affecting benefit plans, contact the nearest office of Employee Benefits Security Administration (EBSA); U.S.
Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, EBSA, U.S. Department of
Labor, 200 Constitution Avenue NW, Washington DC 20210. You may also obtain certain publications about your rights and
responsibilities under ERISA by calling the publications hotline of the EBSA or by visiting the EBSA website at www.dol.gov/ebsa.
CLAIMING BENEFITS
Claims and Appeals Process Under the Plan
The following is a general summary of the claims and appeals process for the Plan. All claims for benefits under the Plan, including all
alleged administrative or other errors, must be filed in accordance with the claims procedures. In most cases, benefits to which you are
entitled are paid upon your eligibility for benefits under the Plan without a request.
If you believe you are entitled to benefits under the Plan, you may contact your HR Representative. If your HR Representative advises you
that you are not eligible for severance benefits under the Plan and you disagree, you may file a claim for benefits. A “claim” is your first
request for a review of the denial, and an “appeal” is your second request for review of the denial.
If My Initial Request for Payment Is Denied, How Do I File a Claim for Benefits?
You or an authorized representative (your spouse or adult child, or a person authorized, in writing or by a court on your behalf) have the
right to file a claim for benefits under the Plan. Your claim must be in writing. Send all documentation that you consider relevant, and a
statement of why you believe your claim should be granted, to the Claims Committee c/o Discover myHR. If you are not satisfied with the
Claim Reviewer’s decision, you have the right to file an appeal (a second request for a review of your denial).
Who Reviews My Claim or Appeal?
The Claims Committee is the Reviewer responsible for reviewing claims for benefits under the Plan. If the amount involved is $20,000 or
less, your claim may instead be decided by Discover Financial Services’ Director of Benefits (or delegate). The Director of Benefits, in his
or her sole discretion, determines whether the amount involved exceeds $20,000.
When Must I File a Claim?
Your claim must be filed in a timely manner. You must file your claim within 180 days following the date your initial request for benefits
is denied. If you want to file an appeal (the second level review) after your claim (the first level review) is denied, you must do so within
180 days following the denial of your claim.
You may not bring a lawsuit to recover benefits under this Plan until you have exhausted the Plan’s administrative process described in
this booklet. If your appeal is denied, you have the right to file a lawsuit under ERISA, provided you do so before the earliest of:
•
Six months following the date of your appeal has been denied;
•
Three years following the date benefits under the Plan commenced or services related to the amount you are appealing were
performed, as applicable or;
•
The end of the otherwise applicable statutory limitation period.
When Will I Receive a Decision on My Claim or Appeal?
Claims will be decided within 90 days of receipt, but a 90-day extension is allowed if the Reviewer needs additional time due to special
circumstances, and appeals will be decided within 60 days of receipt, but a 60-day extension is allowed if the Reviewer needs additional
time due to special circumstances.
What Happens If My Claim Is Denied?
If your claim is denied, in whole or in part, you will receive a written or electronic notice containing the following information:
•
The specific reason for the denial;
•
Reference to the specific plan provisions on which the denial is based;
•
A description of any additional material or information which you must provide in order to complete your claim and an
explanation of why such material or information is necessary;
•
Incomplete claims will be treated as part of the request for information and extension process and not as a denial unless you do not
respond to the request for information within the required time period; and
•
Instruction and deadlines for making an appeal, including a statement of your right to file a lawsuit under ERISA, if your appeal is
denied.
How Do I Make an Appeal If My Claim Is Denied?
Your appeal must be in writing. Send a statement of why you believe your appeal should be granted, along with all documentation that
you consider relevant, to the Hearing Panel, c/o Discover myHR. You will be provided, upon request and without charge, reasonable
access to, and copies of all documents, records and other information relevant to your claim under applicable legal standards.
What Happens If My Appeal Is Denied?
If your appeal is denied, in whole or in part, you will receive a written or electronic notice containing the following information:
•
The specific reasons for the denial;
•
Reference to the specific plan provisions on which the denial is based;
•
A statement that you are entitled to receive, upon request and without charge, reasonable access to and copies of all documents,
records and other information relevant to your claim under applicable legal standards; and
•
A statement of your right to file a lawsuit under ERISA.
May I Have My Appeal Reheard?
No. All decisions of the Hearing Panel are final, conclusive and binding. If, however, you believe that the Reviewer did not follow the
terms of the plan or has violated law, you may bring a legal action under ERISA. See the “Your ERISA Rights” section above.
How Do I Contact The Persons And Entities Named In These Procedures?
Send all correspondence and documents to the Claims Committee, Hearing Panel, Director of Benefits or Discover myHR to:
Discover Benefit Determination Review Team
DEPT 10820
P.O. Box 299107
Lewisville, TX 75029-9107
Fax: 847-554-1441
What Else Should I Know About How The Reviewers Make Decisions?
The Plan Administrator and fiduciaries, including the reviewers, have discretionary authority to interpret the Plan and make
determinations under the Plan. Any decision made pursuant to this authority is given full force and effect unless arbitrary or capricious.
You may contact Discover myHR by phone, on the Web or by fax as follows:
Benefits Representatives:
844-DFS-myHR (844-337-6947)
8:00am – 6:00pm, Central time, Monday through Friday, except certain holidays
Web site:
MyDiscoverBenefits.com
24 hours a day, seven days a week
Fax:
847-554-1441
Exhibit 10.60
[DISCOVER LETTERHEAD]
Private and Confidential
[●], 2024
[Name]
[Address]
[Name],
Reference is made to (1) the Agreement and Plan of Merger, dated as of February 19, 2024 (the “Merger Agreement”), by and among
Discover Financial Services (the “Company”), Capital One Financial Corporation (“Capital One”) and Vega Merger Sub, Inc. and (2) the
Discover Financial Services Change in Control Severance Policy Amended and Restated May 3, 2024 (the “Severance Policy”).
The Company hereby acknowledges and agrees that the closing of the transactions (the “Mergers”) contemplated by the Merger
Agreement (the “Closing”) will constitute “Good Reason” under the Severance Policy (but, for clarity, not under any retention award that
may have been granted to you pursuant to, or in connection with, the Mergers) as a result of, and effective as of, the Closing, subject to
your continued employment in good standing through such date. If you intend to terminate your employment for “Good Reason” pursuant
to this letter, you must give written notice to the Company of such intention no later than thirty (30) days after [the date] of the Closing.
Nothing in this acknowledgement letter constitutes a contract of employment or a right to employment for any period of time, and your
employment continues to be at-will and may be terminated by you or the Company (or, after the Closing, Capital One) at any time for any
reason or no reason. If you have any questions regarding this acknowledgment letter, please contact [Name] at [Email Address].
Sincerely,
Michael Shepherd
Interim Chief Executive Officer
Exhibit 10.61
[DISCOVER LETTERHEAD]
December 11, 2024
Discover Financial Services (the “Company”) is considering paying or settling some of your 2025 compensation early. The early
payment and settlement are designed to reduce potential adverse tax consequences that you may experience as a result of the acquisition
by Capital One Financial Corporation (“Capital One”).
You are not required to agree to early payment and settlement. It is entirely at your election. In addition, you will need to return
amounts paid early under certain circumstances. Finally, amounts paid early remain subject to existing clawback and risk review
provisions.
1. This is a binding agreement if you elect to participate.
If you agree, this letter agreement (this “Agreement”) will memorialize your agreement with the Company regarding the early
payment of part of your 2024 cash bonus and early vesting and settlement of certain restricted stock units (“RSUs”) and performance
stock units (“PSUs”) (if applicable) on or after December 19, 2024 and no later than December 31, 2024 (the date of such payment and
settlement, the “Payment Date”) as set forth below.
2. Early payment of your 2024 bonus.
Subject to your continued employment in good standing through the Payment Date, on the Payment Date, or as soon as
administratively practicable thereafter, the Company will pay you [115% of your target annual cash bonus][your annual cash bonus after
applying the individual performance factor and risk modifier, if any,] for 2024, less applicable deductions and withholdings (your “Bonus
Prepayment”). Your Bonus Prepayment will be treated for tax withholding and reporting purposes as taxable compensation to you when
made. In 2025, at the time the Company typically determines bonuses, it will determine the actual amount of your annual cash bonus for
2024 and may pay you any excess over your Bonus Prepayment (after taking into consideration [individual performance factors,] risk
and/or compliance adjustments, Company discretion, etc.), less applicable deductions and withholdings.
3. Early vesting and settlement of your RSUs and PSUs (if applicable).
Subject to your continued employment in good standing through the Payment Date, on the Payment Date, the Company will
accelerate the vesting and settlement of 100% of any RSUs granted to you in 2024 that were scheduled to vest by their terms between
January 1, 2025 and June 30, 2025 (your “RSU Presettlement”) and 110% of the target amount of any PSUs granted to you in 2022 for the
2022-2024 performance period (your “PSU Presettlement”), in each case less applicable deductions and withholdings. Your RSU
Presettlement and PSU Presettlement will be treated for tax withholding and reporting purposes as taxable compensation to you when
vested and settled. For purposes of this Agreement, “Shares” has the meaning set forth in the Discover Financial Services 2023 Omnibus
Incentive Plan.
4. Your repayment obligations.
If your employment with the Company is terminated by you without Good Reason (as defined in the Discover Financial Services
Change in Control Severance Policy Amended and Restated May 3, 2024 (the “Severance Policy”)) or by the Company for Cause (as
defined in the Severance Policy) on or before February 14, 2025, subject to any applicable exceptions set forth in the Company’s policies
and procedures, including the Year-End Incentive Standard, you agree to promptly (but in any event no later than 15 days following the
date of termination) repay to the Company the pre-tax amount of your Bonus Prepayment.
If your employment with the Company is terminated by you without Good Reason or by the Company for Cause before the
originally-scheduled vesting date of the RSUs and PSUs subject to your RSU Presettlement and PSU Presettlement, as applicable, you
agree to promptly (but in any event no later than 15 days following the date of termination) (1) pay to the Company an amount in cash
equal to the value of the Shares that would have been delivered pre-tax in connection with your RSU Presettlement and PSU Presettlement
as of the Payment Date, which value shall be determined by the Company, in its sole discretion, or (2) transfer to the Company a number
of shares of Common Stock equal to the number of Shares that would have been delivered pre-tax in connection with your RSU
Presettlement and PSU Presettlement, which number shall be determined by the Company, in its sole discretion.
You understand that the Bonus Prepayment, RSU Presettlement and PSU Presettlement remain subject to any applicable forfeiture,
recovery or other action by the Company pursuant to any clawback or recoupment policy in effect, including the Company’s Incentive
Compensation Clawback Policy, Compensation Recoupment Policy, and clawback and risk review provisions set forth in the award
agreements for the RSUs and PSUs subject to your RSU Presettlement and PSU Presettlement.
5. Miscellaneous
The validity, interpretation, construction and performance of this Agreement shall in all respects be governed by the laws of the
State of Illinois, without reference to principles of conflict of law. As used in this Agreement, “Company” shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes this Agreement by operation of law, or
otherwise (including, after the Closing, Capital One and its affiliates).
This Agreement is intended to comply with the requirements of Section 409A of the Code (to the extent applicable) and shall be
interpreted, operated and administered accordingly. Each payment under this Agreement will be treated as a separate payment for purposes
of Section 409A of the Code.
This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
[Signature page follows]
Sincerely,
Discover Financial Services
Carrie Blair
EVP, Chief Human Resources Officer
AGREED AND ACCEPTED BY:
Name:
Title:
Dated:
Exhibit 10.62
Summary of Cash Award for J. Michael Shepherd
On December 23, 2024, the Compensation and Human Capital Committee of the Boards of Directors of Discover Financial Services (the
“Company”) and Discover Bank (the “Bank”) approved a one-time cash award of $1,500,000 to J. Michael Shepherd, Interim Chief
Executive Officer and President of the Company and Interim President of the Bank, to be paid in a single lump sum, less applicable taxes
and withholdings, on or before December 31, 2024, in accordance with the Company’s standard payroll practices and procedures. The
award was in recognition of his significant efforts and leadership.
Exhibit 19
DISCOVER FINANCIAL SERVICES
INSIDER TRADING POLICY
Policy
The purpose of this Insider Trading Policy (this “Policy”) is to guard against the misuse and improper disclosure of material nonpublic
Information (“MNPI”) and to avoid the appearance of impropriety that may arise in connection with the personal trading by the Board of
Directors (“Directors”) of Discover Financial Services (“DFS”) and employees (for the avoidance of doubt, all references herein to
“employees” shall include officers) of DFS and its subsidiaries (collectively referred to as the “Company”).
Directors and employees must never trade, encourage others to trade, gift, or recommend securities based on MNPI relating to those
securities. In addition, Directors and employees are prohibited from providing MNPI to others who may then trade on that information.
The Company will also be prohibited from trading in the Company’s securities at any time based upon MNPI about itself, consistent with
applicable law.
Scope
This Policy applies to all Directors and employees and their immediate family members and the securities accounts of all Directors and
employees and their immediate family members.
Directors and employees are responsible for the transactions of immediate family members and should make their immediate family
member aware that they need to confer with the Director or employee, as applicable, prior to trading in the Company’s securities. In
addition, Directors and employees are responsible for the transactions of any entities they influence or control, including any corporations,
partnerships, or trusts. Directors and employees should treat such transactions as if they were for their own account. Examples of
securities accounts include:
•
Joint accounts
•
Family accounts
•
Accounts of Directors’ and employees’ children or other relatives for whom they or their spouses or civil/domestic partners
contribute substantial support (e.g., a child in college who is claimed as a dependent on a Director’s or employee’s income tax
return or who receives health benefits through the Director or employee)
•
Retirement accounts that hold or can hold securities or other financial instruments (other than mutual fund shares or bank
certificates of deposit)
•
Corporate accounts (e.g., LTIP or ESPP)
•
Trust accounts for which Directors or employees or their spouses or civil/domestic partners act as trustees or otherwise guide or
influence
•
Arrangements similar to trust accounts that benefit Directors or employees or their spouses, civil/domestic partners or minor
children directly or indirectly
•
Accounts for which Directors or employees or their spouses or civil/domestic partners act as custodians
•
Partnership accounts
This Policy does not apply to checking, savings, money market, and other deposit accounts. Transactions in publicly traded mutual funds
that are invested in the Company’s securities are not transactions subject to this Policy.
Additionally, this Policy does not apply to purchases of the Company’s securities resulting from an employee’s periodic contribution of
money to the Discover Financial Services Employee Stock Purchase Plan (ESPP) pursuant to the payroll deduction election made at the
time of their enrollment in the plan. This Policy does, however, apply to employee’s elections to begin participation in the ESPP or to
change contribution levels for any enrollment period, and to their sales of the Company’s securities purchased pursuant to the ESPP.
Employees may terminate their enrollment in the ESPP at any time.
Requirements
1.0 Material, Nonpublic Information
Directors and employees shall never, under any circumstances, trade, encourage others to trade, gift, or recommend securities or other
financial instruments of DFS or any other company on the basis of MNPI. In addition, they should not disclose MNPI to persons within
the Company whose jobs do not require them to have that information, or outside of the Company to other persons or entities, including,
but not limited to, family, friends, business associates, investors, and expert consulting firms, unless any such disclosure is made in
accordance with the Regulation FD (Fair Disclosure) Policy.
1.1 Definition
“Material nonpublic information” or “MNPI” generally is nonpublic information about the Company, its customers, counterparties, or
otherwise that may have an impact on the price of common stock, or another financial instrument of DFS or another company (when
information with respect to such other company was obtained in the course of employment with the Company or the performance of
services on the Company’s behalf), or that a reasonable investor would be likely to consider important in making an investment decision
(i.e., to buy, hold, or sell securities). MNPI may be positive or negative.
Examples of MNPI may include:
•
Significant undisclosed financial information (e.g., company earnings information or estimates, changes to previously announced
earnings guidance or the decision to suspend earnings guidance, prospective dividend increases or decreases, share repurchases,
valuation of investments, liquidity problems, projections, or borrowings or other financial transactions out of the ordinary course)
•
Significant undisclosed operating developments (e.g., new product developments, changes in business operations, a change in
auditor or notification that the auditor’s reports may no longer be relied upon, or extraordinary management developments)
•
Significant undisclosed proposed business activities (e.g., proposed or agreed mergers, acquisitions, divestitures, major
investments, significant contracts, restructurings, financings, securities offerings, establishment of a repurchase program,
extraordinary borrowings, or significant related party transactions)
•
Significant undisclosed legal or regulatory developments (e.g., a regulatory investigation or threatened or pending litigation)
•
Significant undisclosed information security or cybersecurity developments (e.g., discovery of significant cybersecurity risks,
including vulnerabilities, incidents, and breaches)
Information is generally considered nonpublic if the Company has not previously released it through a press release disseminated through
a national wire service, a filing with the Securities and Exchange Commission, or a pre-announced conference call or webcast open to the
public. Even after the Company has released information to the press or the information has been reported, at least one full Trading Day
(as defined below) must elapse before you trade in securities of DFS. For purposes of this Policy, a “Trading Day” shall mean any day on
which the New York Stock Exchange is open for trading. For example, if the Company issues a press release containing material
information at 6:00 p.m. on a Tuesday, and the New York Stock Exchange is open for trading on Wednesday, persons subject to this Policy
shall not be permitted to trade in Company stock until Thursday. If the Company issues a press release containing material information at
6:00 p.m. on a Friday, and the New York Stock Exchange is open for trading on Monday, persons subject to this Policy shall not be
permitted to trade in Company stock until Tuesday.
1.2 Duties
The determination of whether nonpublic information is material is often complex, subjective, depends on specific facts, and often judged
in hindsight. Accordingly, Directors and employees should take a broad and cautious view when evaluating whether a particular piece of
information is “material.” Although it can be difficult to determine whether particular information is material, there are various categories
of information that are particularly sensitive and, as a general rule, should be considered material. Thus, Legal should be consulted if there
is any uncertainty regarding whether information is material or if there are unusual facts. Additionally, any questions about whether a
proposed trade is permitted or prohibited by this Policy should be resolved by seeking guidance from Legal or Enterprise Threat &
Intelligence Management (“ETIM”) prior to trading.
In all cases, the responsibility for determining whether an individual is in possession of MNPI rests with that individual, and any action on
the part of the Company, Legal, ETIM, or any other Director or employee, does not in any way constitute legal advice or insulate an
individual from liability under applicable securities laws.
The misuse of MNPI may result in, among other things, regulatory inquiry, litigation, and adverse publicity for the Director or employee
involved and the Company, as well as disciplinary action by the Company, up to and including termination of employment. The misuse of
MNPI may also result in civil and criminal penalties, including fines and imprisonment.
2.0 Transactions in Discover Financial Services Securities
2.1 Special Restrictions on Access Persons
Access Persons are subject to additional restrictions when trading in the Company’s securities. Legal and Corporate Affairs (“Legal”) or
ETIM shall notify the employee if he or she is (or if he or she becomes or ceases to be) an Access Person. Access Persons shall only trade
in or gift the Company’s securities during designated trading periods as specified by the Company (“Window Periods”). Even during a
Window Period, Access Persons may not initiate a trade in or gift of the Company’s securities, or securities of DFS customer or
counterparties, if they are in possession or aware of MNPI.
Legal determines Window Periods. Access Persons should contact ETIM if they have any questions regarding their applicable Window
Period.
Occasionally, the Company, through Legal or ETIM, may close or shorten Window Periods for some or all Access Persons due to
developments regarding material nonpublic information. In such events, Legal or ETIM will notify them that they should not trade in the
Company’s securities, and that they should not disclose to others the fact that the Window Period has been closed or shortened for them.
The following additional restrictions on Access Persons apply to all securities issued by the Company, its subsidiaries, and affiliates,
including common stock, preferred stock, and debt securities, except as otherwise noted.
•
Access Persons are required to hold positions in the Company’s securities for six months. If they acquire shares upon conversion
of a stock unit that they have held for the required period, Access Persons do not need to hold those shares for any additional
amount of time.
•
As discussed below, Access Persons are not permitted to sell short or trade derivatives involving the Company’s securities.
•
Access Persons may only enroll or change their enrollment election in the ESPP during Window Periods, unless notified otherwise
by Legal or ETIM. They may terminate their enrollment in the ESPP at any time if acting in good faith.
•
Access Persons are required to inform their investment manager(s) of the restrictions that apply to them as Access Persons.
In addition to applicable Window Periods, requests made by Access Persons to engage in any transactions involving the Company’s
securities within four business days (i) before the anticipated announcement or (ii) after the actual announcement of a repurchase plan or
program or an increase of an existing share repurchase plan or program by the Company may not be approved as this would result in
specific disclosure in the Company's SEC filings.
2.2 Special Restrictions on Directors and the Senior Leadership Council
2.2.1 Managed Accounts
The Company’s securities shall not be purchased or sold for any managed account held by, or on behalf of, a Director or a member of the
Senior Leadership Council. This exclusion includes
All Directors of Discover Financial Services and Discover Bank; all Discover Financial Services Senior Leadership Council members and officers; and individuals notified by Legal or ETIM that, due to
their job responsibilities or financial systems access, are considered to be Access Persons.
1
1
accounts held by the Director’s or a member of the Senior Leadership Council’s immediate family, or any other account that the Director
or a member of Senior Leadership Council could be expected to influence or control.
2.2.2 Windows Period Pre-clearance Requirement
In addition to the requirements previously discussed, all Directors and members of the Senior Leadership Council are required to obtain
preclearance from the General Counsel, or his/her delegate, before engaging in any transaction involving the Company’s securities,
including gifts.
Once preclearance is provided, the transaction must be commenced within two (2) business days following the preclearance approval;
otherwise, the preclearance will lapse, and new preclearance approval will need to be obtained before commencing the transaction.
2.2.3 Hedging or Pledging
Directors and members of the Senior Leadership Council who are subject to the requirements of Section 16 of the Securities and
Exchange Act of 1934, as amended (the “Exchange Act”), are not permitted to hedge the Company’s securities, hold the Company’s
securities in a margin account, or otherwise pledge the Company’s securities, including as collateral for a loan.
2.2.4 Short Sales
“Short sales” of stock are transactions where an individual borrows stock, sells it, and then buys stock at a later date to replace the
borrowed shares. Short sales generally evidence an expectation on the part of the seller that the securities will decline in value and have
the potential to signal to the market that the seller lacks confidence in the Company’s prospects/performance. In addition, short sales may
reduce the seller’s incentive to seek to improve the Company’s performance. For these reasons, short sales are prohibited.
2.2.5 Publicly-Traded Options
Because publicly-traded options (e.g., puts and calls ) have a relatively short term, transactions in options may create the appearance that
trading is based on MNPI. Further, such transactions may indicate a preference for short-term performance at the expense of the
Company’s long-term objections. Accordingly, any transactions in put options, call options, or other derivative securities are prohibited by
this Policy.
2.3 Gifts
Gifts of the Company’s securities are considered transactions and trades subject to this Insider Trading Policy and, thus, employees and
Directors shall only make gifts when they are not in possession of MNPI and during a Window Period, as applicable.. As explained below,
for those individuals subject to the requirements of Section 16 of the Exchange Act, gifts must be reported within the same timeframe as
other transactions in the Company’s securities.
Hedging transactions may be accomplished through the use of various financial instruments, including prepaid variable forwards, equity swaps, collars, and exchange funds.
A put is an option or right to sell a specific stock at a specific price before a set date, and a call is an option or right to buy a specific stock before a set date. Generally, call options are purchased when one
believes that the price of a stock will rise, whereas put options are purchased when one believes that the price of a stock will fall.
2
3
2
3
2.4 Exceptions for Certain Directors and Members of the Senior Leadership Council with Rule 10b5-1 Trading Plans
Certain Directors and members of the Senior Leadership Council may be permitted to enter into trading plans under Rule 10b5-1 of the
Exchange Act, as determined in the sole discretion of the Chief Executive Officer and the General Counsel. A Rule 10b5-1 Trading Plan is
a preset contract, instruction, or a written plan regarding the purchase or sale of securities pursuant to the requirement of the SEC’s Rule
10b5-1(c).
Directors and members of the Senior Leadership Council must receive prior written approval from the General Counsel before adopting,
modifying, or terminating a Rule 10b5-1 Trading Plan. Similarly, Directors or members of the Senior Leadership Council must receive
prior written approval from the General Counsel before adopting, modifying, or terminating a trading plan not governed by Rule 10b5-1.
All trading plans, regardless of whether they are governed by Rule 10b5-1, must comply with this Policy.
3.0 Violations
Violations of this Policy may result in penalties ranging from disciplinary actions, up to and including termination of an employee’s
employment, as well as civil or criminal proceedings. The Company reserves the right to instruct applicable individuals to cancel any
trade at their expense.
4.0 Disclosure Restrictions (i.e., “Tipping”)
It is also prohibited to disclose MNPI about the Company or other publicly traded companies (including the Company’s vendors,
suppliers, and customers) to others when that information is obtained in the course of employment with the Company or the performance
of services on behalf of the Company before its public disclosure and dissemination by the Company or such other respective company.
To avoid even the appearance of impropriety, please refrain from discussing the Company’s business or prospects or making
recommendations about buying or selling the Company’s securities or the securities of other companies with which the Company has a
relationship. This concept of unlawful tipping includes passing on information to friends, family members, or acquaintances under
circumstances that suggest you were trying to help them make a profit or avoid a loss.
5.0 Reporting Obligations for Director and Executive Officers
Individuals subject to Section 16 of the Exchange Act should keep in mind the applicable reporting obligations contained therein. Most
transactions must be reported within two (2) business days of the transaction; therefore, you must immediately report any covered
transaction in the Company’s securities to Legal. Additionally, bona fide gifts of the Company’s securities
must be publicly reported, including within the same two-day timeframe, as other transactions within the Company’s securities.
7.0 Ethics and Conduct
This section must not be changed. Please contact the Office of Ethics and Conduct with any questions.
This Policy is referenced in the Code of Conduct and Business Ethics (the “Code”). The Code serves as the Company’s guiding
framework for ethical behavior and professional conduct.
We conduct business legally & ethically by performing our jobs to the highest professional and ethical standards, following both the spirit
and letter of the law to avoid actual or perceived misconduct. Every employee is responsible for living up to the highest standards of
ethical behavior, complying with the Code, and being accountable in all we do.
The Company reserves the right to investigate matters and to otherwise ensure compliance with this Policy. Refer to the Policy on
Workforce Problems and Investigations for further information.
The Company strictly prohibits intimidation or retaliation, in any form, against anyone for participating in or assisting with an
investigation or reporting a concern in good faith. Any person who has concerns about or is aware of possible retaliatory action should
report it. Any retaliatory conduct will be treated as a violation of the Code and the Company will take appropriate corrective action against
the individuals who engage in retaliation, up to, and including, separation from the Company. All reports received by the Company,
through whatever method, are subject to the protections and requirements established in the Whistleblower Policy.
Policy Governance
Policy Administration
Administration of this Policy is the responsibility of ETIM in consultation with the Vice President, Associate General Counsel and
Assistant Secretary. Legal is responsible for the review of this Policy, in addition to developing and maintaining the content.
It should be noted, however, that the securities laws do not recognize any mitigating circumstances, and, in any event, even the appearance
of an improper transaction must be avoided to preserve the Company’s reputation for adhering to the highest standards of conduct. This
means that individuals may have to forgo a proposed transaction in DFS’s or another company’s securities even if the transaction was
planned before learning of MNPI and even though waiting to complete the transaction may result in economic loss or failure to realize an
anticipated profit.
Note that at the end of 2022, the Securities and Exchange Commission changed its rules to require contemporaneous reporting of bona fide gifts, as opposed to the prior yearend reporting requirement.
4
4
Exhibit 21
DISCOVER FINANCIAL SERVICES
SUBSIDIARIES
Subsidiary
Jurisdiction of
Incorporation or
Formation
DFS Corporate Services LLC
Delaware
DFS International Inc.
Delaware
DFS Services LLC
Delaware
Diners Club International Ltd.
New York
Diners Club Services Private Limited
India
Diners Club Taiwan Ltd.
Taiwan
Discover Bank
Delaware
Discover Financial Services (Canada), Inc.
British Columbia
Discover Financial Services (Hong Kong) Limited
Hong Kong
Discover Financial Services (UK) Limited
England/Wales
Discover Funding LLC
Delaware
Discover Global Employment Company Private Limited
Singapore
Discover Home Loans, Inc.
Delaware
Discover Information Technology (Shanghai) Limited
Shanghai
Discover Products Inc.
Utah
Discover Properties LLC
Delaware
Discover Services Corporation
Delaware
Discover Ventures Inc.
Delaware
GTC Insurance Agency, Inc.
Delaware
PULSE Network LLC
Delaware
The Student Loan Corporation
Delaware
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-271900, 333-173360, 333-150228, 333-144184, and 333-144188, on
Form S-8 and No. 333-280359 on Form S-3 of our reports dated February 20, 2025, relating to the consolidated financial statements of Discover
Financial Services, and the effectiveness of Discover Financial Services’ internal control over financial reporting, appearing in this Annual Report on
Form 10-K of Discover Financial Services for the year ended December 31, 2024.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 20, 2025
Exhibit 31.1
CERTIFICATION
I, J. Michael Shepherd, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Discover Financial Services (the “registrant”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 20, 2025
/s/ J. MICHAEL SHEPHERD
J. Michael Shepherd
Interim Chief Executive Officer and President
Exhibit 31.2
CERTIFICATION
I, John T. Greene, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Discover Financial Services (the “registrant”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 20, 2025
/s/ JOHN T. GREENE
John T. Greene
Executive Vice President, Chief Financial
Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Discover Financial Services (the “Company”) on Form 10-K for the period ended December 31, 2024, as filed
with the Securities and Exchange Commission (the “Report”), each of J. Michael Shepherd, Interim Chief Executive Officer and President of the
Company, and John T. Greene, Executive Vice President and Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: February 20, 2025
/s/ J. MICHAEL SHEPHERD
J. Michael Shepherd
Interim Chief Executive Officer and President
Date: February 20, 2025
/s/ JOHN T. GREENE
John T. Greene
Executive Vice President, Chief Financial
Officer