Discover Financial Services (Form: 10-Q, Received: 05/02/2017 16:24:39)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2017



o	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		36-2517428
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2500 Lake Cook Road, Riverwoods, Illinois 60015		(224) 405-0900
(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

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 x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o
	Emerging growth company o

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. o

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

As of April 28, 2017 , there were 380,190,745 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

DISCOVER FINANCIAL SERVICES

Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017

TABLE OF CONTENTS



Part I	FINANCIAL INFORMATION
Item 1 .	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65
Item 4.	Controls and Procedures	66
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits	67

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.

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 ^SM , Discover ^® Network and Diners Club International ^® . All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.

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Part I.	FINANCIAL INFORMATION


Item 1.	Financial Statements

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Financial Condition



	March 31, 2017			December 31, 2016
	(unaudited) (dollars in millions, except share amounts)
Assets
Cash and cash equivalents	$	15,163		$	11,914
Restricted cash	1,100			95
Investment securities (includes $1,553 and $1,605 at fair value at March 31, 2017 and December 31, 2016, respectively)	1,718			1,757
Loan receivables
Loan receivables	75,853			77,254
Allowance for loan losses	(2,264		)	(2,167		)
Net loan receivables	73,589			75,087
Premises and equipment, net	750			734
Goodwill	255			255
Intangible assets, net	165			166
Other assets	2,055			2,300
Total assets	$	94,795		$	92,308
Liabilities and Stockholders’ Equity
Deposits
Interest-bearing deposit accounts	$	53,017		$	51,461
Non-interest bearing deposit accounts	505			531
Total deposits	53,522			51,992
Long-term borrowings	26,823			25,443
Accrued expenses and other liabilities	3,185			3,550
Total liabilities	83,530			80,985
Commitments, contingencies and guarantees (Notes 9, 12 and 13)
Stockholders’ Equity:
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 563,401,588 and 562,414,040 shares issued at March 31, 2017 and December 31, 2016, respectively	6			5
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 575,000 shares issued and outstanding and aggregate liquidation preference of $575 at March 31, 2017 and December 31, 2016	560			560
Additional paid-in capital	3,979			3,962
Retained earnings	15,568			15,130
Accumulated other comprehensive loss	(155		)	(161		)
Treasury stock, at cost; 181,050,010 and 173,648,023 shares at March 31, 2017 and December 31, 2016, respectively	(8,693		)	(8,173		)
Total stockholders’ equity	11,265			11,323
Total liabilities and stockholders’ equity	$	94,795		$	92,308

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



	March 31, 2017			December 31, 2016
	(unaudited) (dollars in millions)
Assets
Restricted cash	$	1,100		$	95
Loan receivables	$	31,130		$	33,016
Allowance for loan losses allocated to securitized loan receivables	$	(976	)	$	(955	)
Other assets	$	5		$	4
Liabilities
Long-term borrowings	$	16,780		$	16,411
Accrued expenses and other liabilities	$	15		$	15

See Notes to the Condensed Consolidated Financial Statements.

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DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Income



	For the Three Months Ended March 31,
	2017		2016
	(unaudited) (dollars in millions, except per share amounts)
Interest income
Credit card loans	$	1,876	$	1,733
Other loans	367		326
Investment securities	7		11
Other interest income	28		14
Total interest income	2,278		2,084
Interest expense
Deposits	191		162
Long-term borrowings	195		172
Total interest expense	386		334
Net interest income	1,892		1,750
Provision for loan losses	586		424
Net interest income after provision for loan losses	1,306		1,326
Other income
Discount and interchange revenue, net	233		273
Protection products revenue	58		61
Loan fee income	89		80
Transaction processing revenue	39		36
Other income	28		24
Total other income	447		474
Other expense
Employee compensation and benefits	363		345
Marketing and business development	168		162
Information processing and communications	80		88
Professional fees	147		160
Premises and equipment	25		24
Other expense	102		107
Total other expense	885		886
Income before income tax expense	868		914
Income tax expense	304		339
Net income	$	564	$	575
Net income allocated to common stockholders	$	551	$	562
Basic earnings per common share	$	1.43	$	1.35
Diluted earnings per common share	$	1.43	$	1.35
Dividends declared per common share	$	0.30	$	0.28

See Notes to the Condensed Consolidated Financial Statements.

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DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Comprehensive Income



	For the Three Months Ended March 31,
	2017		2016
	(unaudited) (dollars in millions)
Net income	$	564	$	575
Other comprehensive income, net of taxes
Unrealized gain on available-for-sale investment securities, net of tax	1		14
Unrealized gain ( loss) on cash flow hedges, net of tax	5		(26		)
Other comprehensive income (loss)	6		(12		)
Comprehensive income	$	570	$	563

See Notes to the Condensed Consolidated Financial Statements.

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DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Changes in Stockholders’ Equity



							Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders’ Equity
	Preferred Stock			Common Stock
	Shares	Amount		Shares	Amount
	(unaudited) (dollars in millions, shares in thousands)
Balance at December 31, 2015	575	$	560	560,679	$	5	$	3,885	$	13,250		$	(160	)	$	(6,265	)	$	11,275
Net income	—	—		—	—		—		575			—			—			575
Other comprehensive loss	—	—		—	—		—		—			(12		)	—			(12		)
Purchases of treasury stock	—	—		—	—		—		—			—			(423		)	(423		)
Common stock issued under employee benefit plans	—	—		21	—		1		—			—			—			1
Common stock issued and stock-based compensation expense	—	—		1,510	—		27		—			—			—			27
Dividends — common stock	—	—		—	—		—		(118		)	—			—			(118		)
Dividends — preferred stock	—	—		—	—		—		(9		)	—			—			(9		)
Balance at March 31, 2016	575	$	560	562,210	$	5	$	3,913	$	13,698		$	(172	)	$	(6,688	)	$	11,316

Balance at December 31, 2016	575	$	560	562,414	$	5	$	3,962	$	15,130		$	(161	)	$	(8,173	)	$	11,323
Net income	—	—		—	—		—		564			—			—			564
Other comprehensive income	—	—		—	—		—		—			6			—			6
Purchases of treasury stock	—	—		—	—				—			—			(520		)	(520		)
Common stock issued under employee benefit plans	—	—		20	—		1		—			—			—			1
Common stock issued and stock-based compensation expense	—	—		968	1		16		—			—			—			17
Dividends — common stock	—	—		—	—		—		(117		)	—			—			(117		)
Dividends — preferred stock	—	—		—	—		—		(9		)	—			—			(9		)
Balance at March 31, 2017	575	$	560	563,402	$	6	$	3,979	$	15,568		$	(155	)	$	(8,693	)	$	11,265

See Notes to the Condensed Consolidated Financial Statements.

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DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Cash Flows



	For the Three Months Ended March 31,
	2017			2016
	(unaudited) (dollars in millions)
Cash flows from operating activities
Net income	$	564		$	575
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	586			424
Depreciation and amortization	93			84
Amortization of deferred revenues and accretion of accretable yield on acquired loans	(98		)	(98		)
Net loss investments and other assets	14			13
Other, net	11			4
Changes in assets and liabilities:
Decrease (increase) in other assets	181			(33		)
(Decrease) increase in accrued expenses and other liabilities	(338		)	189
Net cash provided by operating activities	1,013			1,158

Cash flows from investing activities
Maturities and sales of available-for-sale investment securities	52			158
Maturities of held-to-maturity investment securities	4			5
Purchases of held-to-maturity investment securities	(17		)	(16		)
Net principal repaid on loans originated for investment	1,010			1,793
Purchases of other investments	(14		)	(1		)
Increase in restricted cash	(1,005		)	(911		)
Purchases of premises and equipment	(47		)	(46		)
Net cash (used for) provided by investing activities	(17		)	982

Cash flows from financing activities
Proceeds from issuance of securitized debt	1,290			991
Maturities and repayment of securitized debt	(925		)	(980		)
Proceeds from issuance of other long-term borrowings	1,005			38
Proceeds from issuance of common stock	1			1
Purchases of treasury stock	(520		)	(423		)
Net increase in deposits	1,529			925
Dividends paid on common and preferred stock	(127		)	(129		)
Net cash provided by financing activities	2,253			423
Net increase in cash and cash equivalents	3,249			2,563
Cash and cash equivalents, at beginning of period	11,914			9,572
Cash and cash equivalents, at end of period	$	15,163		$	12,135

See Notes to the Condensed Consolidated Financial Statements.

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Notes to the Condensed Consolidated Financial Statements

(unaudited)

1. Background and Basis of Presentation

Description of Business

Discover Financial Services (“DFS” or the “Company”) is a direct banking and payment services company. The Company is 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 and therefore is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company provides direct banking products and services and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home equity loans and deposit products. The Company also operates the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”). The Discover Network processes transactions for Discover-branded credit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as point-of-sale terminals at retail locations throughout the 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.

The Company’s business segments are Direct Banking and Payment Services. The Direct Banking segment includes Discover-branded credit cards issued to individuals on the Discover Network and other consumer products and services, including private student loans, personal loans, home equity loans, and other consumer lending and deposit products. The majority of Direct 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.

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

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments which are necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with the Company’s 2016 audited consolidated financial statements filed with the Company’s annual report on Form 10-K for the year ended December 31, 2016 .

Recently Issued Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of this ASU is to simplify the test for goodwill impairment by eliminating Step 2 of the current impairment test. Under the current rules, if the reporting unit’s carrying value exceeds its fair value (Step 1), goodwill impairment is measured as the difference between the carrying value of goodwill and its implied fair value. To compute the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new standard, the Company will perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;

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however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU apply to the Company’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU apply on a prospective basis. All of the Company’s recorded goodwill is associated with its PULSE debit business. This ASU has no impact on cash flows, and its adoption is not expected to have any impact on the Company’s financial condition or results of operations because the estimated fair value of the PULSE reporting unit is well in excess of its carrying value. The Company has not elected to early adopt this amendment.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. Whereas restricted cash balances have traditionally been excluded from the statement of cash flows, this ASU requires restricted cash and restricted cash equivalents to be included within the beginning and ending totals of cash, cash equivalents and restricted cash presented on the statement of cash flows for all periods presented. Restricted cash and restricted cash equivalent inflows and outflows with external parties are required to be classified within the operating, investing, and/or financing activity sections of the statement of cash flows whereas transfers between cash and cash equivalents and restricted cash and restricted cash equivalents should no longer be presented on the statement of cash flows. ASU 2016-18 also requires the nature of the restrictions to be disclosed to help provide information about the sources and uses of these balances during a reporting period and a reconciliation of the cash, cash equivalents and restricted cash totals on the statement of cash flows to the related balance sheet line items when cash, cash equivalents, and restricted cash are presented in more than one line item on the balance sheet. The reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements and must be provided for each period that a balance sheet is presented. The ASU will become effective for the Company on January 1, 2018, with early adoption permitted, and is not expected to have a material impact to the Company’s statement of cash flows. The Company has not elected to early adopt this amendment.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU eliminates the incurred loss threshold for initial recognition of credit impairment in current GAAP and replaces it with the expected loss concept. For all loans carried at amortized cost, companies will be required to measure their allowance for loan losses based on management’s current estimate of all expected credit losses over the remaining contractual term of the assets. Because it eliminates the incurred loss trigger, the new accounting guidance will require companies, upon the origination of a loan, to record their estimate of all expected credit losses on that loan through an immediate charge to earnings. Updates to that estimate each period will be recorded through provision expense. The estimate of loan losses must be based on historical experience, current conditions and reasonable and supportable forecasts. The ASU does not mandate the use of any specific method for estimating credit loss, permitting companies to use judgment in selecting the approach that is most appropriate in their circumstances.

The new rules are expected to affect the Company’s allowance for loan losses as a result of: (1) the requirement to measure the allowance based on all losses expected to occur over the remaining life of the loans receivable rather than including only losses deemed to be related to a past event or current condition, and (2) the reclassification of the non-accretable credit adjustment, currently embedded in the Company’s purchased credit-impaired ("PCI") student loan portfolio, into the allowance for loan losses. The separate measurement guidance applicable today for loans modified in a troubled debt restructuring will also be affected. Both troubled debt restructurings and PCI assets, which the ASU refers to as purchased credit-deteriorated ("PCD") will still be subject to certain separate disclosure requirements. Measurement of credit impairment of available-for-sale debt securities will generally remain unchanged under the new rules, but any such impairment will be recorded through an allowance, rather than a direct write-down of the security.

The ASU will become effective for the Company on January 1, 2020, with early adoption permitted no sooner than January 1, 2019. Upon adoption, a cumulative effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective in an amount necessary to adjust the allowance for loan losses to equal the current estimate of expected losses on financial assets held at that date. Additionally, upon adoption, the carrying value of PCD loans will be increased through an offsetting addition to the allowance for loan losses for the amount of expected credit losses on those loans, to be re-evaluated in subsequent periods and adjusted through provision expense as needed, and any non-credit premium or discount will be amortized or accreted to interest income from that point forward over the remaining life of PCD loans. Management is evaluating the standard, initiating implementation efforts across the Company, and planning for loss modeling requirements consistent with lifetime expected loss estimates. The Company has also been involved in efforts to identify and resolve various implementation issues specific to the application of the standard to credit card receivables. Adoption of the standard could have a potentially material impact on how the Company records and reports its financial condition and results of operations, and on regulatory capital. The extent of the impact upon adoption

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will likely depend on the characteristics of the Company's loan portfolio and economic conditions at that date, as well as forecasted conditions thereafter.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU requires excess tax benefits and tax deficiencies, which arise due to differences between the measure of compensation expense for GAAP accounting purposes and the amount deductible for tax purposes, to be recorded directly through the income statement as a component of income tax expense. Under previous GAAP, such amounts generally were recorded directly to stockholders' equity. The change in treatment of excess tax benefits and tax deficiencies will also impact the computation of diluted earnings per share, and the cash flows associated with those items will be classified as operating activities on the statement of cash flows. The ASU permits certain elective changes associated with stock compensation accounting. For example, companies can elect to account for award forfeitures as they occur rather than using an estimated forfeiture rate in the accrual of compensation expense. In addition, the ASU increases the proportion of shares an employer is permitted (though not required) to withhold on behalf of an employee to satisfy the employee’s income tax burden on a share-based award without causing the award to become subject to liability accounting. The Company adopted the ASU on its effective date of January 1, 2017. For the three months ended March 31, 2017, the effect on net income from excess tax benefits was $6 million , and basic and diluted earnings per share each increased by $0.016 per share. The Company elected to apply the change in presentation on the Condensed Consolidated Statement of Cash Flows on a prospective basis. The Company will continue to incorporate estimated forfeitures in the accrual of compensation expense and the Company has not changed its policy on statutory withholding requirements. The Company will continue to allow the employee to withhold up to the Company’s minimum statutory withholding requirements. This election had no impact on the Company's condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The guidance in this ASU provides clarification on the principal versus agent concept in relation to revenue recognition guidance issued as part of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 requires a company to determine whether it is a principal or an agent in a transaction in which another party is involved in providing goods or services to a customer by evaluating the nature of its promise to the customer. ASU 2016-08 provides clarification for identifying the good, service or right being transferred in a revenue transaction and identifies the principal as the party that controls the good, service or right prior to its transfer to the customer. The ASU provides further clarity on how to evaluate control in this context. This guidance will become effective for the Company on January 1, 2018 and management is evaluating the impact of these changes as part of its overall evaluation of ASU 2014-09, discussed below. Based on its evaluations to date, management does not anticipate that this ASU will result in different conclusions regarding the Company's revenue arrangements that involve a principal-agent relationship, but any such changes that could occur would result only in classification differences on the statements of income with no impact on income before taxes, net income, financial condition or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance will require lessees to capitalize most leases on their balance sheet whereas under current GAAP only capital leases are recognized on the lessee’s balance sheet. Leases which today are identified as capital leases will generally be identified as financing leases under the new guidance but otherwise their accounting treatment will remain relatively unchanged. Leases identified today as operating leases will generally remain in that category under the new standard, but both a right-of-use asset and a liability for remaining lease payments will now be required to be recognized on the balance sheet for this type of lease. The manner in which expenses associated with all leases are reported on the income statement will remain mostly unchanged. Lessor accounting also remains substantially unchanged by the new standard. The new guidance will become effective for the Company on January 1, 2019, and management does not expect it to have a material impact on the condensed consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU will have limited impact on the Company since it does not change the guidance for classifying and measuring investments in debt securities or loans. The standard requires entities to measure certain cost-method equity investments at fair value with changes in value recognized in net income. Equity investments that do not have readily determinable fair values will be carried at cost, less any impairment, plus or minus changes resulting from any observable price changes in orderly transactions for an identical or similar investment of the same issuer. This ASU requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans) on the balance sheet or the accompanying notes to

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the financial statements. This ASU will become effective for the Company on January 1, 2018 and is not expected to have a material impact to the financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU supersedes existing revenue recognition requirements in Topic 605, Revenue Recognition, including an assortment of transaction-specific and industry-specific rules. This ASU establishes 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. ASU Topic 606 does not apply to rights or obligations associated with financial instruments (for example, interest income from loans or investments, or interest expense on debt), and therefore the Company’s net interest income should not be affected. The Company’s revenue from discount and interchange, protection products, transaction processing and certain fees are within the scope of these rules. Throughout 2015, management followed the discussions of the FASB and evaluated the conclusions published by its Transition Resource Group ("TRG"), specifically those pertaining to how the new revenue recognition rules should be interpreted for credit card arrangements, loyalty programs, and transaction processing arrangements. Those discussions support the conclusion that timing and measurement of fee revenues associated with the Company’s credit card arrangements and costs associated with the Company’s credit card reward programs will not be impacted by the new rules. The FASB TRG discussions and guidance also support the conclusion that the timing and measurement of revenue associated with the Company’s transaction processing services, including discount and interchange and other transaction processing fees, will remain substantially unchanged under the new accounting model. This conclusion covers the vast majority of the Company’s revenue that is within the scope of the new standard. While management continues to evaluate the remaining in-scope revenue items to determine what, if any, impact the rules will have on their accounting and reporting, no material impacts are expected. The new revenue recognition model will become effective for the Company on January 1, 2018. Upon adoption in 2018, the Company will record an adjustment, if needed, to retained earnings as of the beginning of the year of initial application, which can be either the earliest comparative period presented, with all periods presented under the new rules, or January 1, 2018, without restating prior periods presented. Management does not expect to present any restated prior period amounts when the standard becomes effective in 2018, because little if any change in timing or measurement of the Company’s revenue is expected to occur under the new standard.


2.	Business Dispositions

On June 16, 2015, the Company announced the closing of the mortgage origination business it acquired in 2012, which was part of its Direct Banking segment. The disposition represented the exiting of an ancillary business and did not have a major impact on the Company’s operations.


3.	Investments

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

	March 31, 2017		December 31, 2016
U.S. Treasury securities ⁽¹⁾	$	673	$	674
States and political subdivisions of states	1		2
Residential mortgage-backed securities - Agency ⁽²⁾	1,044		1,081
Total investment securities	$	1,718	$	1,757


(1)	Includes $59 million and $73 million of U.S. Treasury securities pledged as swap collateral as of March 31, 2017 and December 31, 2016 , respectively.


(2)	Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

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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 March 31, 2017
Available-for-Sale Investment Securities ⁽¹⁾
U.S. Treasury securities	$	676	$	—	$	(3	)	$	673
Residential mortgage-backed securities - Agency	880		3		(3		)	880
Total available-for-sale investment securities	$	1,556	$	3	$	(6	)	$	1,553
Held-to-Maturity Investment Securities ⁽²⁾
States and political subdivisions of states	$	1	$	—	$	—		$	1
Residential mortgage-backed securities - Agency ⁽³⁾	164		1		(1		)	164
Total held-to-maturity investment securities	$	165	$	1	$	(1	)	$	165

At December 31, 2016
Available-for-Sale Investment Securities ⁽¹⁾
U.S. Treasury securities	$	676	$	—	$	(2	)	$	674
Residential mortgage-backed securities - Agency	934		2		(5		)	931
Total available-for-sale investment securities	$	1,610	$	2	$	(7	)	$	1,605
Held-to-Maturity Investment Securities ⁽²⁾
States and political subdivisions of states	$	2	$	—	$	—		$	2
Residential mortgage-backed securities - Agency ⁽³⁾	150		1		(1		)	150
Total held-to-maturity investment securities	$	152	$	1	$	(1	)	$	152


(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 that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.

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

	Number of Securities in a Loss Position	Less than 12 months
	Number of Securities in a Loss Position	Fair Value		Unrealized Losses
At March 31, 2017
Available-for-Sale Investment Securities
U.S. Treasury securities	1	$	673	$	(3	)
Residential mortgage-backed securities - Agency	17	$	450	$	(3	)
Held-to-Maturity Investment Securities
Residential mortgage-backed securities - Agency	37	$	78	$	(1	)

At December 31, 2016
Available-for-Sale Investment Securities
U.S. Treasury securities	1	$	674	$	(2	)
Residential mortgage-backed securities - Agency	19	$	586	$	(5	)
Held-to-Maturity Investment Securities
Residential mortgage-backed securities - Agency	31	$	61	$	(1	)

There were no investment securities in a continuous unrealized loss position for more than 12 months at March 31, 2017 and December 31, 2016 , respectively. There were no losses related to other-than-temporary impairments during the three months ended March 31, 2017 and 2016 .

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The following table provides information about proceeds from sales, recognized gains and losses and net unrealized gains and losses on available-for-sale securities (dollars in millions):

	For the Three Months Ended March 31,
	2017		2016
Net unrealized gain recorded in other comprehensive income, before-tax	$	2	$	23
Net unrealized gain recorded in other comprehensive income, after-tax	$	1	$	14

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

	One Year or Less		After One Year Through Five Years		After Five Years Through Ten Years		After Ten Years		Total
At March 31, 2017
Available-for-Sale Investment Securities—Amortized Cost
U.S. Treasury securities	$	—	$	676	$	—	$	—	$	676
Residential mortgage-backed securities - Agency	—		57		483		340		880
Total available-for-sale investment securities	$	—	$	733	$	483	$	340	$	1,556
Held-to-Maturity Investment Securities—Amortized Cost
State and political subdivisions of states	$	—	$	—	$	—	$	1	$	1
Residential mortgage-backed securities - Agency	—		—		—		164		164
Total held-to-maturity investment securities	$	—	$	—	$	—	$	165	$	165
Available-for-Sale Investment Securities—Fair Values
U.S. Treasury securities	$	—	$	673	$	—	$	—	$	673
Residential mortgage-backed securities - Agency	—		57		483		340		880
Total available-for-sale investment securities	$	—	$	730	$	483	$	340	$	1,553
Held-to-Maturity Investment Securities—Fair Values
State and political subdivisions of states	$	—	$	—	$	—	$	1	$	1
Residential mortgage-backed securities - Agency	—		—		—		164		164
Total held-to-maturity investment securities	$	—	$	—	$	—	$	165	$	165

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, as well as stimulate economic development in low to moderate income communities. These investments are accounted for using the equity method of accounting and are recorded within other assets. The related commitment for future investments is recorded in accrued expenses and other liabilities within the condensed consolidated statements of financial condition. The portion of each investment's operating results allocable to the Company is recorded in other expense within the condensed consolidated statements of income. The Company earns a return primarily through the receipt of tax credits allocated to the affordable housing projects and the community revitalization projects. These investments are not consolidated as the Company does not have a controlling financial interest in the entities. As of March 31, 2017 and December 31, 2016 , the Company had outstanding investments in these entities of $319 million and $326 million , respectively, and related contingent liabilities of $56 million and $64 million , respectively. Of the above outstanding equity investments, the Company had $270 million of investments related to affordable housing projects as of March 31, 2017 and December 31, 2016 , which had $56 million and $64 million related contingent liabilities, respectively.

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4.	Loan Receivables

The Company has three loan portfolio segments: credit card loans, other loans and PCI loans.

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

	March 31, 2017			December 31, 2016
Loan receivables
Credit card loans ⁽¹⁾	$	59,757		$	61,522
Other loans
Personal loans	6,663			6,481
Private student loans	6,689			6,393
Other	295			274
Total other loans	13,647			13,148
PCI loans ⁽²⁾	2,449			2,584
Total loan receivables	75,853			77,254
Allowance for loan losses	(2,264		)	(2,167		)
Net loan receivables	$	73,589		$	75,087


(1)	Amounts include $21.3 billion and $20.8 billion underlying investors’ interest in trust debt at March 31, 2017 and December 31, 2016 , respectively, and $8.5 billion and $10.8 billion in seller's interest at March 31, 2017 and December 31, 2016 , respectively.


(2)	Amounts include $1.3 billion and $1.4 billion of loans pledged as collateral against the notes issued from the Student Loan Corporation ("SLC") securitization trusts at March 31, 2017 and December 31, 2016 , respectively. See Note 5: Credit Card and Student Loan Securitization Activities for additional information.

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Credit Quality Indicators

The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for loan losses.

Information related to the delinquent and non-accruing loans in the Company’s loan portfolio is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading “— Purchased Credit-Impaired Loans” (dollars in millions):

	30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due		90 or More Days Delinquent and Accruing		Total Non-accruing ⁽¹⁾
At March 31, 2017
Credit card loans ⁽²⁾	$	617	$	616	$	1,233	$	557	$	201
Other loans
Personal loans ⁽³⁾	54		20		74		19		10
Private student loans (excluding PCI) ⁽⁴⁾	98		38		136		38		—
Other	1		1		2		—		9
Total other loans (excluding PCI)	153		59		212		57		19
Total loan receivables (excluding PCI)	$	770	$	675	$	1,445	$	614	$	220

At December 31, 2016
Credit card loans ⁽²⁾	$	655	$	597	$	1,252	$	544	$	189
Other loans
Personal loans ⁽³⁾	55		19		74		18		8
Private student loans (excluding PCI) ⁽⁴⁾	106		35		141		35		—
Other	1		1		2		—		19
Total other loans (excluding PCI)	162		55		217		53		27
Total loan receivables (excluding PCI)	$	817	$	652	$	1,469	$	597	$	216

(1)

The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of non-accruing credit card loans was $8 million for the three months ended March 31, 2017 and 2016 . The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. This amount was estimated based on customers' current balances and most recent interest rates.


(2)	Credit card loans that are 90 or more days delinquent and accruing interest include $66 million and $58 million of loans accounted for as troubled debt restructurings at March 31, 2017 and December 31, 2016 , respectively.


(3)	Personal loans that are 90 or more days delinquent and accruing interest include $3 million and $2 million of loans accounted for as troubled debt restructurings at March 31, 2017 and December 31, 2016 , respectively.


(4)	Private student loans that are 90 or more days delinquent and accruing interest include $4 million and $3 million of loans accounted for as troubled debt restructurings at March 31, 2017 and December 31, 2016 .

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Information related to the net charge-offs in the Company's loan portfolio is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions):

	For the Three Months Ended March 31,
	2017				2016
	Net Charge-offs		Net Charge-off Rate ⁽¹⁾		Net Charge-offs		Net Charge-off Rate ⁽¹⁾
Credit card loans	$	422	2.84	%	$	326	2.34	%
Other loans
Personal loans	51		3.16	%	34		2.45	%
Private student loans (excluding PCI)	14		0.83	%	12		0.85	%
Other	2		3.45	%	—		—	%
Total other loans	67		2.02	%	46		1.59	%
Net charge-offs (excluding PCI)	$	489	2.69	%	$	372	2.21	%
Net charge-offs (including PCI)	$	489	2.60	%	$	372	2.11	%


(1)	Net charge-off rate represents net charge-off dollars (annualized) divided by average loans for the reporting period.

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 as well as information from credit bureaus, such as FICO or other credit scores, relating to the customer’s broader credit performance. FICO scores are generally obtained at origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that a significant portion of delinquent accounts have FICO scores below 660.

The following table provides the most recent FICO scores available for the Company’s customers as a percentage of each class of loan receivables:

	Credit Risk Profile by FICO Score
	660 and Above		Less than 660 or No Score
At March 31, 2017
Credit card loans	81	%	19	%
Personal loans	95	%	5	%
Private student loans (excluding PCI) ⁽¹⁾	95	%	5	%

At December 31, 2016
Credit card loans	82	%	18	%
Personal loans	96	%	4	%
Private student loans (excluding PCI) ⁽¹⁾	95	%	5	%


(1)	PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."

For private student loans, additional credit risk management activities include monitoring the amount of loans in forbearance. Forbearance allows borrowers experiencing temporary financial difficulties and willing to make payments, the ability to temporarily suspend payments. Eligible borrowers have a lifetime cap on forbearance of 12 months . At March 31, 2017 and December 31, 2016 , there were $25 million and $19 million , respectively, of private student loans, including PCI, in forbearance, representing 0.4% and 0.3% , respectively, of total student loans in repayment and forbearance.

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Allowance for Loan Losses

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

	For the Three Months Ended March 31, 2017
	Credit Card			Personal Loans			Student Loans ⁽¹⁾			Other			Total
Balance at beginning of period	$	1,790		$	200		$	158		$	19		$	2,167
Additions
Provision for loan losses	524			58			12			(8		)	586
Deductions
Charge-offs	(535		)	(57		)	(17		)	(2		)	(611		)
Recoveries	113			6			3			—			122
Net charge-offs	(422		)	(51		)	(14		)	(2		)	(489		)
Balance at end of period	$	1,892		$	207		$	156		$	9		$	2,264

	For the Three Months Ended March 31, 2016
	Credit Card			Personal Loans			Student Loans ⁽¹⁾			Other			Total
Balance at beginning of period	$	1,554		$	155		$	143		$	17		$	1,869
Additions
Provision for loan losses	362			44			17			1			424
Deductions
Charge-offs	(439		)	(39		)	(15		)	—			(493		)
Recoveries	113			5			3			—			121
Net charge-offs	(326		)	(34		)	(12		)	—			(372		)
Balance at end of period	$	1,590		$	165		$	148		$	18		$	1,921


(1)	Includes both PCI and non-PCI private student loans.

Net charge-offs of principal are recorded against the allowance for loan losses, as shown in the preceding table. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions):

	For the Three Months Ended March 31,
	2017		2016
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)	$	84	$	69
Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)	$	22	$	17

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The following tables provide additional detail of the Company’s allowance for loan losses and recorded investment in its loan portfolio by impairment methodology (dollars in millions):

	Credit Card		Personal Loans		Student Loans ⁽¹⁾		Other Loans		Total
At March 31, 2017
Allowance for loans evaluated for impairment as
Collectively evaluated for impairment in accordance with ASC 450-20	$	1,717	$	184	$	103	$	3	$	2,007
Evaluated for impairment in accordance with ASC 310-10-35 ⁽²⁾⁽³⁾	175		23		19		6		223
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30	—		—		34		—		34
Total allowance for loan losses	$	1,892	$	207	$	156	$	9	$	2,264
Recorded investment in loans evaluated for impairment as
Collectively evaluated for impairment in accordance with ASC 450-20	$	58,630	$	6,576	$	6,588	$	250	$	72,044
Evaluated for impairment in accordance with ASC 310-10-35 ⁽²⁾⁽³⁾	1,127		87		101		45		1,360
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30	—		—		2,449		—		2,449
Total recorded investment	$	59,757	$	6,663	$	9,138	$	295	$	75,853

At December 31, 2016
Allowance for loans evaluated for impairment as
Collectively evaluated for impairment in accordance with ASC 450-20	$	1,623	$	179	$	105	$	3	$	1,910
Evaluated for impairment in accordance with ASC 310-10-35 ⁽²⁾⁽³⁾	167		21		18		16		222
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30	—		—		35		—		35
Total allowance for loan losses	$	1,790	$	200	$	158	$	19	$	2,167
Recorded investment in loans evaluated for impairment as
Collectively evaluated for impairment in accordance with ASC 450-20	$	60,437	$	6,400	$	6,307	$	219	$	73,363
Evaluated for impairment in accordance with ASC 310-10-35 ⁽²⁾⁽³⁾	1,085		81		86		55		1,307
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30	—		—		2,584		—		2,584
Total recorded investment	$	61,522	$	6,481	$	8,977	$	274	$	77,254


(1)	Includes both PCI and non-PCI private student loans.

(2)

Loan receivables evaluated for impairment in accordance with Accounting Standards Codification ("ASC") 310-10-35 include credit card loans, personal loans and student loans collectively evaluated for impairment in accordance with ASC Subtopic 310-40, Receivables, which consists of modified loans accounted for as troubled debt restructurings. Other loans are individually evaluated for impairment and generally do not represent troubled debt restructurings.

(3)

The unpaid principal balance of credit card loans was $973 million and $935 million at March 31, 2017 and December 31, 2016 , respectively. The unpaid principal balance of personal loans was $86 million and $79 million at March 31, 2017 and December 31, 2016 , respectively. The unpaid principal balance of student loans was $99 million and $84 million at March 31, 2017 and December 31, 2016 , respectively. All loans accounted for as troubled debt restructurings have a related allowance for loan losses.

Troubled Debt Restructurings

The Company has internal loan modification programs that provide relief to credit card, personal loan and student 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 are also available for credit card and personal loans. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on student loans and certain grants of student loan forbearance, result in the loans being considered individually impaired. In addition, loans that defaulted or graduated from modification programs or forbearance are considered to be individually impaired.

For credit card customers, the temporary hardship program primarily consists of a reduced minimum payment and an interest rate reduction, both lasting for a period no longer than 12 months . The permanent workout program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The permanent modification program does not normally provide for the forgiveness of unpaid principal, but

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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 but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. Credit card loans included in temporary and permanent programs are accounted for as troubled debt restructurings.

For personal loan customers, in certain situations the Company offers various payment programs, including temporary and permanent programs. The temporary programs normally consist of a reduction of the minimum payment for a period of no longer than 12 months with the option of a final balloon payment required at the end of the loan term or an extension of the maturity date with the total term not exceeding nine years . Further, in certain circumstances the interest rate on the loan is reduced. The permanent program involves changing the terms of the loan in order to pay off the outstanding balance over a longer term and also in certain circumstances reducing the interest rate on the loan. Similar to the temporary programs, the total term may not exceed nine years . The Company also allows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are accounted for as troubled debt restructurings.

To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance or programs that include payment deferral, temporary payment reduction, temporary interest rate reduction or extended terms. A modified loan typically meets the definition of a troubled debt restructuring based on the cumulative length of the concession period and an evaluation of the credit quality of the borrower, based on FICO scores. Prior to the third quarter of 2016, only a second forbearance when the borrower was 30 days or greater delinquent was considered a troubled debt restructuring. As a result, the student loan balances being accounted for as troubled debt restructurings increased, although it did not lead to significant changes in the balance of the overall allowance for loan losses.

The Company monitors borrower performance after using payment programs or forbearance and the Company believes the programs help to prevent defaults and are useful in assisting customers experiencing financial difficulties. The Company plans to continue to use payment programs and forbearance and, as a result, expects to have additional loans classified as troubled debt restructurings in the future.

Additional information about modified loans classified as troubled debt restructurings is shown below (dollars in millions):

	Average recorded investment in loans		Interest income recognized during period loans were impaired ⁽¹⁾		Gross interest income that would have been recorded with original terms ⁽²⁾
For the Three Months Ended March 31, 2017
Credit card loans ⁽³⁾	$	1,108	$	25	$	20
Personal loans	$	84	$	2	$	1
Private student loans ⁽⁴⁾	$	94	$	2	$	—

For the Three Months Ended March 31, 2016
Credit card loans ⁽³⁾	$	1,021	$	20	$	20
Personal loans	$	69	$	2	$	1
Private student loans ⁽⁴⁾	$	50	$	1	N/A


(1)	The Company does not separately track interest income on loans in modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs.

(2)

The Company does not separately track the amount of additional gross interest income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on non-impaired loans and the average interest rate earned on loans in the modification programs to the average loans in the modification programs.

(3)

Includes credit card loans that were modified in troubled debt restructurings, but are no longer enrolled in a troubled debt restructuring program due to noncompliance with the terms of the modification or successful completion of a program. The average balance of credit card loans that were no longer enrolled in a troubled debt restructuring program was $311 million and $274 million , respectively, for the three months ended March 31, 2017 and 2016 .

(4)

As a result of the updates implemented in the third quarter of 2016, some student loans accounted for as troubled debt restructurings have additional gross income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in accordance with the original terms. For the three months ended March 31, 2017 , the gross income that would have been recorded with original terms for student loans in modification programs was not material.

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In order to evaluate the primary financial effects that resulted from credit card loans entering into a loan modification program during the three months ended March 31, 2017 and 2016 , the Company quantified the amount by which interest and fees were reduced during the periods. During the three months ended March 31, 2017 and 2016 , the Company forgave approximately $11 million and $9 million , respectively, of interest and fees as a result of accounts entering into a credit card loan modification program.

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

	For the Three Months Ended March 31,
	2017			2016
	Number of Accounts	Balances		Number of Accounts	Balances
Accounts that entered a loan modification program during the period
Credit card loans	30,893	$	181	22,284	$	135
Personal loans	1,563	$	18	1,061	$	12
Private student loans	1,017	$	17	452	$	8

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

	For the Three Months Ended March 31,
	2017			2016
	Number of Accounts	Aggregated Outstanding Balances Upon Default		Number of Accounts	Aggregated Outstanding Balances Upon Default
Troubled debt restructurings that subsequently defaulted
Credit card loans ⁽¹⁾⁽²⁾	8,166	$	44	4,700	$	25
Personal loans ⁽²⁾	307	$	4	158	$	2
Private student loans ⁽³⁾	185	$	3	197	$	3


(1)	Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain revoked in most cases.


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


(3)	For student loans, defaults have been defined as loans that are 60 or more days delinquent. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.

Of the account balances that defaulted as shown above for the three months ended March 31, 2017 and 2016 , approximately 38% and 37% , respectively, of the total balances were charged off at the end of the month in which they defaulted. For accounts that have defaulted from a loan modification program and have not been subsequently charged off, the balances are included in the allowance for loan loss analysis discussed above under "— Allowance for Loan Losses."

Purchased Credit-Impaired Loans

Purchased loans with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are considered impaired at acquisition and are reported as PCI loans. The private student loans acquired in the SLC transaction, as well as the additional acquired private student loan portfolio comprise the Company’s only PCI loans at March 31, 2017 and December 31, 2016 . Total PCI student loans had an outstanding balance of $2.6 billion and $2.7 billion , including accrued interest, and a related carrying amount of $2.4 billion and $2.6 billion as of March 31, 2017 and December 31, 2016 , respectively.

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The following table provides changes in accretable yield for the acquired loans during each period (dollars in millions):

	For the Three Months Ended March 31,
	2017			2016
Balance at beginning of period	$	796		$	965
Accretion into interest income	(41		)	(49		)
Balance at end of period	$	755		$	916

Periodically, the Company updates the estimate of cash flows expected to be collected based on management's latest expectations of future credit losses, borrower prepayments and certain other assumptions that affect cash flows. No provision expense was recorded during the three months ended March 31, 2017 and 2016 . The allowance for PCI loan losses at March 31, 2017 and December 31, 2016 was $34 million and $35 million . For the three months ended March 31, 2017 and 2016 , there were no changes in expected cash flow assumptions. Changes to accretable yield are recognized prospectively as an adjustment to yield over the remaining life of the pools.

At March 31, 2017 , the 30 or more days delinquency and 90 or more days delinquency rates on PCI student loans (which include loans not yet in repayment) were 2.64% and 0.84% , respectively. At December 31, 2016 , the 30 or more days delinquency and 90 or more days delinquency rates on PCI student loans (which include loans not yet in repayment) were 2.88% and 0.87% , respectively. These rates include private student loans that are greater than 120 days delinquent that are covered by an indemnification agreement or insurance arrangements through which the Company expects to recover a substantial portion of the loan. The net charge-off rate on PCI student loans was 0.53% and 0.43% for the three months ended March 31, 2017 and 2016 , respectively.


5.	Credit Card and Student Loan Securitization Activities

Credit Card Securitization Activities

The Company accesses the term asset securitization market through the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust (“DCENT”), which are trusts into which credit card loan receivables are transferred (or, in the case of DCENT, into which beneficial interests in DCMT are transferred) and from which DCENT issues notes to investors.

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. In order 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. The subordinated classes are held by wholly-owned subsidiaries of Discover Bank. The Company is exposed to credit-related risk of loss associated with trust assets as of the balance sheet date through the retention of these subordinated interests. The estimated probable incurred loss is included in the allowance for loan losses estimate.

The Company’s credit card securitizations are accounted for as secured borrowings and the trusts and Discover Funding LLC are treated as consolidated subsidiaries of the Company. The Company’s retained interests in the assets of the trusts, consisting of investments in DCENT notes held by subsidiaries of Discover Bank, constitute intercompany positions which are eliminated in the preparation of the Company’s condensed consolidated statements of financial condition.

Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the trusts’ creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to third-party creditors of the Company. The trusts have ownership of cash balances that also have restrictions, the amounts of which are reported in restricted cash. Investment of trust cash balances is limited to investments that are permitted under the governing documents of the trusts and which have maturities no later than the related date on which funds must be made available for distribution to trust investors. With the exception of the seller’s interest in trust receivables, the Company’s interests in trust assets are generally subordinate to the interests of third-party investors and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts’ debt.

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

	March 31, 2017			December 31, 2016
Restricted cash	$	1,025		$	23

Investors’ interests held by third-party investors	16,075			15,625
Investors’ interests held by wholly-owned subsidiaries of Discover Bank	5,231			5,189
Seller’s interest	8,507			10,812
Loan receivables ⁽¹⁾	29,813			31,626
Allowance for loan losses allocated to securitized loan receivables ⁽¹⁾	(950		)	(928		)
Net loan receivables	28,863			30,698
Other	5			4
Carrying value of assets of consolidated variable interest entities	$	29,893		$	30,725


(1)	The Company maintains its allowance for loan losses at an amount sufficient to absorb probable losses inherent in all loan receivables, which includes all loan receivables in the trusts. Therefore, credit risk associated with the transferred receivables is fully reflected on the Company’s balance sheet 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, the securitization structures include certain features that could result in earlier-than-expected repayment of the securities. The primary investor protection feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements. Insufficient cash flows would trigger the early repayment of the securities. This is referred to as the “economic early amortization” feature.

Investors are allocated cash flows derived from activities related to the accounts comprising the securitized pool of receivables, the amounts of which reflect finance charges billed, certain fee assessments, allocations of merchant discount and interchange, and recoveries on charged-off accounts. From these cash flows, investors are reimbursed for charge-offs occurring within the securitized pool of receivables and receive a contractual rate of return and Discover Bank is paid a servicing fee as servicer. Any cash flows remaining in excess of these requirements are reported to investors as excess spread. An excess spread rate of less than 0% for a contractually specified period, generally a three-month average, would trigger an economic early amortization event. In such an event, the Company would be required to seek immediate sources of replacement funding. 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.

Through its wholly-owned indirect subsidiary, Discover Funding LLC, the Company is required to maintain a contractual minimum level of receivables in the trust in excess of the face value of outstanding investors’ interests. This excess is referred to as the minimum seller’s interest. The required minimum seller’s interest in the pool of trust receivables, which is included in credit card loan receivables restricted for securitization investors, is set at approximately 7% in excess of the total investors’ interests (which includes interests held by third parties as well as those interests held by the Company). If the level of receivables in the trust was to fall below the required minimum, the Company would be required to add receivables from the unrestricted pool of receivables, which would increase the amount of credit card loan 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 is impacted by seasonality as higher balance repayments tend to occur in the first calendar year quarter. If the Company could not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors’ interests would be triggered. The Company retains significant exposure to the performance of trust assets through holdings of the seller's interest and subordinated security classes of DCENT. The Company may elect to add receivables to the restricted pool of receivables subject to certain requirements. The Company also has the right to remove a random selection of accounts, which would serve to decrease the amount of credit card loan receivables restricted for securitization investors, subject to certain requirements including that the minimum seller's interest is still met. In the three months ended March 31, 2017 , no accounts were added to or removed from those restricted for securitization investors.

In addition to performance measures associated with the transferred credit card loan receivables or the inability to add receivables to satisfy the seller's interest requirement, there are other events or conditions which could trigger an early amortization event, such as non-payment of principal at expected maturity. As of March 31, 2017 , no economic or other early amortization events have occurred.

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The table below provides information concerning investors’ interests and related excess spread (dollars in millions):

At March 31, 2017	Investors’ Interests ⁽¹⁾		Number of Series Outstanding	3-Month Rolling Average Excess Spread
Discover Card Execution Note Trust (DiscoverSeries notes)	$	21,306	37	12.73	%


(1)	Investors’ interests include third-party interests and subordinated interests held by wholly-owned subsidiaries of Discover Bank.

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.

Student Loan Securitization Activities

The Company’s student loan securitizations are accounted for as secured borrowings and the trusts are treated as consolidated subsidiaries of the Company. Trust receivables underlying third-party investors’ interests are recorded in PCI loans and the related debt issued by the trusts is reported in long-term borrowings. The assets of the Company’s consolidated VIEs are restricted from being sold or pledged as collateral for other borrowings and the cash flows from these restricted assets may be used only to pay obligations of the trusts.

Currently there are three trusts from which securities were issued to investors. Principal payments on the long-term secured borrowings are made as cash is collected on the underlying loans that are used as collateral on the secured borrowings. The Company does not have access to cash collected by the securitization trusts until cash is released in accordance with the trust indenture agreements and, for certain securitizations, no cash will be released to the Company until all outstanding trust borrowings have been repaid. Similar to the credit card securitizations, the Company continues to own and service the accounts that generate the student loan receivables held by the trusts and receives servicing fees from the trusts based on either a percentage of the principal balance outstanding or a flat fee per borrower. Although the servicing fee income offsets the fee expense related 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.

Under terms of all the trust arrangements, the Company has the option, but not the obligation, to provide financial support to the trusts, but has never provided such support. A substantial portion of the credit risk associated with the securitized loans has been transferred to third parties under private credit insurance or indemnification arrangements.

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

	March 31, 2017			December 31, 2016
Restricted cash	$	75		$	72

Student loan receivables ⁽¹⁾	1,317			1,390
Allowance for loan losses allocated to securitized loan receivables ⁽¹⁾	(26		)	(27		)
Net student loan receivables	1,291			1,363
Carrying value of assets of consolidated variable interest entities	$	1,366		$	1,435


(1)	The Company maintains its allowance for loan losses on PCI loans sufficient to absorb probable decreases in cash flows that were previously expected. Therefore, credit risk associated with the transferred receivables is fully reflected on the Company's balance sheet in accordance with GAAP.


6.	Deposits

The Company offers its deposit products to customers through two channels: (i) through direct marketing, internet origination and affinity relationships (“direct-to-consumer deposits”); and (ii) indirectly through contractual arrangements with securities brokerage firms (“brokered deposits”). Direct-to-consumer deposits include certificates of deposit, money market accounts, online savings and checking accounts and IRA certificates of deposit, while brokered deposits include certificates of deposit and sweep accounts.

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The following table provides a summary of interest-bearing deposit accounts (dollars in millions):

	March 31, 2017		December 31, 2016
Certificates of deposit in amounts less than $100,000	$	20,734	$	20,225
Certificates of deposit in amounts $100,000 or greater ⁽¹⁾	5,862		5,864
Savings deposits, including money market deposit accounts	26,421		25,372
Total interest-bearing deposits	$	53,017	$	51,461


(1)	Includes $1.4 billion in certificates of deposit greater than $250,000, the Federal Deposit Insurance Corporation ("FDIC") insurance limit, as of March 31, 2017 and December 31, 2016 , respectively.

The following table summarizes certificates of deposit in amounts of $100,000 or greater by contractual maturity (dollars in millions):

Maturity Period	March 31, 2017
Three months or less	$	667
Over three months through six months	846
Over six months through twelve months	1,644
Over twelve months	2,705
Total	$	5,862

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

Year	March 31, 2017
2017	$	8,626
2018	7,084
2019	3,236
2020	2,618
2021	1,872
Thereafter	3,160
Total	$	26,596

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7.	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):

	March 31, 2017					December 31, 2016
	Maturity	Interest Rate	Weighted-Average Interest Rate	Outstanding Amount		Outstanding Amount
Securitized Debt
Fixed-rate asset-backed securities ⁽¹⁾	2017-2022	1.22%-5.65%	2.07%	$	10,408	$	9,868
Floating-rate asset-backed securities ⁽²⁾⁽³⁾	2017-2022	1.21%-1.45%	1.33%	5,592		5,694
Total Discover Card Master Trust I and Discover Card Execution Note Trust				16,000		15,562

Floating-rate asset-backed securities ^(4)(5)(6)(7)	2031-2042	1.19%-4.75%	2.65%	780		849
Total SLC Private Student Loan Trusts				780		849
Total long-term borrowings - owed to securitization investors				16,780		16,411

Discover Financial Services (Parent Company)
Fixed-rate senior notes ⁽¹⁾	2017-2027	3.75%-10.25%	4.53%	3,088		2,090
Fixed-rate retail notes	2017-2031	2.85%-4.40%	3.73%	183		169

Discover Bank
Fixed-rate senior bank notes ⁽¹⁾	2018-2026	2.00%-4.25%	3.21%	6,075		6,077
Fixed-rate subordinated bank notes	2019-2020	7.00%-8.70%	7.49%	697		696
Total long-term borrowings				$	26,823	$	25,443


(1)	The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in London Interbank Offered Rate (“LIBOR”). Use of these interest rate swaps impacts carrying value of the debt.


(2)	Discover Card Execution Note Trust floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 30 to 54 basis points as of March 31, 2017 .


(3)	The Company uses interest rate swaps to manage its exposure to changes in interest rates related to future cash flows resulting from interest payments on a portion of these long-term borrowings. There is no impact on debt carrying value from use of these interest rate swaps. See Note 15: Derivatives and Hedging Activities for additional information.


(4)	SLC Private Student Loan Trusts floating-rate asset-backed securities include issuances with the following interest rate terms: 3-month LIBOR + 17 to 45 basis points , Prime rate + 75 to 100 basis points and 1-month LIBOR + 350 basis points as of March 31, 2017 .


(5)	The Company acquired an interest rate swap related to the securitized debt assumed in the SLC transaction which matured and is no longer outstanding as of March 31, 2017 . The swap did not qualify for hedge accounting and had no impact on debt carrying value. See Note 15: Derivatives and Hedging Activities for additional information.


(6)	Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying student loans. The dates shown represent final maturity dates.


(7)	Includes $265 million of senior notes maturing in 2031, $470 million of senior and subordinated notes maturing in 2036 and $45 million of senior notes maturing in 2042 as of March 31, 2017 .

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

Year	March 31, 2017
2017	$	4,250
2018	5,268
2019	5,987
2020	3,082
2021	1,038
Thereafter	7,198
Total	$	26,823

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The Company has access to committed undrawn capacity through private securitizations to support the funding of its credit card loan receivables. As of March 31, 2017 , the total commitment of secured credit facilities through private providers was $6.0 billion , none of which was drawn as of March 31, 2017 . Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers which have various expirations in calendar years 2018 through 2020. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each individual conduit 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.


8.	Accumulated Other Comprehensive Income

Changes in each component of accumulated other comprehensive income (loss) ("AOCI") were as follows (dollars in millions):

	Unrealized (Loss) Gain on Available-for-Sale Investment Securities, Net of Tax			Loss on Cash Flow Hedges, Net of Tax			Pension Plan Loss, Net of Tax			AOCI
For the Three Months Ended March 31, 2017
Balance at December 31, 2016	$	(3	)	$	(13	)	$	(145	)	$	(161	)
Net change	1			5			—			6
Balance at March 31, 2017	$	(2	)	$	(8	)	$	(145	)	$	(155	)

For the Three Months Ended March 31, 2016
Balance at December 31, 2015	$	—		$	(20	)	$	(140	)	$	(160	)
Net change	14			(26		)	—			(12		)
Balance at March 31, 2016	$	14		$	(46	)	$	(140	)	$	(172	)

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

	Before Tax			Tax (Expense) Benefit			Net of Tax
For the Three Months Ended March 31, 2017
Available-for-Sale Investment Securities
Net unrealized holding gain arising during the period	$	2		$	(1	)	$	1
Net change	$	2		$	(1	)	$	1
Cash Flow Hedges
Net unrealized gain arising during the period	$	6		$	(3	)	$	3
Amounts reclassified from AOCI	5			(3		)	2
Net change	$	11		$	(6	)	$	5

For the Three Months Ended March 31, 2016
Available-for-Sale Investment Securities
Net unrealized holding gain arising during the period	$	23		$	(9	)	$	14
Net change	$	23		$	(9	)	$	14
Cash Flow Hedges
Net unrealized loss arising during the period	$	(52	)	$	21		$	(31	)
Amounts reclassified from AOCI	9			(4		)	5
Net change	$	(43	)	$	17		$	(26	)

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9.	Income Taxes

The following table presents the calculation of the Company's effective income tax rate (dollars in millions, except effective income tax rate):

	For the Three Months Ended March 31,
	2017			2016
Income before income tax expense	$	868		$	914
Income tax expense	$	304		$	339
Effective income tax rate	35.0		%	37.1		%

Income tax expense and the effective tax rate decreased $35 million and 2.1% , respectively for the three months ended March 31, 2017 as compared to the same period in 2016 . The decrease in rates is primarily due to the resolution of certain state tax matters and excess tax benefits related to stock-based compensation.

The Company is subject to examination by the Internal Revenue Service ("IRS") and tax authorities in various state, local and foreign tax jurisdictions. The Company regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions resulting from these and subsequent years' examinations. T he 2008-2010 federal audit is currently under Administrative Appeals and the IRS is currently examining the years 2011-2012. At this time, the potential change in unrecognized tax benefits is not expected to be significant over the next 12 months. The Company believes that its reserves are sufficient to cover any tax, penalties and interest that would result from such examinations.


10.	Earnings Per Share

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

	For the Three Months Ended March 31,
	2017			2016
Numerator
Net income	$	564		$	575
Preferred stock dividends	(9		)	(9		)
Net income available to common stockholders	555			566
Income allocated to participating securities	(4		)	(4		)
Net income allocated to common stockholders	$	551		$	562
Denominator
Weighted-average shares of common stock outstanding	386			417
Weighted-average shares of common stock outstanding and common stock equivalents	386			417

Basic earnings per common share	$	1.43		$	1.35
Diluted earnings per common share	$	1.43		$	1.35

Anti-dilutive securities were not material and had no impact on the computation of diluted EPS for the three months ended March 31, 2017 and 2016 .


11.	Capital Adequacy

The Company is subject to the capital adequacy guidelines of the Federal Reserve, and Discover Bank, the Company’s main 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 have a direct material effect on the financial position and results of the Company and Discover Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Discover Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain

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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.

In 2013, the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC issued final capital rules under the Basel Committee’s December 2010 framework (referred to as “Basel III”) establishing a new comprehensive capital framework for U.S. banking organizations. The final capital rules of Basel III ("Basel III rules") substantially revise Basel I rules regarding the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company. The Basel III rules became effective for the Company on January 1, 2015. This timing is based on the Company being classified as a "Standardized Approach" entity.

Among other things, the Basel III rules (i) introduced a new capital measure called Common Equity Tier 1 (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and additional Tier 1 capital instruments meeting specified requirements, (iii) apply most deductions/adjustments to regulatory capital measures to CET1 and not to the other components of capital, thus potentially requiring higher levels of CET1 in order to meet minimum ratios and (iv) expand the scope of the deductions/adjustments from capital as compared to existing regulations.

The Basel III minimum capital ratios are as follows:


•	8.0% Total capital (i.e., Tier 1 plus Tier 2) to risk-weighted assets;


•	6.0% Tier 1 capital (i.e., CET1 plus Additional Tier 1) to risk-weighted assets;


•	4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”); and


•	4.5% CET1 to risk-weighted assets.

As of March 31, 2017 , the Company and Discover Bank met all Basel III minimum capital ratio requirements to which they were subject. The Company and Discover Bank also met the requirements to be considered "well-capitalized" under Regulation Y and prompt corrective action regulations, respectively, and there have been no conditions or events that management believes have changed the Company's or Discover Bank's category. To be categorized as “well-capitalized,” the Company and Discover Bank must maintain minimum capital ratios as set forth in the table below.

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The following table shows the actual capital amounts and ratios of the Company 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 ⁽¹⁾		Ratio ⁽¹⁾
March 31, 2017
Total capital (to risk-weighted assets)
Discover Financial Services	$	12,307	15.7	%	$	6,271	≥8.0%	$	7,839	≥10.0%
Discover Bank	$	12,431	16.0	%	$	6,214	≥8.0%	$	7,768	≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services	$	11,061	14.1	%	$	4,703	≥6.0%	$	4,703	≥6.0%
Discover Bank	$	10,566	13.6	%	$	4,661	≥6.0%	$	6,214	≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services	$	11,061	11.8	%	$	3,763	≥4.0%	N/A		N/A
Discover Bank	$	10,566	11.3	%	$	3,731	≥4.0%	$	4,663	≥5.0%
CET1 capital (to risk-weighted assets) (Basel III transition)
Discover Financial Services	$	10,501	13.4	%	$	3,528	≥4.5%	N/A		N/A
Discover Bank	$	10,566	13.6	%	$	3,496	≥4.5%	$	5,049	≥6.5%

December 31, 2016
Total capital (to risk-weighted assets)
Discover Financial Services	$	12,445	15.5	%	$	6,408	≥8.0%	$	8,010	≥10.0%
Discover Bank	$	12,334	15.5	%	$	6,346	≥8.0%	$	7,932	≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services	$	11,152	13.9	%	$	4,806	≥6.0%	$	4,806	≥6.0%
Discover Bank	$	10,450	13.2	%	$	4,759	≥6.0%	$	6,346	≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services	$	11,152	12.3	%	$	3,624	≥4.0%	N/A		N/A
Discover Bank	$	10,450	11.6	%	$	3,591	≥4.0%	$	4,488	≥5.0%
CET1 capital (to risk-weighted assets) (Basel III transition)
Discover Financial Services	$	10,592	13.2	%	$	3,604	≥4.5%	N/A		N/A
Discover Bank	$	10,450	13.2	%	$	3,570	≥4.5%	$	5,156	≥6.5%


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


12.	Commitments, Contingencies and Guarantees

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

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Commitments

Lease Commitments

The Company leases various office space and equipment under capital and non-cancelable operating leases, which expire at various dates through 2028. Future minimum payments on capital leases were not material at March 31, 2017. The following table shows future minimum payments on non-cancelable operating leases with original terms in excess of one year (dollars in millions):

	March 31, 2017
2017	$	9
2018	11
2019	9
2020	8
2021	7
Thereafter	28
Total minimum lease payments	$	72

Unused Commitments to Extend Credit

At March 31, 2017 , the Company had unused commitments to extend credit for loans of approximately $188.3 billion . Such commitments 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 commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification.

Contingencies

See Note 13: Litigation and Regulatory Matters for a description of potential liability arising from pending litigation or regulatory proceedings involving the Company.

Guarantees

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

Securitizations Representations and Warranties

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

The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of third-party investor interests in credit card asset-backed securities, and the principal amount of any student loan secured borrowings, plus any unpaid interest for the corresponding secured borrowings. The Company has recorded substantially all of the maximum potential amount of future payments in long-term borrowings on the Company’s condensed consolidated statements of financial condition. The Company has not recorded any incremental contingent liability associated with its secured borrowing representations and warranties. Management believes that the

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probability of having to replace, repurchase or sell assets pledged as collateral under secured borrowing arrangements, including an early amortization event, is low.

Mortgage Loans Representations and Warranties

The Company sold loans it originated to investors on a servicing-released basis and the risk of loss or default by the borrower is generally transferred to the investor. However, the Company was required by these investors to make certain representations and warranties relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual life of the mortgage loan, even though the Company closed the mortgage origination business. Subsequent to the sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual mortgage loans, the Company may be obligated to repurchase the respective mortgage loan or indemnify the investors for any losses from borrower defaults if such deficiency or defect cannot be cured within the specified period following discovery. The Company has established a repurchase reserve based on expected losses. At March 31, 2017 , this amount was not material and was included in accrued expenses and other liabilities on the condensed consolidated statements of financial condition.

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.


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

The maximum potential amount of future payments related to such contingent obligations is dependent upon the transaction volume processed between the time a potential counterparty defaults on its settlement and the time at which the Company disables the settlement of any further transactions for the defaulting party. 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.

While the Company has some contractual remedies to offset these counterparty settlement exposures (such as letters of credit or pledged deposits), in the event that 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, based on historical transaction volume, would be $159 million for merchant guarantees as of March 31, 2017 . The maximum potential counterparty exposures to these settlement guarantees for ATM guarantees would be immaterial as of March 31, 2017 . The maximum potential counterparty exposures for network alliance guarantees would be $30 million as of March 31, 2017 .

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 March 31, 2017 , the Company had not recorded any contingent liability in the consolidated financial statements for these counterparty exposures, and management believes that the probability of any payments under these arrangements is low.

Discover Network Merchant Chargeback Guarantees

The Company operates the Discover Network, issues payment cards and permits third parties to issue payment cards. The Company is contingently liable for certain transactions processed on the Discover Network in the event of a dispute between the payment card customer and a merchant. The contingent liability arises if the disputed transaction involves a merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in the

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customer’s favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn credits its customer’s account. The Discover Network will then charge back the disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by the applicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect the amount subject to dispute from the merchant or merchant acquirer ( e.g. , in the event of merchant default or dissolution or after expiration of the time period for chargebacks in the applicable agreement), the Discover Network will bear the loss for the amount credited or refunded to the customer. In most instances, a loss by the Discover Network is unlikely to arise in connection with payments on card transactions because most products or services are delivered when purchased and credits are issued by merchants on returned items in a timely fashion, thus minimizing the likelihood of cardholder disputes with respect to amounts paid by the Discover Network. However, where the product or service is not scheduled to be provided to the customer until a later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases. Losses related to merchant chargebacks were not material for the three months ended March 31, 2017 and 2016 .

The maximum potential amount of obligations of the Discover Network arising as a result of 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 table below summarizes certain information regarding merchant chargeback guarantees (in millions):

	For the Three Months Ended March 31,
	2017		2016
Aggregate sales transaction volume ⁽¹⁾	$	32,654	$	31,281


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

The Company did not record any contingent liability in the condensed consolidated financial statements for merchant chargeback guarantees as of March 31, 2017 or December 31, 2016 . 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 higher risk due to various factors such as time delays in the delivery of products or services. As of March 31, 2017 and December 31, 2016 , the Company had escrow deposits and settlement withholdings of $9 million , which are recorded in interest-bearing deposit accounts and accrued expenses and other liabilities on the Company's condenses consolidated statements of financial condition.


13.	Litigation and Regulatory Matters

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

The Company has historically relied on the arbitration clause in its cardmember agreements, which has in some instances limited the costs of, and the Company’s exposure to litigation, but there can be no assurance that the Company will continue to be successful in enforcing its arbitration clause in the future. Legal challenges to the enforceability of these clauses have led most card issuers, and may cause the Company, to discontinue their use. From time to time, the Company is involved in legal actions challenging its arbitration clause. Bills are periodically introduced in Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses, and the Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the Consumer Financial Protection Bureau (the "CFPB") to conduct a study on pre-dispute arbitration clauses and, based on the study, potentially limit or ban arbitration clauses. On May 5, 2016, the CFPB issued its proposed arbitration rule that would (i) effectively ban consumer financial companies from using arbitration clauses to prevent class action cases and (ii) require records of all other arbitrations to be provided to the CFPB for potential publication on its website. The deadline for submitting comments to the proposed rule was August 22, 2016. The timing and provisions of any final rule are uncertain at this time.

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The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company’s business including, among other matters, consumer regulatory, accounting, tax and other operational matters, some of which may result in significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief, which could materially impact the Company's condensed consolidated financial statements, increase its cost of operations, or limit its ability to execute its business strategies and engage in certain business activities. For example, Discover Bank and Discover Financial Services have been the subject of actions by the FDIC and the Federal Reserve, respectively, with respect to anti-money laundering and related compliance programs as described more fully below. In addition, certain subsidiaries of the Company are subject to a consent order with the CFPB regarding certain student loan servicing practices, as described below. Regulatory actions generally can include demands for civil money penalties, changes to certain business practices and customer restitution. Supervisory actions related to anti-money laundering and related laws and regulations will limit for a period of time the Company's ability to enter into certain types of acquisitions and make certain types of investments.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matters present loss contingencies which are both probable and estimable. Litigation and regulatory settlement related expense was not material for the three months ended March 31, 2017 and 2016 .

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 those losses the likelihood of which 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 $135 million . This estimated range of reasonably possible losses is based upon currently available information for those proceedings in which the Company is involved, takes into account the Company’s best estimate of such losses for those matters for which an estimate can be made, and does not represent the Company’s maximum potential loss exposure. Various aspects of the legal proceedings underlying the estimated range will change from time to time and actual results may vary significantly from the estimate.

The Company’s estimated range 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 be material to the Company’s condensed consolidated financial condition, operating results and cash flows for a particular future period, depending on, among other things, the level of the Company’s income for such period, and could adversely affect the Company’s reputation.

On July 5, 2012, the Antitrust Division of the United States Department of Justice (the “Division”) issued a Civil Investigative Demand ("CID") to the Company seeking information regarding an investigation related to potential violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§1-2, by an unidentified party other than Discover. The CID seeks documents, data and narrative responses to several interrogatories and document requests, related to the debit card market. A CID is a request for information in the course of a civil investigation and does not constitute the commencement of legal proceedings. The Division is permitted by statute to issue a CID to anyone whom it believes may have information relevant to an investigation. The receipt of a CID does not presuppose that there is probable cause to believe that a violation of the antitrust laws has occurred or that a formal complaint ultimately will be filed. The Company is cooperating with the Division in connection with the CID.

On May 26, 2015, the Company entered into a written agreement with the Federal Reserve Bank of Chicago where the Company agreed to enhance the Company’s enterprise-wide anti-money laundering and related compliance programs. The agreement does not include civil money penalties. This agreement follows the consent order that Discover Bank entered into with the FDIC on June 13, 2014 related to Discover Bank’s anti-money laundering and related compliance programs. In the consent order, Discover Bank agreed to, among other things, enhance its anti-money laundering and related compliance programs.

On July 9, 2015, a class action lawsuit was filed against the Company in the U.S. District Court for the Northern District of Illinois (Polly Hansen v. Discover Financial Services and Discover Home Loans, Inc.). The plaintiff alleges that the Company contacted her, and members of the class she seeks to represent, on their cellular and residential telephones without their express consent or after consent was revoked in violation of the Telephone Consumer Protection Act ("TCPA"). Plaintiff seeks statutory damages for alleged negligent and willful violations of the TCPA, attorneys' fees, costs and injunctive relief. The TCPA provides for statutory damages of $500 for each violation ( $1,500 for willful violations). On March 9, 2016, Sumner Davenport was substituted as lead plaintiff for Polly Hansen. On January 13, 2017, plaintiff filed an unopposed motion for preliminary approval of a class action settlement to resolve the case. On January 20, 2017, the Court

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granted preliminary approval of the settlement. The final approval hearing is scheduled for September 14, 2017. If approved, the case will be dismissed with prejudice as to all certified class members who do not opt out of the settlement.

On July 22, 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 resolving the agency’s investigation with respect to certain student loan servicing practices. The CFPB’s investigation into these practices has been previously disclosed by the Company, initially in February 2014. The order requires the Discover Subsidiaries to provide redress of approximately $16 million to consumers who may have been affected by the activities described in the order related to certain collection calls, overstatements of minimum payment due amounts in billing statements, and provision of interest paid information to consumers, and provide regulatory disclosures with respect to loans acquired in default. In addition, the Discover Subsidiaries are required to pay a $2.5 million civil money penalty to the CFPB. As required by the consent order, on October 19, 2015, the Discover Subsidiaries submitted to the CFPB a redress plan and a compliance plan designed to ensure that the Discover Subsidiaries provide redress and otherwise comply with the terms of the order.

On September 4, 2015, the District Attorney of Trinity County, California filed a protection products lawsuit against the Company in California state court (The People of the State of California Ex Rel, Eric L. Heryford, District Attorney, Trinity County v. Discover Financial Services, et al.). The District Attorney subsequently dismissed this lawsuit on February 19, 2016 and filed a new complaint in federal court in the Eastern District of California on March 4, 2016 alleging the same cause of action. An amended complaint was filed on March 25, 2016. The lawsuit asserts various claims under California's Unfair Competition Law with respect to the Company's marketing and administration of various protection products. Plaintiff seeks declaratory relief, statutory civil penalties, and attorneys’ fees. The Company filed a motion to dismiss the first amended complaint on April 26, 2016. The Company is not in a position at this time to assess the likely outcome or its exposure, if any, with respect to this matter, but will seek to vigorously defend against all claims asserted by the plaintiff.

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 violations of the Sherman Antitrust Act, California's Cartwright Act, and unjust enrichment. Plaintiffs allege a conspiracy by defendants to shift fraud liability to merchants with the migration to the EMV security standard and chip technology. Plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys' fees, costs and injunctive relief. On July 15, 2016, plaintiffs filed an amended complaint that includes additional named plaintiffs, reasserts the original claims, and includes additional state law causes of action. The defendants filed motions to dismiss on August 5, 2016. On September 30, 2016, the court granted the motions to dismiss for certain issuing banks and EMVCo but denied the motions to dismiss filed by the other networks, including the Company. Discovery is proceeding and a class certification ruling is expected this spring unless the Court agrees to transfer the action to federal court in New York where certain related claims are now pending in the actions consolidated as MDL 1720, or the Court agrees to stay the California litigation pending resolution of the New York claims. A ruling on the decision to transfer or stay the case is expected in May . The Company is not in a position at this time to assess the likely outcome or its exposure, if any, with respect to this matter, but will seek to vigorously defend against all claims asserted by the plaintiffs.


14.	Fair Value Measurements and Disclosures

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 financial instruments, which is based on whether the inputs to the valuation techniques used to measure the fair value of each financial instrument 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.

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•

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 in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.

The determination of classification of its financial instruments within the fair value hierarchy is performed at least quarterly by the Company. For transfers in and out of the levels of the fair value hierarchy, the Company discloses the fair value measurement based on the value immediately preceding the transfer.

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.

During the three months ended March 31, 2017 , there were no changes to the Company's valuation techniques that had, or are expected to have, a material impact on the Company's condensed consolidated financial position or results of operations.

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 March 31, 2017
Assets
U.S. Treasury securities	$	673	$	—	$	—	$	673
Residential mortgage-backed securities - Agency	—		880		—		880
Available-for-sale investment securities	$	673	$	880	$	—	$	1,553

Derivative financial instruments ⁽¹⁾	$	—	$	15	$	—	$	15

Liabilities
Derivative financial instruments ⁽¹⁾	$	—	$	9	$	—	$	9

Balance at December 31, 2016
Assets
U.S. Treasury securities	$	674	$	—	$	—	$	674
Residential mortgage-backed securities - Agency	—		931		—		931
Available-for-sale investment securities	$	674	$	931	$	—	$	1,605

Derivative financial instruments	$	—	$	7	$	—	$	7

Liabilities
Derivative financial instruments	$	—	$	94	$	—	$	94


(1)	Beginning in first quarter 2017, certain cash collateral amounts (variation margin) associated with derivative positions that are cleared through an exchange are reflected as offsets to the associated derivative asset and derivative liability balances, generally reducing the fair values to approximately zero. See Note 15: Derivatives and Hedging Activities for additional information.

There were no transfers between Levels 1 and 2 within the fair value hierarchy for the three months ended March 31, 2017 and 2016 .

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Available-for-Sale Investment Securities

Investment securities classified as available-for-sale consist of U.S. Treasury securities and residential mortgage-backed securities. 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 Company classifies residential mortgage-backed securities as Level 2, the fair value estimates of which are based on the best information available. This data may consist of observed market prices, broker quotes or discounted cash flow models that incorporate assumptions such as benchmark yields, issuer spreads, prepayment speeds, credit ratings and losses, the priority of which may vary based on availability of information.

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

At March 31, 2017 , amounts reported in residential mortgage-backed securities reflect government-rated obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae with a par value of $860 million , a weighted-average coupon of 2.81% and a weighted-average remaining maturity of three 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 are based on an expectation of future interest rates derived from the observable market interest rate curves. The Company considers collateral and master netting agreements that mitigate credit exposure to counterparties in determining the counterparty credit risk valuation adjustment. The fair values of the currency instruments are valued 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 amongst 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 to any changes to the valuation techniques performed by proprietary pricing models prior to implementation, working closely with the third-party valuation service, and reviews the control objectives of the service at least annually. The Company corroborates the fair value of foreign exchange forward contracts through independent calculation of the fair value 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 and other intangible assets. For these assets, measurement at fair value in periods subsequent to the initial recognition of the assets is applicable if one or more of the assets is determined to be impaired. During the three months ended March 31, 2017 and 2016 , the Company had no material impairments related to these assets.

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Financial Instruments Measured at Other Than Fair Value

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

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Carrying Value
Balance at March 31, 2017
Assets
States and political subdivisions of states	$	—	$	1	$	—	$	1	$	1
Residential mortgage-backed securities - Agency	—		164		—		164		164
Held-to-maturity investment securities	$	—	$	165	$	—	$	165	$	165

Cash and cash equivalents	$	15,163	$	—	$	—	$	15,163	$	15,163
Restricted cash	$	1,100	$	—	$	—	$	1,100	$	1,100
Net loan receivables	$	—	$	—	$	76,788	$	76,788	$	73,589
Accrued interest receivables	$	—	$	736	$	—	$	736	$	736

Liabilities
Deposits	$	—	$	53,705	$	—	$	53,705	$	53,522
Long-term borrowings - owed to securitization investors	$	—	$	16,083	$	825	$	16,908	$	16,780
Other long-term borrowings	$	—	$	10,550	$	—	$	10,550	$	10,043
Accrued interest payables	$	—	$	188	$	—	$	188	$	188

Balance at December 31, 2016
Assets
States and political subdivisions of states	$	—	$	2	$	—	$	2	$	2
Residential mortgage-backed securities - Agency	—		150		—		150		150
Held-to-maturity investment securities	$	—	$	152	$	—	$	152	$	152

Cash and cash equivalents	$	11,914	$	—	$	—	$	11,914	$	11,914
Restricted cash	$	95	$	—	$	—	$	95	$	95
Net loan receivables	$	—	$	—	$	78,252	$	78,252	$	75,087
Accrued interest receivables	$	—	$	724	$	—	$	724	$	724

Liabilities
Deposits	$	—	$	52,183	$	—	$	52,183	$	51,992
Long-term borrowings - owed to securitization investors	$	—	$	15,617	$	900	$	16,517	$	16,411
Other long-term borrowings	$	—	$	9,470	$	—	$	9,470	$	9,032
Accrued interest payables	$	—	$	168	$	—	$	168	$	168

The fair values of these financial assets and liabilities, which are not carried at fair value on the condensed consolidated statements of financial condition, were determined by applying the fair value provisions discussed herein. The use of different assumptions or estimation techniques may have a material effect on these estimated fair value amounts. The following describes the valuation techniques of these financial instruments measured at other than fair value.

Cash and Cash Equivalents

The carrying value of cash and cash equivalents approximates fair value due to the low level of risk these assets present to the Company as well as the relatively liquid nature of these assets, particularly given their short maturities.

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Restricted Cash

The carrying value of restricted cash approximates fair value due to the low level of risk these assets present to the Company as well as the relatively liquid nature of these assets, particularly given their short maturities.

Held-to-Maturity Investment Securities

Held-to-maturity investment securities consist of residential mortgage-backed securities issued by agencies and municipal bonds. The fair value of residential mortgage-backed securities included in the held-to-maturity portfolio is estimated similarly to residential mortgage-backed securities carried at fair value on a recurring basis discussed herein. Municipal bonds are valued based on quoted market prices for the same or similar securities.

Net Loan Receivables

The Company's loan receivables are comprised of credit card and installment loans, including the PCI student loans. Fair value estimates are derived utilizing discounted cash flow analyses, the calculations of which are performed on groupings of loan receivables that are similar in terms of loan type and characteristics. Inputs to the cash flow analysis of each grouping consider recent prepayment trends and seasonality factors, if appropriate, as well as interest accrual estimates based on recent yields. The expected future cash flows, derived through the cash flow analysis, of each grouping are discounted at rates at which similar loans within each grouping could be originated under current market conditions. Significant inputs to the fair value measurement of the loan portfolio are unobservable and, as such, are classified as Level 3.

Accrued Interest Receivables

The carrying value of accrued interest receivables, which is included in other assets on the condensed consolidated statements of financial condition, approximates fair value as it is due in less than one year.

Deposits

The carrying values of money market deposits, savings deposits and demand deposits approximate fair value due to the potentially liquid nature of these deposits. For time deposits for which readily available market rates do not exist, fair values are estimated by discounting expected future cash flows using market rates currently offered for deposits with similar remaining maturities.

Long-Term Borrowings - Owed to Securitization Investors

Fair values of long-term borrowings owed to credit card securitization investors are determined utilizing quoted market prices of the same transactions and, as such, are classified as Level 2. Fair values of long-term borrowings owed to student loan securitization investors are calculated by discounting cash flows using estimated assumptions including, among other things, maturity and market discount rates. A portion of the difference between the carrying value and the fair value of the long-term borrowings owed to student loan securitization investors relates to purchase accounting adjustments recorded in connection with the December 2010 purchase of SLC. Significant inputs to these fair value measurements are unobservable and, as such, are classified as Level 3.

Other Long-Term Borrowings

Fair values of other long-term borrowings, consisting of subordinated and senior debt, are determined utilizing current observable market prices for those transactions and, as such, are classified as Level 2. A portion of the difference between the carrying value and the fair value of other long-term borrowings relates to the cash premiums paid in connection with the 2012 fiscal year debt exchanges.

Accrued Interest Payables

The carrying value of accrued interest payables, which is included in accrued expenses and other liabilities on the condensed consolidated statements of financial condition, approximates fair value as it is payable in less than one year.

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15.	Derivatives and Hedging Activities

The Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or speculative purposes. Certain derivatives used to manage the Company’s exposure to interest rate movements and other identified risks are not designated as hedges and do not qualify for hedge accounting.

Derivatives may give rise to counterparty credit risk, which generally is addressed 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 prior to engaging in any transaction with the Company. Counterparties are monitored on a regular basis by the Company 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, the Company considers collateral and legally enforceable master netting agreements that mitigate credit exposure to related counterparties.

All derivatives are recorded in other assets at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values. See Note 14: Fair Value Measurements and Disclosures for a description of the valuation methodologies of derivatives. Cash collateral posted and held balances are recorded in other assets and deposits, respectively, in the condensed consolidated statements of financial condition. Collateral amounts recorded in the condensed consolidated statements of financial condition are based on the net collateral posted or held position for each applicable legal entity's master netting arrangement with each counterparty. Effective in the first quarter of 2017, certain cash collateral amounts associated with derivative positions that are cleared through an exchange are now legally characterized as settlement of the derivative positions. This change results in such collateral amounts being reflected as offsets to the associated derivatives balances recorded in other assets or in accrued expenses and other liabilities, instead of as collateral in other assets or deposits. There is no change to the presentation in the condensed consolidated statements of financial condition of collateral related to positions that are not cleared through an exchange.

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 changes in interest rates related to future cash flows resulting from interest payments on credit card securitized debt and deposits. The Company's outstanding cash flow hedges are for an initial maximum period of five years for securitized debt and seven years for deposits. The derivatives are designated as hedges of the risk of changes in cash flows on the Company's LIBOR or Federal Funds rate-based interest payments, and qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”).

The effective portion of 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. The ineffective portion of the change in fair value of the derivative, if any, is recognized directly in earnings. Amounts reported in AOCI related to derivatives at March 31, 2017 will be reclassified to interest expense as interest payments are made on certain of the Company's floating-rate securitized debt or deposits. During the next 12 months, the Company estimates it will reclassify $8 million of pretax losses to interest expense related to its derivatives designated as cash flow hedges.

Fair Value Hedges

The Company is exposed to changes in fair value of certain 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 fair value of certain fixed-rate senior notes, securitized debt, bank notes and interest-bearing brokered deposits attributable to changes in LIBOR, a benchmark interest rate as defined by ASC 815. These interest rate swaps qualify as fair value hedges in accordance with ASC 815. Changes in both (i) the fair values of the derivatives and (ii) the hedged fixed-rate senior notes, securitized debt, bank notes and interest-bearing brokered deposits relating to the risk being hedged are recorded in interest expense. The changes generally provide substantial offset to one another, with any difference, or ineffectiveness recorded in interest expense. Any basis differences between the fair value and the carrying amount of the hedged item at the inception of the hedging relationship are amortized to interest expense.

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Derivatives Not Designated as Hedges

Foreign Exchange Forward Contracts

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

Derivatives Cleared Through an Exchange

Effective January 3, 2017, the Chicago Mercantile Exchange ("CME") changed the legal characterization of cash variation margin payments on derivatives cleared through its exchange as "settlements" rather than as "collateral". The Company currently utilizes only CME for all cleared transactions. The International Swaps and Derivatives Association ("ISDA") outlined their conclusions regarding the impact of the change, stating that variation margin payments that are legally considered settlement payments should be accounted for with corresponding derivative positions as one unit of account and should no longer be accounted for separately as collateral. The Securities and Exchange Commission staff did not object to the ISDA’s conclusions. The results of the change are reflected in the table below for the current period. With settlement payments on derivative positions cleared through the CME reflected as offsets to the associated derivative asset and liability balances, the fair values of derivative instruments and collateral balances shown are generally reduced. At March 31, 2017 , the change resulted in a decrease of $87 million in both derivative assets and liabilities on the condensed consolidated statements of financial condition.

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):

	March 31, 2017									December 31, 2016
	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 ⁽¹⁾	$	3,700	7	$	1		$	9		$	3,700	$	—		$	22
Interest rate swaps—fair value hedge ⁽¹⁾	$	6,494	45	14			—			$	6,208	7			72
Derivatives not designated as hedges
Foreign exchange forward contracts ⁽²⁾	$	12	6	—			—			$	13	—			—
Interest rate swap	$	—	—	—			—			$	149	—			—
Total gross derivative assets/liabilities ⁽³⁾				15			9					7			94
Less: Collateral held/posted ⁽⁴⁾				(5		)	(9		)			(2		)	(94		)
Total net derivative assets/liabilities				$	10		$	—				$	5		$	—

(1)

Beginning in first quarter 2017, certain cash collateral amounts (variation margin) associated with derivative positions that are cleared through an exchange are reflected as offsets to the associated derivative asset and derivative liability balances, generally reducing the fair values to approximately zero. The affected contracts remain term instruments and are reflected in notional amounts and number of outstanding derivative contracts.


(2)	The foreign exchange forward contracts have notional amounts of EUR 7 million , GBP 3 million and SGD 1 million as of March 31, 2017 and notional amounts of EUR 6 million , GBP 5 million and SGD 1 million as of December 31, 2016 .

(3)

In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At March 31, 2017 , the Company had one outstanding contract with a notional amount of $20 million and immaterial fair value. At December 31, 2016 , the Company had one outstanding contract with a notional amount of $36 million and immaterial fair value.


(4)	Collateral amounts, which consist of both cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged. Beginning in first quarter 2017, collateral held/posted excludes amounts that are recorded as offsets to the associated derivative asset or derivative liability balances.

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

		Amount of Gain (Loss) Recognized in OCI
		For the Three Months Ended March 31,
	Location	2017			2016
Derivatives designated as hedges
Interest rate swaps - cash flow/net investment hedges
Total gain (loss) recognized in OCI after amounts reclassified into earnings, pre-tax	OCI	$	11		$	(43	)
Total gain (loss) recognized in OCI		$	11		$	(43	)


		Amount of (Loss) Gain Recognized in Income
		For the Three Months Ended March 31,
	Location	2017			2016
Derivatives designated as hedges
Interest rate swaps - cash flow hedges
Amount reclassified from OCI into income	Interest Expense	$	(5	)	$	(9	)
Total amount reclassified from OCI into income on cash flow hedges		(5		)	(9		)

Interest rate swaps - fair value hedges
(Loss) gain on interest rate swaps		(16		)	31
Gain (loss) on hedged items		16			(31		)
Net ineffectiveness gain (loss)	Interest Expense	—			—

Increase to interest expense related to net settlements on interest rate swaps	Interest Expense	6			9
Total gain on fair value hedges		6			9
Total gain on derivatives designated as hedges recognized in income		$	1		$	—

Derivatives not designated as hedges
Total loss on derivatives not designated as hedges recognized in income	Other Income	$	—		$	(1	)

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 these derivatives held with that counterparty. The Company may also be required to post collateral with a counterparty for its fair value and cash flow hedge interest rate swaps depending on the credit rating it or Discover Bank receives from specified major credit rating agencies. 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. However, beginning in first quarter 2017, certain cash collateral amounts related to positions cleared through an exchange are reflected as offsets to the associated derivatives balances recorded in other assets and accrued expenses and other liabilities.

As of March 31, 2017 , DFS had a right to reclaim $4 million of cash collateral that had been posted (net of amounts required to be posted by the counterparty) because the credit rating of the Company did not meet specified thresholds. At March 31, 2017 , Discover Bank’s credit rating met specified thresholds set by its counterparties. However, if its credit rating is reduced by one rating notch, Discover Bank would be required to post additional collateral. The amount of additional collateral as of March 31, 2017 would have been $50 million .

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


16.	Segment Disclosures

The Company’s business activities are managed in two segments: Direct Banking and Payment Services.

•

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

•

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

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


•	The Company aggregates operating segments when determining reportable segments.


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


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


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


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


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

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

	Direct Banking		Payment Services			Total
For the Three Months Ended March 31, 2017
Interest income
Credit card loans	$	1,876	$	—		$	1,876
Private student loans	124		—			124
PCI student loans	41		—			41
Personal loans	198		—			198
Other	39		—			39
Total interest income	2,278		—			2,278
Interest expense	386		—			386
Net interest income	1,892		—			1,892
Provision for loan losses	594		(8		)	586
Other income	375		72			447
Other expense	849		36			885
Income before income tax expense	$	824	$	44		$	868

For the Three Months Ended March 31, 2016
Interest income
Credit card loans	$	1,733	$	—		$	1,733
Private student loans	107		—			107
PCI student loans	49		—			49
Personal loans	167		—			167
Other	28		—			28
Total interest income	2,084		—			2,084
Interest expense	334		—			334
Net interest income	1,750		—			1,750
Provision for loan losses	423		1			424
Other income	406		68			474
Other expense	851		35			886
Income before income tax expense	$	882	$	32		$	914


17.	Subsequent Events

The Company has evaluated events and transactions that have occurred subsequent to March 31, 2017 and determined that there were no subsequent events that would require recognition or disclosure in the condensed consolidated financial statements.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report. This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report, and there is no undertaking to update or revise them as more information becomes available.

The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence and consumer debt and investor sentiment; the impact of current, pending and future legislation, regulation, supervisory guidance and regulatory and legal actions, including, but not limited to, those related to financial regulatory reform, consumer financial services practices, anti-corruption and funding, capital and liquidity; the actions and initiatives of current and potential competitors; our ability to manage our expenses; our ability to successfully achieve card acceptance across our networks and maintain relationships with network participants; our ability to sustain and grow our private student loan, personal loan and home equity loan products; losses as a result of mortgage loan repurchase and indemnification obligations to secondary market purchasers; difficulty obtaining regulatory approval for, financing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; our ability to manage our credit risk, market risk, liquidity risk, operational risk, legal and compliance risk and strategic risk; the availability and cost of funding and capital; access to deposit, securitization, equity, debt and credit markets; the impact of rating agency actions; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; losses in our investment portfolio; limits on our ability to pay dividends and repurchase our common stock; limits on our ability to receive payments from our subsidiaries; fraudulent activities or material security breaches of key systems; our ability to remain organizationally effective; our ability to increase or sustain Discover card usage or attract new customers; our ability to maintain relationships with merchants; the effect of political, economic and market conditions, geopolitical events and unforeseen or catastrophic events; our ability to introduce new products and services; our ability to manage our relationships with third-party vendors; our ability to maintain current technology and integrate new and acquired systems; 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; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. We routinely evaluate and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or our debt or equity securities.

Additional factors that could cause our results to differ materially from those described below can be found in this section in this quarterly report and in “Risk Factors,” “Business—Competition,” “Business—Supervision and Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2016 , which is filed with the SEC and available at the SEC’s internet site (http://www.sec.gov).

Introduction and Overview

Discover Financial Services ("DFS") is a direct banking and payment services company. We provide direct banking products and services and payment services through our subsidiaries. We offer our customers credit card loans, private student loans, personal loans, home equity loans and deposit products. We also operate the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”). The Discover Network processes transactions for Discover-branded credit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as point-of-sale terminals at retail locations throughout the 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.

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

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expense), loan loss provisions, customer rewards and expenses incurred to grow, manage and service our loan receivables and networks. Our business activities are funded primarily through consumer deposits, securitization of loan receivables and the issuance of unsecured debt.

Quarter Highlights


•	Net income for the three months ended March 31, 2017 was $564 million compared to $575 million for the same period in 2016.


•	Total loans grew $5.5 billion , or 8% , from March 31, 2016 to $75.9 billion .


•	Credit card loans grew $4.1 billion , or 7% , to $59.8 billion , and Discover card sales volume increased 6% from March 31, 2016.


•	Net charge-off rate excluding PCI loans increased 48 basis points from the prior year to 2.69% and the credit card delinquency rate for loans over 30 days past due increased 38 basis points from the prior year to 2.06% .


•	Direct-to-consumer deposits grew $4.3 billion , or 13% , from the prior year to $37.1 billion .


•	Payment Services transaction dollar volume for the segment was $47.1 billion , up 5% from the prior ye ar.

Outlook

We continue to focus on deploying capital through disciplined and profitable organic loan growth across all products as well as through our quarterly dividends and share repurchase program. During the quarter, we invested in marketing and rewards to achieve growth in our receivables. We expect increases in total expenses because of ongoing investments in marketing and infrastructure to support growth strategies. Intense competition in rewards persists and we continue to leverage rewards to support growth, which is expected to result in a higher rewards rate year over year.

The total charge-off rate is expected to increase in comparison to the prior year and we expect to add to the loan loss reserve to provide for the seasoning of recent loan growth. We expect net interest margin to increase slightly during the year, driven by our balance sheet positioning for anticipated prime rate increases.

In our payments segment, we continue to pursue new ways to drive volume growth while we expect competition to remain intense. We continue to leverage our network to support our card-issuing business.

Regulatory Environment and Developments

In recent years, federal banking regulators have implemented and continue to propose and finalize new regulations and supervisory guidance, including under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Regulators have also increased their examination and enforcement action activities. The Dodd-Frank Act creates a framework for regulation of large systemically significant financial firms, including Discover, through a variety of measures, including increased capital and liquidity requirements and limits on leverage and enhanced supervisory authority. The Dodd-Frank Act contains comprehensive provisions governing the practices and oversight of financial institutions as well as other participants in the financial markets. We expect regulators to continue taking formal enforcement actions against financial institutions in addition to addressing concerns through non-public supervisory actions or findings. While the new Congress and Administration have expressed support for Dodd-Frank modifications that could reduce regulatory burdens through a variety of channels including executive actions, rulemaking and legislation, prospects for the enactment of significant changes are uncertain.

The impact of the evolving regulatory environment on our business and operations depends upon a number of factors, including supervisory priorities and actions, our actions, those of our competitors and other marketplace participants, and the behavior of consumers. Regulatory developments, enforcement actions, findings and ratings could affect supervisory priorities, actions, and rule-making, as well as negatively impact our business strategies, require us to limit or change our business practices, limit our product offerings, invest more management time and resources in compliance efforts, limit the fees we can charge for services, limit our ability to pursue certain business opportunities and obtain related required regulatory approvals, or change how we compensate certain of our employees. For example, from April to May 2016, federal banking regulators issued an interagency notice of proposed rulemaking on incentive compensation arrangements that replaces rules proposed in 2011 and incorporates consideration of supervisory experience with the 2010 Interagency Guidance on Sound Incentive Compensation Policies ("2010 Guidance"). Unlike the principles-based 2010 Guidance, the proposed rules are prescriptive in nature and would require an extensive restructuring of certain incentive compensation

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practices for “senior executive officers” and “significant risk takers.” Any changes to our business or compensation structure arising out of this rule could impact our ability to attract, hire or retain certain personnel. Comments on the proposed rules were due July 22, 2016. The timing and substance of the final rule are unknown. For more information on recent matters affecting Discover, see Note 13: Litigation and Regulatory Matters to our condensed consolidated financial statements. Regulatory developments, enforcement actions, findings and ratings could also have an impact on our strategies, the value of our assets, or otherwise adversely affect our businesses.

As a result of the growing cybersecurity threat and the mounting number of incidents involving unauthorized access to consumer information, banking regulators and policymakers at the federal and state levels are increasingly focused on measures to enhance data security and incident response capabilities. The Cybersecurity Act of 2015 establishes a framework to facilitate and encourage confidential sharing of cybersecurity information among private sector and federal government entities and provides certain liability shields for cybersecurity information sharing. The Federal Financial Institutions Examination Council recently revised examiner guidance for evaluating the adequacy of a financial institution's information security program and associated risk management practices. In addition, in October 2016, federal banking regulators issued an advanced notice of proposed rulemaking that provides for enhanced cyber risk management standards to increase the operational resilience of large financial services firms and reduce the systemic impact of a cybersecurity event. The timing and final form of any final rule is uncertain at this time. Legislation at various levels of government has also been proposed to address security breach notification. While it is too early to know their impact, these developments could ultimately result in the imposition of 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.

Compliance expenditures have increased significantly for Discover and other financial services firms, and we expect them to continue to increase as regulators remain focused on controls and operational processes. We may face additional compliance and regulatory risk to the extent that we enter into new business arrangements with third-party service providers, alternative payment providers or other industry participants. The additional expense, time and resources needed to comply with ongoing regulatory requirements may adversely impact our business and results of operations.

Consumer Financial Services

The Consumer Financial Protection Bureau (the "CFPB") regulates consumer financial products and services, as well as certain financial services providers, including Discover. 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 designated financial services providers. The CFPB’s regulatory authority includes the exercise of rulemaking, supervision and enforcement powers with respect to “unfair, deceptive or abusive acts or practices” and consumer access to fair, transparent and competitive financial products and services. The CFPB's policy priorities for 2017, as in recent years, include a focus on several financial products of the type we offer (e.g. credit cards and student loans).

Under its rulemaking authority, the CFPB recently issued proposed regulations that would significantly limit the use of pre-dispute arbitration agreements and class action waivers. For more information, see Note 13: Litigation and Regulatory Matters to our condensed consolidated financial statements.

In addition, the CFPB publishes regular Complaint Reports and Supervisory Highlights about specific products, services and practices. The CFPB also maintains an online consumer complaint portal that shows the nature of each consumer's complaint and the financial services provider's responses, such as whether the requested relief was provided. The complaint portal allows consumers' narratives of their complaints to be included, although the Bureau does not verify the accuracy of the narratives. On July 29, 2016 the CFPB proposed to replace the dispute function on the portal, whereby the customer can dispute a company’s response to the complaint, with a survey that will allow the customer to provide feedback on the financial services provider's handling of the complaint. The CFPB seeks to implement this survey in 2017. In addition to conducting regular examinations of regulated financial services providers the CFPB regularly collects account-level information about certain financial products (e.g. credit cards) from Discover and other large financial services providers. The CFPB's analysis of complaint and account-level data, together with its supervisory examinations, can inform future decisions about its regulatory and examination priorities and influence consumers' decisions about doing business with financial services providers.

Credit Cards

The cost and availability of credit, credit disclosures and consumer experience with debt collectors continue to be an area of focus of the CFPB. Pursuant to the CARD Act, the CFPB is conducting its bi-annual review of the consumer credit

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card market. The bi-annual review may result in additional guidance for credit card issuers, regulatory changes or legislative recommendations to Congress. Consumer experience with debt collectors continues to be a focus of the CFPB. T he CFPB may propose debt collection regulations that may apply to our lending business in 2017. The CFPB previously published an outline of proposals addressing the collection of debts by parties other than the original lender and in the near future, is expected to publish a proposal for entities collecting their own debts. The rules are intended to ensure that debt collectors have sufficient information to collect the related debt, prevent unfair, deceptive and abusive acts and practices, inform consumers of their rights and provide interpretations on certain sections of the Fair Debt Collections Practices Act. Courts and legislators also have been focused on the debt collection practices of consumer financial services providers. The ultimate impact of this increased scrutiny is uncertain at this time.

Private Student Loans

There continues to be legislative and regulatory focus on the private student loan market, including by the CFPB, the Federal Deposit Insurance Corporation (the "FDIC") and some state legislatures and state attorneys general. This regulatory focus has resulted in an increase in supervisory examinations of Discover related to private student loans. On July 22, 2015, the CFPB entered into a consent order pertaining to certain student loan servicing practices of Discover Bank, The Student Loan Corporation and Discover Products, Inc. See Note 13: Litigation and Regulatory Matters to our condensed consolidated financial statements for more information.

Recent areas of regulatory attention include servicing, payments and collection practices, originations at for-profit schools, and other matters. Student loan servicing laws were recently enacted in California and the District of Columbia, and several other similar bills are pending that would impose new licensing, servicing, reporting and regulatory oversight requirements on non-bank student loan servicers. The enactment of new legislation or the adoption of new regulations or guidance may increase the complexity and expense of servicing student loans. Legislators and regulators may take additional actions that impact the student loan market in the future, which could cause us to change our private student loan products or servicing practices in ways that we may not currently anticipate.

Mortgage Lending

The mortgage industry continues to be an area of supervisory focus and the CFPB has stated that it will concentrate its examinations on a variety of mortgage-related topics including steering consumers to less favorable products, discrimination, abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan origination compensation and servicing practices. The CFPB has recently published several final rules impacting the mortgage industry. For example, on August 4, 2016, the CFPB issued final rules amending its 2013 mortgage servicing rules to expand the obligations of servicers and resolve some ambiguities. These changes will generally take effect in 2017. The CFPB has also recently proposed changes to the rules for integrated mortgage origination disclosures. The timing and substance of a final rule is uncertain at this point.

Payment Networks

The Dodd-Frank Act contains several provisions impacting the debit card market, including network participation requirements and interchange fee limitations. The changing debit card environment, including competitor actions related to merchant and acquirer pricing and transaction routing strategies, has adversely affected, and is expected to continue to adversely affect, our PULSE network's business practices, network transaction volume, revenue and prospects for future growth. We continue to closely monitor competitor pricing strategies in order to assess their impact on our business and on competition in the marketplace. The U.S. Department of Justice is examining some of these competitor pricing strategies. In addition, PULSE filed a lawsuit against Visa in late 2014 with respect to these competitive concerns, which will significantly impact expenses for the payment services segment. In addition, the Dodd-Frank Act's network participation requirements impact PULSE's ability to enter into exclusivity arrangements, which affects PULSE's current business practices and may materially adversely affect its network transaction volume and revenue.

European interchange fee regulation entered into force in June 2015. The regulation, among other things, caps interchange fees of "four-party" networks such as Visa and MasterCard. However, the regulation provides that “three-party” networks should be treated as “four-party” networks when they license third-party providers to issue cards and/or acquire merchants or when they issue cards with a co-brand partner or through an agent. This means the caps apply to elements of the financial arrangements agreed to between Diners Club and each of our stand-alone acquirers in Western Europe. The caps took effect in December 2015. The regulation excludes commercial card transactions from the scope of the caps. The

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regulation also contains a number of business rules, which we have, to the extent applicable, implemented in our Diners Club business.

There are additional initiatives in Europe that may have an impact on our Diners Club business, including revisions to the Payment Services Directive ("PSD2") and the new General Data Protection Regulation ("GDPR"). The PSD2 was published in the Official Journal of the EU in December 2015. Each European Union member state will transpose the PSD2 into its national law, and in January 2018 the PSD2 will enter into force. Among other terms, the PSD2 includes provisions that once transposed into local law will regulate surcharging and network access requirements, which may result in differential surcharging of Diners Club cards and may impact Diners Club licensing arrangements in Europe. The European Parliament's Civil Liberties, Justice and Home Affairs Committee approved the final draft of the GDPR in December 2015. The final GDPR was published in the Official Journal of the European Union on May 4, 2016. Organizations have two years to prepare before the legislation comes into force on May 25, 2018. We are analyzing the impact of the final GDPR on our business and preparing for its implementation.

The Chinese State Council previously announced that foreign payments companies would be able to participate in the Chinese domestic market and be eligible to apply for a license to operate a Bank Card Clearing Institution ("BCCI") in China. In June 2016 the People’s Bank of China, in conjunction with the China Banking Regulatory Commission, promulgated the Administrative Measures on BCCIs, but implementation guidelines are yet to be published. We are analyzing any potential impact on our business strategy in China.

Capital, Liquidity and Funding

Capital

Discover Financial Services and Discover Bank are subject to regulatory capital requirements that became effective January 1, 2015 under final rules issued by the Board of Governors of the Federal Reserve System (the "Federal Reserve")and the FDIC to implement the provisions under the Basel Committee’s December 2010 framework (referred to as “Basel III”). The final capital rules ("Basel III rules") require minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios. In addition, the Basel III rules establish a capital conservation buffer above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 ("CET1") capital and result in higher required minimum ratios by up to 2.5%. The new capital conservation buffer requirement became effective on January 1, 2016; however, the buffer threshold amounts are subject to a gradual phase-in period. In 2016, the highest capital conservation buffer threshold was 0.625%, which has risen to 1.25% for the 2017 calendar year. The full 2.5% buffer requirement will not be fully phased-in until January 2019. A banking organization is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below any of the minimum capital requirements, taking into account the applicable capital conservation buffer thresholds. Based on our current capital composition and levels and business plans, we are and expect to continue to be in compliance with the requirements for the foreseeable future. For additional information, see "— Liquidity and Capital Resources — Capital."

The Basel Committee has recently proposed revisions to its standardized approach to measuring credit risk for purposes of calculating regulatory capital requirements. The proposed revisions include a provision that would, for the first time, require banking organizations to include a percentage of “unconditionally cancellable commitments” in risk-weighted asset calculations. This change could require credit card issuers, such as Discover, to substantially increase the amount of capital they hold against unused credit card lines. If the Basel Committee were to adopt the revisions as proposed, they would become applicable to Discover only if implemented within the United States by the domestic federal bank regulatory agencies, and made applicable to all "Standardized Approach" banks. Those agencies have publicly acknowledged the Basel Committee’s proposals, indicating that the revisions “would apply primarily to large, internationally active banking organizations.”

Liquidity

We are subject to the Federal Reserve's final rule implementing certain enhanced prudential standards under the Dodd-Frank Act for large U.S. bank holding companies, including enhanced liquidity and risk management requirements, which became effective January 1, 2015. The final rule prescribes a broad range of qualitative liquidity risk management practices.

Additionally, we are subject to the U.S. liquidity coverage ratio rule issued by federal banking regulators in 2014, which became effective on January 1, 2016. This new quantitative requirement is designed to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organizations in the United States. The rule requires covered banks to maintain an amount of high-quality liquid assets sufficient to cover projected net cash outflows

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during a prospective 30-day calendar period under an acute, hypothetical liquidity stress scenario. Given our current asset size, we are subject to a modified liquidity coverage ratio requirement which requires a lower level of high-quality liquid assets to meet the minimum ratio requirement due to adjustments to the net cash outflow amount. Under the rule's transition period, we are required to maintain a liquidity ratio of 100% in 2017. As of March 31, 2017 , our liquidity coverage ratio was in excess of the applicable regulatory requirement. On December 19, 2016, the Federal Reserve issued a final rule that will require banking institutions subject to the liquidity coverage ratio rule to publish quarterly public disclosures regarding the company’s liquidity risk profile and components of its liquidity coverage ratio calculation. Discover will be required to publish its first disclosure under the rule beginning the fourth quarter of 2018.

In April 2016, the federal banking agencies issued a notice of proposed rulemaking to implement, within the United States, the long-term liquidity standards previously issued at the international level by the Basel Committee on Banking Supervision. The proposed rule would impose a new quantitative liquidity requirement called the Net Stable Funding Ratio (“NSFR”) to ensure that covered banking organizations maintain stable funding to meet their funding needs over a one year time horizon. The NSFR is intended to complement the shorter-term liquidity coverage ratio requirement. Under the proposed rule, we would be subject to a less stringent “modified” NSFR requirement. If adopted as a final rule, the minimum NSFR requirements would take effect on January 1, 2018.

On January 30, 2017, the Federal Reserve finalized amendments to its capital plan and stress test rules for certain bank holding companies with total consolidated assets between $50 billion and $250 billion, including Discover. Under the final rule, the Federal Reserve may only object to a large and noncomplex bank holding company's capital plan submission, including Discover's, if the Federal Reserve determines that the company "has not demonstrated an ability to maintain capital above each minimum regulatory capital ratio on a proforma basis under expected and stressful conditions throughout the planning horizon." The final rule also eliminates certain reporting requirements for large and noncomplex institutions and reduces the de minimis threshold under which a well-capitalized bank holding company can increase capital distributions during a non-object period without a reassessment from regulators. The final rule became effective on March 5, 2017. While the full impact of the final rule is not yet clear, we expect the changes while relatively minor to be generally positive for our capital planning process.

Segments

We manage our business activities in two segments: Direct Banking and Payment Services. In compiling the segment results that follow, our Direct Banking segment bears all corporate overhead costs that are not specifically associated with a particular segment and all costs associated with Discover Network marketing, servicing and infrastructure, with the exception of an allocation of direct and incremental costs driven by our Payment Services segment.

Direct Banking

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

Payment Services

Our Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and our 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 (included in other income) from Diners Club.

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

	For the Three Months Ended March 31,
	2017			2016
Direct Banking
Interest income
Credit card	$	1,876		$	1,733
Private student loans	124			107
PCI student loans	41			49
Personal loans	198			167
Other	39			28
Total interest income	2,278			2,084
Interest expense	386			334
Net interest income	1,892			1,750
Provision for loan losses	594			423
Other income	375			406
Other expense	849			851
Income before income tax expense	824			882
Payment Services
Provision for loan losses	(8		)	1
Other income	72			68
Other expense	36			35
Income before income tax expense	44			32
Total income before income tax expense	$	868		$	914

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

	For the Three Months Ended March 31,
	2017		2016
Network Transaction Volume
PULSE Network	$	36,066	$	34,680
Network Partners	3,661		3,572
Diners Club ⁽¹⁾	7,382		6,738
Total Payment Services	47,109		44,990
Discover Network—Proprietary ⁽²⁾	29,859		28,576
Total Volume	$	76,968	$	73,566
Transactions Processed on Networks
Discover Network	503		486
PULSE Network	870		841
Total	1,373		1,327
Credit Card Volume
Discover Card Volume ⁽³⁾	$	32,406	$	30,004
Discover Card Sales Volume ⁽⁴⁾	$	29,134	$	27,552


(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 proprietary sales volume on the Discover Network.


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


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

Direct Banking

Our Direct Banking segment reported pretax income of $824 million for the three months ended March 31, 2017 as compared to pretax income of $882 million for the three months ended March 31, 2016 .

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Loan receivables decreased to $75.9 billion at March 31, 2017 as compared to $77.3 billion at December 31, 2016 primarily due to a decrease in credit card loans resulting from seasonally higher balances at the end of the year. Discover card sales volume was $29.1 billion for the three months ended March 31, 2017 , which was an increase of 5.7% as compared to the same period in 2016 . This volume growth was primarily driven by an increase in discretionary spending and higher gas prices.

Net interest margin increased for the three months ended March 31, 2017 as compared to the same period in 2016 primarily driven by higher yields on credit card loans, partially offset by higher funding costs. The increase in yields on credit card loans was primarily due to the prime rate increase and a higher portion of revolving card receivables in the portfolio. Interest income increased during the three months ended March 31, 2017 as compared to the same period in 2016 due to loan growth and yield expansion. Interest expense increased during the three months ended March 31, 2017 as compared to the same period in 2016 primarily due to an increase in the volume of direct-to-consumer deposits and unsecured funding as well as higher market rates.

At March 31, 2017 and December 31, 2016 , our delinquency rate for credit card loans over 30 days past due was 2.06% and 2.04% , respectively. For the three months ended March 31, 2017 , our net charge-off rate on credit cards increased to 2.84% as compared to 2.34% for the same period in 2016 . For the three months ended March 31, 2017 , the provision for loan losses increased as compared to the same period in 2016 due to higher levels of net charge-offs and a larger build of allowance for loan losses . For a detailed discussion on provision for loan losses, see "— Loan Quality — Provision and Allowance for Loan Losses."

Total other income decreased in the three months ended March 31, 2017 as compared to the same period in 2016 due primarily to higher promotional rewards, partially offset by an increase in loan fee income. The higher promotional rewards were partially offset by an increase in discount and interchange revenue, which was primarily driven by higher sales volume. The increase in loan fee income was primarily due to an increase in late fees.

Total other expense remained relatively flat in the three months ended March 31, 2017 as compared to the same period in 2016 . The decrease for the three months ended March 31, 2017 was primarily driven by lower professional fees offset by higher employee compensation and benefits. The decrease in professional fees was primarily driven by the completion of a look back project related to anti-money laundering remediation in 2016. The increase in employee compensation and benefits was primarily driven by growth in overall headcount related to regulatory and compliance needs and higher average salaries.

Payment Services

Our Payment Services segment reported pretax income of $44 million for the three months ended March 31, 2017 as compared to pretax income of $32 million for the same period in 2016 . The increase in segment pretax income was primarily driven by a reserve release related to a Diners Club licensee .

A weakening of the global economy or negative impacts in foreign currency may adversely affect our financial condition or results of operations in our Payment Services segment. We continue to work with our Diners Club licensees with regard to their ability to maintain financing sufficient to support business operations. We may continue to provide additional support in the future, including loans, facilitating transfer of ownership, or acquiring assets or licensees, which may cause us to incur losses. The licensees that we currently consider to be of concern accounted for approximately 4% of Diners Club revenues during the three months ended March 31, 2017 .

Critical Accounting Estimates

In preparing our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States ("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 condensed consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts in our condensed 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 loan losses, the evaluation of goodwill and other non-amortizable intangible assets for potential impairment, the accrual of income taxes and

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estimates of future cash flows associated with PCI loans as critical accounting estimates. These critical accounting estimates are discussed in greater detail in our annual report on Form 10-K for the year ended December 31, 2016 . That discussion can be found within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “— Critical Accounting Estimates.” There have not been any material changes in the methods used to formulate these critical accounting estimates from those discussed in our annual report on Form 10-K for the year ended December 31, 2016 .

Earnings Summary

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

	For the Three Months Ended March 31,				2017 vs. 2016 Increase (Decrease)
	2017		2016		$			%
Interest income	$	2,278	$	2,084	$	194		9	%
Interest expense	386		334		52			16	%
Net interest income	1,892		1,750		142			8	%
Provision for loan losses	586		424		162			38	%
Net interest income after provision for loan losses	1,306		1,326		(20		)	(2	)%
Other income	447		474		(27		)	(6	)%
Other expense	885		886		(1		)	—	%
Income before income tax expense	868		914		(46		)	(5	)%
Income tax expense	304		339		(35		)	(10	)%
Net income	$	564	$	575	$	(11	)	(2	)%

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Net Interest Income

The table that follows this section has been provided to supplement the discussion below and provide further analysis of net interest income and net interest margin. 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-bearing 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. Net interest income is influenced by the following:


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


•	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 and the London Interbank Offered Rate;


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


•	The difference between the carrying amount and future cash flows expected to be collected on PCI loans.

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Average Balance Sheet Analysis (dollars in millions)

	For the Three Months Ended March 31,
	2017							2016
	Average Balance			Rate		Interest		Average Balance			Rate		Interest
Assets
Interest-earning assets
Cash and cash equivalents	$	13,693		0.81	%	$	27	$	10,454		0.50	%	$	13
Restricted cash	819			0.70	%	1		801			0.40	%	1
Investment securities	1,731			1.61	%	7		2,998			1.47	%	11
Loan receivables ⁽¹⁾
Credit card ⁽²⁾	60,122			12.65	%	1,876		56,124			12.42	%	1,733
Personal loans	6,582			12.18	%	198		5,503			12.20	%	167
Private student loans	6,678			7.52	%	124		5,921			7.31	%	107
PCI student loans	2,519			6.67	%	41		3,046			6.46	%	49
Other	284			5.39	%	4		243			5.18	%	3
Total loan receivables	76,185			11.94	%	2,243		70,837			11.69	%	2,059
Total interest-earning assets	92,428			9.99	%	2,278		85,090			9.85	%	2,084
Allowance for loan losses	(2,166		)					(1,866		)
Other assets	4,166							4,453
Total assets	$	94,428						$	87,677
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits ⁽³⁾	$	26,619		1.86	%	122		$	25,449		1.67	%	106
Money market deposits ⁽⁴⁾	6,911			1.16	%	20		6,986			1.05	%	18
Other interest-bearing savings deposits	19,028			1.05	%	49		15,076			1.01	%	38
Total interest-bearing deposits ⁽⁵⁾	52,558			1.48	%	191		47,511			1.37	%	162
Borrowings
Short-term borrowings	1			0.67	%	—		2			0.64	%	—
Securitized borrowings ⁽³⁾⁽⁴⁾	16,960			2.17	%	91		16,950			2.04	%	86
Other long-term borrowings ⁽³⁾	9,600			4.38	%	104		7,934			4.38	%	86
Total borrowings	26,561			2.97	%	195		24,886			2.78	%	172
Total interest-bearing liabilities	79,119			1.98	%	386		72,397			1.86	%	334
Other liabilities and stockholders’ equity	15,309							15,280
Total liabilities and stockholders’ equity	$	94,428						$	87,677
Net interest income						$	1,892						$	1,750
Net interest margin ⁽⁶⁾				10.07	%						9.94	%
Net yield on interest-bearing assets ⁽⁷⁾				8.30	%						8.27	%
Interest rate spread ⁽⁸⁾				8.01	%						7.99	%


(1)	Average balances of loan receivables include non-accruing loans, which are included in the yield calculations. 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 $51 million and $45 million of amortization of balance transfer fees for the three months ended March 31, 2017 and 2016 , respectively.


(3)	Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding.


(4)	Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding.


(5)	Includes the impact of FDIC insurance premiums and Large Institution Surcharge.


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


(7)	Net yield on interest-bearing assets represents net interest income as a percentage of average total interest-earning assets.


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

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Loan Quality

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

	March 31, 2017			December 31, 2016
Loan receivables
Credit card loans	$	59,757		$	61,522
Other loans
Personal loans	6,663			6,481
Private student loans	6,689			6,393
Other	295			274
Total other loans	13,647			13,148
PCI loans ⁽¹⁾	2,449			2,584
Total loan receivables	75,853			77,254
Allowance for loan losses	(2,264		)	(2,167		)
Net loan receivables	$	73,589		$	75,087


(1)	Represents PCI private student loans. See Note 4: Loan Receivables to our condensed consolidated financial statements for more information regarding PCI loans.

Provision and Allowance for Loan Losses

Provision for loan losses is the expense related to maintaining the allowance for loan losses at an appropriate level to absorb the estimated probable losses in the loan portfolio at each period end date. While establishing the estimate for probable losses requires management judgment, the factors that influence the provision for loan losses include:


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


•	Changes in consumer spending and payment behaviors;


•	Changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio and maturation of the loan portfolio;


•	The level and direction of historical and anticipated loan delinquencies and charge-offs;


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


•	Regulatory changes or new regulatory guidance.

In determining the allowance for loan losses, we estimate probable losses separately for segments of the loan portfolio that have similar risk characteristics. We use a migration analysis to estimate the likelihood that a loan will progress through the various stages of delinquency. We use other analyses to estimate losses incurred from non-delinquent accounts, which adds to the identification of loss emergence. We use these analyses together as a basis for determining our allowance for loan losses.

The provision for loan 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 loan losses at the balance sheet date. For the three months ended March 31, 2017 , the provision for loan losses increased by $162 million , or 38% , as compared to the same period in 2016 primarily due to higher levels of net charge-offs and a larger build of allowance for loan losses as compared to the same period in 2016.

The allowance for loan losses was $2.3 billion at March 31, 2017 , which reflects a $97 million reserve build over the amount of the allowance for loan losses at December 31, 2016 . The reserve build, which primarily relates to credit card loans, was due to seasoning of recent loan growth. At March 31, 2017 , the level of allowance for personal loans increased slightly as compared to December 31, 2016 due to continued loan growth while the allowance attributed to student loans remained relatively flat as compared to December 31, 2016 . The level of allowance related to other loans at March 31, 2017 decreased as compared to December 31, 2016 due to a reserve release related to a Diners Club licensee.

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

	For the Three Months Ended March 31, 2017
	Credit Card			Personal Loans			Student Loans ⁽¹⁾			Other			Total
Balance at beginning of period	$	1,790		$	200		$	158		$	19		$	2,167
Additions
Provision for loan losses	524			58			12			(8		)	586
Deductions
Charge-offs	(535		)	(57		)	(17		)	(2		)	(611		)
Recoveries	113			6			3			—			122
Net charge-offs	(422		)	(51		)	(14		)	(2		)	(489		)
Balance at end of period	$	1,892		$	207		$	156		$	9		$	2,264

	For the Three Months Ended March 31, 2016
	Credit Card			Personal Loans			Student Loans ⁽¹⁾			Other			Total
Balance at beginning of period	$	1,554		$	155		$	143		$	17		$	1,869
Additions
Provision for loan losses	362			44			17			1			424
Deductions
Charge-offs	(439		)	(39		)	(15		)	—			(493		)
Recoveries	113			5			3			—			121
Net charge-offs	(326		)	(34		)	(12		)	—			(372		)
Balance at end of period	$	1,590		$	165		$	148		$	18		$	1,921


(1)	Includes both PCI and non-PCI private student loans.

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 loan losses, while fraud losses are recorded in other expense. Credit card loan receivables are charged off at the end of the month during which an account becomes 180 days contractually past due. Personal loans and private student loans, which are closed-end consumer loan receivables, are generally charged off at the end of the month during which an account becomes 120 days contractually past due. Generally, customer bankruptcies and probate accounts are charged off at 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 contractual time frame.

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

	For the Three Months Ended March 31,
	2017				2016
	$		%		$		%
Credit card loans	$	422	2.84	%	$	326	2.34	%
Personal loans	$	51	3.16	%	$	34	2.45	%
Private student loans (excluding PCI ⁽¹⁾ )	$	14	0.83	%	$	12	0.85	%


(1)	Charge-offs for PCI loans did not result in a charge to earnings during any of the periods presented and are therefore excluded from the calculation. See Note 4: Loan Receivables to our condensed consolidated financial statements for more information regarding the accounting for charge-offs on PCI loans.

The net charge-off rate on our credit card loans and personal loans increased by 50 basis points and 71 basis points, respectively, for the three months ended March 31, 2017 when compared to the same period in 2016 . The increase for both portfolios was driven primarily by seasoning of recent loan growth. The net charge-off rate on our private student loans excluding PCI loans for the three months ended March 31, 2017 remained relatively flat when compared to the same period in 2016 .

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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 rates of key loan products that are 30 and 90 days or more delinquent, loan receivables that are not accruing interest, regardless of delinquency and restructured loans (dollars in millions):

	March 31, 2017				December 31, 2016
	$		%		$		%
Loans 30 or more days delinquent
Credit card loans	$	1,233	2.06	%	$	1,252	2.04	%
Personal loans	$	74	1.12	%	$	74	1.12	%
Private student loans (excluding PCI loans ⁽¹⁾ )	$	136	2.04	%	$	141	2.22	%

Loans 90 or more days delinquent
Credit card loans	$	616	1.03	%	$	597	0.97	%
Personal loans	$	20	0.31	%	$	19	0.29	%
Private student loans (excluding PCI loans ⁽¹⁾ )	$	38	0.57	%	$	35	0.55	%

Loans not accruing interest	$	220	0.30	%	$	216	0.29	%

Restructured loans
Credit card loans ⁽²⁾	$	1,127	1.89	%	$	1,085	1.76	%
Personal loans ⁽³⁾	$	87	1.31	%	$	81	1.25	%
Private student loans (excluding PCI loans ⁽¹⁾ ) ⁽⁴⁾	$	101	1.51	%	$	86	1.35	%


(1)	Excludes PCI loans which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because we are recognizing interest income on a pool of loans, it is all considered to be performing.


(2)	Restructured credit card loans include $68 million and $60 million at March 31, 2017 and December 31, 2016 , respectively, that are also included in loans over 90 days delinquent or more.


(3)	Restructured personal loans include $3 million and $2 million at March 31, 2017 and December 31, 2016 , respectively, that are also included in loans over 90 days delinquent or more.


(4)	Restructured private student loans include $4 million and $3 million at March 31, 2017 and December 31, 2016 , that are also included in loans over 90 days delinquent or more.

The 30-day and 90-day delinquency rates for credit card loans at March 31, 2017 increased slightly as compared to December 31, 2016 primarily due to seasoning of the portfolio. Personal loans 30-day and 90-day delinquency rates at March 31, 2017 remained relatively flat as compared to December 31, 2016 . The 30-day delinquency rate for private student loans at March 31, 2017 decreased as compared to December 31, 2016 as a result of seasonality of the portfolio, while the 90-day delinquency rate at March 31, 2017 remained relatively flat as compared to December 31, 2016 .

The restructured credit card and personal loan balances at March 31, 2017 increased as compared to December 31, 2016 due to continued loan growth and seasoning. At March 31, 2017 , the restructured private student loan balance increased as compared to December 31, 2016 as a result of greater utilization of programs available as more loans have entered into repayment.

Modified and Restructured Loans

We have loan modification programs that provide for temporary or permanent hardship relief for our credit card loans to borrowers experiencing financial difficulties. The temporary hardship program primarily consists of a reduced minimum payment and an interest rate reduction, both lasting for a period no longer than 12 months. The permanent modification program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The permanent modification program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. We also make permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. Credit card loans included in temporary and permanent programs are accounted for as troubled debt restructurings. For additional information regarding the accounting treatment for these loans as well as

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amounts recorded in the financial statements related to these loans, see Note 4: Loan Receivables to our condensed consolidated financial statements.

For personal loan customers, in certain situations we offer various payment programs, including temporary and permanent programs. The temporary programs normally consist of a reduction of the minimum payment for a period of no longer than 12 months with the option of a final balloon payment required at the end of the loan term or an extension of the maturity date with the total term not exceeding nine years. Further, in certain circumstances, the interest rate on the loan is reduced. The permanent programs involve changing the terms of the loan in order to pay off the outstanding balance over a longer term and also in certain circumstances reducing the interest rate on the loan. Similar to the temporary programs, the total term may not exceed nine years. We also allow permanent loan modifications for customers who request financial assistance through external sources, similar to our credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are accounted for as troubled debt restructurings.

At March 31, 2017 , there was $5.7 billion of private student loans in repayment, which includes both PCI and non-PCI loans to students who are not in deferment. To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, we may offer hardship forbearance or programs that include payment deferral, temporary payment reduction, temporary interest rate reduction or extended terms. A modified loan typically meets the definition of a troubled debt restructuring based on the cumulative length of the concession period and an evaluation of the credit quality of the borrower based on FICO scores. Prior to the third quarter of 2016, only a second forbearance when the borrower was 30 days or greater delinquent was considered a troubled debt restructuring. As a result, the student loan balances being accounted for as troubled debt restructuring increased, although it did not lead to significant changes in the balance of overall allowance for loan losses.

Borrower performance after using payment programs or forbearance is monitored and we believe the programs help to prevent defaults and are useful in assisting customers experiencing financial difficulties. We plan to continue to use payment programs and forbearance and, as a result, we expect to have additional loans classified as troubled debt restructurings in the future.

Other Income

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

	For the Three Months Ended March 31,				2017 vs. 2016 (Decrease) Increase
	2017		2016		$			%
Discount and interchange revenue ⁽¹⁾	$	233	$	273	$	(40	)	(15	)%
Protection products revenue	58		61		(3		)	(5	)%
Loan fee income	89		80		9			11	%
Transaction processing revenue	39		36		3			8	%
Other income	28		24		4			17	%
Total other income	$	447	$	474	$	(27	)	(6	)%


(1)	Net of rewards, including Cashback Bonus rewards, of $363 million and $292 million for the three months ended March 31, 2017 and 2016 , respectively.

Total other income decreased in the three months ended March 31, 2017 by $27 million as compared to the same period in 2016 due primarily to higher promotional rewards, partially offset by an increase in loan fee income. The higher promotional rewards were partially offset by an increase in discount and interchange revenue, which was primarily driven by higher sales volume. The increase in loan fee income was primarily due to an increase in late fees.

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Other Expense

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

	For the Three Months Ended March 31,				2017 vs. 2016 Increase (Decrease)
	2017		2016		$			%
Employee compensation and benefits	$	363	$	345	$	18		5	%
Marketing and business development	168		162		6			4	%
Information processing and communications	80		88		(8		)	(9	)%
Professional fees	147		160		(13		)	(8	)%
Premises and equipment	25		24		1			4	%
Other expense	102		107		(5		)	(5	)%
Total other expense	$	885	$	886	$	(1	)	—	%

Income Tax Expense

The following table presents the calculation of the effective income tax rate (dollars in millions, except effective income tax rate):

	For the Three Months Ended March 31,
	2017			2016
Income before income tax expense	$	868		$	914
Income tax expense	$	304		$	339
Effective income tax rate	35.0		%	37.1		%

Income tax expense and the effective tax rate decreased $35 million and 2.1% , respectively, for the three months ended March 31, 2017 as compared to the same period in 2016 . The decrease in rates is primarily due to the resolution of certain state tax matters and excess tax benefits related to stock-based compensation.

Liquidity and Capital Resources

Funding and Liquidity

We seek to maintain stable, diversified and cost-effective funding sources and a strong liquidity profile in order to fund our business and repay or refinance our maturing obligations under both normal operating conditions and periods of economic or financial stress. In managing our liquidity risk, we seek to maintain a prudent liability maturity profile and ready access to an ample store of primary and contingent liquidity sources. Our primary funding sources include deposits, sourced directly from consumers or through brokers, public term asset-backed securitizations and other short-term and long-term borrowings. Our primary liquidity sources include a liquidity portfolio comprised of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities, and private term asset-backed securitizations. In addition, we have unused capacity with the Federal Reserve discount window which provides another source of contingent liquidity.

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Funding Sources

Deposits

We offer deposit products to customers through two channels: (i) through direct marketing, internet origination and affinity relationships (“direct-to-consumer deposits”); and (ii) indirectly through contractual arrangements with securities brokerage firms (“brokered deposits”). Direct-to-consumer deposits include certificates of deposit, money market accounts, online savings and checking accounts, and IRA certificates of deposit, while brokered deposits include certificates of deposit and sweep accounts. At March 31, 2017 , we had $37.1 billion of direct-to-consumer deposits and $16.4 billion of brokered and other deposits.

Credit Card Securitization Financing

We use the securitization of 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"), through which we issue DCENT DiscoverSeries notes both publicly and through private transactions. From time to time, we may add credit card receivables to these trusts to create sufficient funding capacity for future securitizations while managing the seller’s interest. We retain significant exposure to the performance of trust assets through holdings of the seller's interest and subordinated security classes of DCENT.

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 by a trust during a collection period, including interest collections, fees and interchange, exceeds the fees and expenses of the trust 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 the affected outstanding securitized borrowings using available collections received by the trust (the period of ultimate repayment would be determined by the amount and timing of collections received). An early amortization event would negatively impact our liquidity and 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. As of March 31, 2017 , the DiscoverSeries three-month rolling average excess spread was 12.73% .

We may elect to add receivables to the restricted pool of receivables subject to certain requirements. No accounts were added to those restricted for securitization investors for the three months ended March 31, 2017 . For additional information regarding the seller's interest requirement, see Note 5: Credit Card and Student Loan Securitization Activities to our condensed consolidated financial statements.

At March 31, 2017 , we had $16.1 billion of outstanding public asset-backed securities and $5.2 billion of outstanding subordinated asset-backed securities that had been issued to our wholly-owned subsidiaries.

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 March 31, 2017	Total		Less Than One Year		One Year Through Three Years		Four Years Through Five Years		After Five Years
Scheduled maturities of long-term borrowings - owed to credit card securitization investors	$	16,000	$	5,598	$	7,481	$	2,921	$	—

The triple-A rating of DCENT Class A Notes issued to date has been based, in part, on an FDIC rule which created a safe harbor that provides that the FDIC, as conservator or receiver, will not, using its power to disaffirm or repudiate contracts, seek to reclaim or recover assets transferred in connection with a securitization, or recharacterize them as assets of the insured depository institution, provided such transfer satisfies the conditions for sale accounting treatment under previous GAAP. Although the implementation of the 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 1, 2009. Other legislative and regulatory developments may, however, impact our ability and/or desire to issue asset-backed securities in the future.

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Other Long-Term Borrowings—Student Loans

At March 31, 2017 , we had $805 million of remaining principal balance outstanding on securitized debt assumed as part of the acquisition of The Student Loan Corporation. Principal and interest payments on the underlying student loans will reduce the balance of these secured borrowings over time.

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 March 31, 2017	Principal Amount Outstanding
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2017-2027	$	3,300
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing 2017-2031	$	186
Discover Bank fixed-rate senior bank notes, maturing 2018-2026	$	6,150
Discover Bank fixed-rate subordinated bank notes, maturing 2019-2020	$	700

Certain Discover Financial Services senior notes require us to offer to repurchase the notes at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change of control involving us and a corresponding ratings downgrade to below investment grade.

Short-Term Borrowings

As part of our regular funding strategy, we may from time to time borrow short-term funds in the Federal Funds market or the repurchase (“repo”) market through repurchase agreements. Federal Funds are short-term, unsecured loans between banks or other financial entities with a Federal Reserve account. Funds borrowed in the repo market are short-term, collateralized loans usually secured with highly-rated investment securities such as U.S. Treasury bills or notes, or federal agency mortgage bonds or debentures. At March 31, 2017 and December 31, 2016 , there were no outstanding balances under the Federal Funds market or repurchase agreements.

Additional Funding Sources

Private Asset-Backed Securitizations

We have access to committed, undrawn borrowing capacity through privately placed asset-backed securitizations. At March 31, 2017 , we had total committed capacity of $6.0 billion , none of which was drawn. 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, based upon our liquidity stress testing results, for potential contingency funding needs. We also seek to ensure the stability and reliability of these securitizations by staggering their maturity dates and renewing them approximately one year prior to their scheduled maturity dates.

Federal Reserve

Discover Bank has access to the Federal Reserve Bank of Philadelphia’s discount window. As of March 31, 2017 , Discover Bank had $24.8 billion of available borrowing capacity through the discount window based on the amount and type of assets pledged. We have no borrowings outstanding under the discount window and reserve this capacity as a source of contingency funding.

Funding Uses

Our primary uses of funds include the extensions of loans and credit, primarily through Discover Bank, the purchase of investment securities for our liquidity portfolio, working capital, and debt and capital service. We assess funding uses and liquidity needs under both the normal course of business and hypothetical adverse environments, considering primary uses of funding, such as on-balance sheet loans, and contingent uses of funding, such as the need to post additional collateral for derivatives positions. In order to anticipate funding needs under adverse environments, we maintain liquidity stress scenarios that assess the impact of a range of unusual business events, such as severe economic recessions, financial market disruptions, adverse operational or reputational events and other forms of stress.

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Credit Ratings

Our borrowing costs and capacity in certain funding markets, including 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 collateral enhancement requirements for both our public and private asset securitizations. In addition to increased funding costs, deterioration in credit ratings could reduce our borrowing capacity in the unsecured debt and asset securitization capital markets.

We also maintain agreements with certain of our derivative counterparties that contain provisions that require DFS and Discover Bank to maintain an investment grade credit rating from specified major credit rating agencies. Because the credit rating of DFS did not meet the specified thresholds, we had posted $4 million of collateral with our counterparties at March 31, 2017 . Discover Bank's credit rating met specified thresholds set by its counterparties. However, if Discover Bank's credit ratings were reduced by one ratings notch, Discover Bank would be required to post additional collateral, which, as of March 31, 2017 , would have been $50 million .

A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Our credit ratings are summarized in the following table:

	Moody’s Investors Service	Standard & Poor’s	Fitch Ratings
Discover Financial Services
Senior unsecured debt	Ba1	BBB-	BBB+
Outlook for Discover Financial Services senior unsecured debt	Stable	Stable	Stable
Discover Bank
Senior unsecured debt	Baa3	BBB	BBB+
Outlook for Discover Bank senior unsecured debt	Stable	Stable	Stable
Subordinated debt	Ba1	BBB-	BBB
Discover Card Execution Note Trust
Class A ⁽¹⁾	Aaa(sf)	AAA(sf)	AAA(sf)


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

Liquidity

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

We maintain a liquidity risk and funding management policy which outlines the overall framework and general principles for managing liquidity risk across our business. The policy is approved by the Board of Directors with the implementation responsibilities delegated to the Asset and Liability Management Committee (the “ALCO”). 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. Liquidity risk is centrally managed by the ALCO, which is chaired by our Treasurer and has cross-functional membership. 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 the initial phases of liquidity stress events and a reporting and escalation process that is designed to be consistent with regulatory guidance. The EWIs include both idiosyncratic and systemic measures, and are monitored on a daily basis 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.

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

Our primary liquidity sources include our liquidity portfolio and private securitizations with unused borrowing capacity, which we could utilize to satisfy liquidity needs during normal and stress conditions. We seek to maintain sufficient liquidity to be able to satisfy all maturing obligations and fund business operations for at least 12 months in a severe stress environment. In addition, we have unused capacity with the Federal Reserve discount window which provides a source of contingent liquidity.

At March 31, 2017 , our liquidity portfolio is comprised of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities. Cash and cash equivalents were primarily in the form of 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 housing agencies. These investments 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 upon the size of our Statement of Financial Condition as well as operational requirements and market conditions.

At March 31, 2017 , our liquidity portfolio and undrawn credit facilities were $47.0 billion , which was $4.2 billion higher than the balance at December 31, 2016 . The combination of deposit growth, opportunistic funding issuances in securitization financing and long-term borrowings, and the decline in card seasonal receivables during the first quarter resulted in a temporary increase in the liquidity portfolio. During the three months ended March 31, 2017 , the average balance of our liquidity portfolio was $15.7 billion .



	March 31, 2017		December 31, 2016
	(dollars in millions)
Liquidity portfolio
Cash and cash equivalents ⁽¹⁾	$	14,719	$	11,103
Investment securities ⁽²⁾	1,494		1,532
Total liquidity portfolio	16,213		12,635
Private asset-backed securitizations ⁽³⁾	6,000		6,000
Primary liquidity sources	22,213		18,635
Federal Reserve discount window ⁽³⁾	24,823		24,194
Total liquidity portfolio and undrawn credit facilities	$	47,036	$	42,829


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


(2)	Excludes $59 million and $73 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of March 31, 2017 and December 31, 2016 , 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 management activities, which include dividends 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 preferred stock in the capital markets, as well as dividends from our subsidiaries, particularly 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 Discover Financial Services can meet upcoming funding obligations including common and preferred dividend payments and debt service obligations using existing cash resources. At March 31, 2017 , Discover Financial Services had sufficient cash resources to fund the dividend and debt service payments for more than 18 months.

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We structure our debt maturity schedule to minimize the amount of debt maturing at the bank holding company within a short period of time. See Note 7: Long-Term Borrowings to our condensed consolidated financial statements for further information regarding our debt. Our ALCO and board of directors regularly review our compliance with our liquidity limits as a bank holding company, which are established in accordance with the liquidity risk appetite articulated by our Board of Directors.

Capital

Our primary sources of capital are from the earnings generated by our businesses and common and preferred stock issuances in the capital markets. We seek to manage capital to a level and composition sufficient to support the risks of our businesses, meet regulatory requirements, meet rating agency targets and debt investor expectations and support future business growth. 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, Discover Financial Services, along with Discover Bank, must maintain minimum levels of capital. 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 position and 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. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Current or future legislative or regulatory initiatives may require us to hold more capital in the future.

In 2013, the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC issued the Basel III rules applicable to Discover Financial Services and Discover Bank. Under those rules, Discover Financial Services and Discover Bank are classified as "Standardized Approach" entities, 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 exposures less than $10 billion. Additional phase-in requirements related to components of the final capital rules will become effective through 2019. The Basel III rules include new minimum and "well-capitalized" risk-based capital and leverage ratios, effective January 1, 2015, and refine the definition of what constitutes "capital" for purposes of calculating those ratios of which certain requirements are subject to phase-in periods through the end of 2018 (the "transition period"). During the transition period, the effects of the changes to capital (i.e., certain deductions and adjustments) are recognized in 20% increments from 2015 through 2018. For example, one of the deductions from CET1 capital, goodwill and intangibles, was subject to a 40% of total deduction in 2015 that increased to 60% in 2016 and so on, until reaching 100% deduction of total in 2018. For additional information regarding the risk-based capital and leverage ratios, see Note 11: Capital Adequacy to our condensed consolidated financial statements.

The Basel III rules also introduce a new capital conservation buffer on top of the minimum risk-weighted asset ratios. The buffer is designed to absorb losses during periods of economic stress. The calculation of the buffer started to phase in beginning on January 1, 2016 at the rate of 0.625% and will increase by 0.625% on each subsequent January 1 until it reaches the maximum 2.5% on January 1, 2019. When the capital conservation buffer is fully phased-in on January 1, 2019, this will effectively result in minimum ratios of (i) CET1 to risk-weighted assets of at least 7.0%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5% and (iii) Total capital to risk-weighted assets of at least 10.5%. Banking institutions with a capital ratio below the required amount will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

Another main component of the Basel III rules is a prescribed standardized approach for calculating risk-weighted assets that expands the risk-weight range from 0% to 100% (under Basel I) to 0% to 1,250% (under Basel III). The new range is intended to be more risk-sensitive and the risk-weight assigned depends on the nature of the asset in question.

The Basel III rules provide for a number of the deductions from and adjustments to CET1, to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15%.

Basel III also requires additional disclosures relating to market discipline. This series of disclosures is commonly referred to as “Pillar 3.” The objective is to increase transparency of capital requirements for banking organizations. We are required to make prescribed regulatory disclosures on a quarterly basis regarding our capital structure, capital adequacy, risk

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exposures and risk-weighted assets. The Pillar 3 disclosures are made publicly available, on our website, as a stand-alone report called "Basel III Regulatory Capital Disclosures."

At March 31, 2017 , Discover Financial Services and Discover Bank met the requirements for "well-capitalized" status under Regulation Y and the prompt corrective action rules, respectively, exceeding the regulatory minimums to which they were subject under the applicable rules.

As discussed in Note 11: Capital Adequacy to our condensed consolidated financial statements, we are subject to a CET1 capital ratio requirement under the Basel III rules. We believe that providing an estimate of our capital position based on the Basel III fully phased-in rules is important to complement the existing capital ratios and for comparability to other financial institutions. In addition, we disclose tangible common equity, which represents common equity less goodwill and intangibles. Management believes that common stockholders' equity excluding goodwill and intangibles is a more meaningful measure to investors of our true net asset value. As of March 31, 2017 , the CET1 capital ratio calculated under Basel III fully phased-in rules and tangible common equity are not formally defined by U.S. GAAP or codified in the federal banking regulations and, as such, they are considered to be non-GAAP financial measures. Other financial services companies may also disclose this ratio and metric and definitions may vary, so we advise users of this information to exercise caution in comparing this ratio and metric for different companies.

The following table provides a reconciliation of total common stockholders’ equity (a U.S. GAAP financial measure) to tangible common equity (dollars in millions):

	March 31, 2017			December 31, 2016
Total common stockholders’ equity ⁽¹⁾	$	10,705		$	10,763
Less: Goodwill	(255		)	(255		)
Less: Intangible assets, net	(165		)	(166		)
Tangible common equity	$	10,285		$	10,342


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

The following table provides a reconciliation of CET1 capital calculated under Basel III transition rules to CET1 capital and risk-weighted assets calculated under fully phased-in Basel III rules (dollars in millions):

	March 31, 2017
Common equity Tier 1 capital (Basel III transition)	$	10,501
Adjustments related to capital components during transition ⁽¹⁾	(26		)
Common equity Tier 1 capital (Basel III fully phased-in)	$	10,475

Risk-weighted assets (Basel III fully phased-in) ⁽²⁾	$	78,357
Common equity Tier 1 capital ratio (Basel III fully phased-in)	13.4		%


(1)	Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion.


(2)	Key differences under fully phased-in Basel III rules in the calculation of risk-weighted assets include higher risk weighting for past-due loans and unfunded commitments.

Additionally, we are required to submit an annual capital plan to the Federal Reserve that includes an assessment of our expected uses and sources of capital over a nine quarter planning horizon. In April 2016, we submitted our annual capital plan to the Federal Reserve under the Federal Reserve’s Comprehensive Capital Analysis and Review ("CCAR") program, which included planned dividends and share repurchases over the nine quarter planning horizon. In June 2016, we received non-objection from the Federal Reserve with respect to our proposed capital actions through June 30, 2017. On August 19, 2016, we received a non-objection from the Federal Reserve with respect t o the repurchase of up to an additional $100 million of shares of our common stock. This amount is in addition to the $1.95 billion of share repurchases included in our 2016 capital plan. In April 2017, we submitted our 2017 CCAR plan and we are awaiting a response from the Federal Reserve on our plan. Our ability to make capital distributions, including our ability to pay dividends on or repurchase shares of our common stock, will continue to be subject to the Federal Reserve’s review and non-objection of the actions that we propose each year in our annual capital plan.

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Also in June 2016, the Federal Reserve published the results of its annual supervisory stress tests for bank holding companies with $50 billion or more in total consolidated assets, including Discover Financial Services. At that same time, we published company-run stress test results for Discover Financial Services and Discover Bank. Discover Financial Services is required to publish company-run stress tests results twice each year in accordance with Federal Reserve rules and Discover Bank is required to publish bank-run stress test results under FDIC rules. We published our most recent mid-year stress test results on October 6, 2016.

We recently declared a quarterly cash dividend on our common stock of $0.30 per share, payable on May 25, 2017 to holders of record on May 11, 2017 , which is consistent with last quarter. We also recently declared a quarterly cash dividend on our preferred stock of $16.25 per share, equal to $0.40625 per depositary share, payable on June 1, 2017 , to holders of record on May 15, 2017 , which was the same as the amount paid on our preferred stock in the prior quarter.

On July 14, 2016 , our Board of Directors approved a share repurchase program authorizing the repurchase of up to $2.5 billion of our outstanding shares of common stock. The program expires on October 31, 2017 and may be terminated at any time. This program replaced the prior $2.2 billion share repurchase program, which had $158 million of remaining authorization. During the three months ended March 31, 2017 , we repurchased approximately 7 million shares, or 2% , of our outstanding common stock for $495 million . We expect to continue to make share repurchases under our repurchase program from time to time based on market conditions and other factors, subject to legal and regulatory requirements and restrictions, including approval from the Federal Reserve described above. Share repurchases under the program may be made through a variety of methods, including open market purchases, privately negotiated transactions or other purchases, including block trades, accelerated share repurchase transactions, or any combination of such methods.

The amount and size of any future dividends and share repurchases will depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors. The declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of our Board of Directors. Holders of our shares of common stock are subject to the prior dividend rights of holders of our preferred stock or the depositary shares representing such preferred stock outstanding, and if full dividends have not been declared and paid on all outstanding shares of preferred stock in any dividend period, no dividend may be declared or paid or set aside for payment on our common stock. 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 to which our banking subsidiaries can provide funds to us through dividends, loans or otherwise. Further, also noted above, current or future regulatory initiatives may require us to hold more capital in the future. There can be no assurance that we will declare and pay any dividends or repurchase any shares of our common stock in the future.

Certain Off-Balance Sheet Arrangements

Guarantees

Guarantees are contracts or indemnification agreements that contingently 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 contingently require the guarantor to make payments to a guaranteed party based on another entity’s failure to perform under an agreement. Our guarantees relate to transactions processed on the Discover Network and certain transactions processed by PULSE and Diners Club. See Note 12: Commitments, Contingencies and Guarantees to our condensed consolidated financial statements for further discussion regarding our guarantees.

Contractual Obligations and Contingent Liabilities and Commitments

In the normal course of business, we enter into various contractual obligations that may require future cash payments. Contractual obligations at March 31, 2017 , which include deposits, long-term borrowings, operating and capital lease obligations, interest payments on fixed-rate debt, purchase obligations and other liabilities were $84.3 billion . For a description of our contractual obligations, see our annual report on Form 10-K for the year ended December 31, 2016 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Contingent Liabilities and Commitments.”

We extend credit for consumer loans, primarily arising from agreements with customers for unused lines of credit on certain credit cards, provided there is no violation of conditions established in the related agreement. At March 31, 2017 , our unused commitments were approximately $188.3 billion . These commitments, 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 and loan qualification. In addition, in the ordinary course of business, we guarantee payment on

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behalf of subsidiaries relating to contractual obligations with external parties. The activities of the subsidiaries covered by any such guarantees are included in our condensed consolidated financial statements.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

We borrow money from a variety of depositors and institutions in order to provide loans to our customers, as well as invest in other assets and our business. These loans and other assets earn interest, which we use to pay interest on the money borrowed. Our net interest income and, therefore, earnings, will be negatively affected if the interest rate earned on assets increases at a slower pace than increases to the interest rate we owe on our borrowings. Changes in interest rates and competitor responses to those changes may influence customer payment rates, loan balances or deposit account activity. We may face higher-cost alternative sources of funding as a result, which has the potential to decrease earnings.

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

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

Our interest rate sensitive assets include our variable rate loan receivables and the assets that make up our liquidity portfolio. We have restrictions on our ability to mitigate interest rate risk by adjusting rates on existing balances and competitive actions may restrict our ability to increase the rates that we charge to customers for new loans. At March 31, 2017 , the majority of our credit card and student loans were at variable rates. Assets with rates that are fixed at period end but which will mature, or otherwise contractually reset to a market-based indexed rate or other fixed rate prior to the end of the 12-month 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 purposes of measuring rate sensitivity for such loans, only the effect of the hypothetical 100 basis point change in the underlying market-based indexed rate has been considered. For assets that have a fixed interest rate but which contractually will, or are 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 loan losses, which for purposes of this analysis 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-month period. Thus, liabilities that vary with changes in a market-based index, such as Federal Funds or LIBOR, which will reset before the end of the 12-month period, or liabilities whose rates are fixed at the fiscal period end, but which will mature and are assumed to be replaced with a market-based indexed rate prior to the end of the 12-month period, also are considered to be rate sensitive. For these fixed-rate liabilities, earnings sensitivity is measured from the expected maturity date.

Assuming an immediate 100 basis point increase in the interest rates affecting all interest rate sensitive assets and liabilities at March 31, 2017 , we estimate that net interest income over the following 12-month period would increase by approximately $199 million , or 2% . Assuming an immediate 100 basis point increase in the interest rates affecting all interest

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rate sensitive assets and liabilities at December 31, 2016 , we estimated that net interest income over the following 12-month period would increase by approximately $201 million , or 3% . We have not provided an estimate of any impact on net interest income of a decrease in interest rates as many of our interest rate sensitive assets and liabilities are tied to interest rates that are already at or near their historical minimum levels (i.e., Prime and LIBOR) and, therefore, could not materially decrease further assuming U.S. market interest rates continue to remain above zero percent. Sustained negative interest rates for an economy the size and complexity of the United States would likely lead to broad macroeconomic impacts that are difficult to foresee. While there is a possibility that U.S market interest rates could fall below zero percent, this has not historically occurred in the United States. Net interest income sensitivity requires assumptions to be made regarding market conditions, consumer behavior, and the overall growth and composition of the balance sheet. These assumptions are inherently uncertain and, as a result, actual earnings may differ from the simulated earnings presented above. Our actual earnings are dependent on multiple factors including, but not limited to, the direction and timing of changes in interest rates the movement of short-term versus long-term rates, balance sheet design, competitor actions, which may affect pricing decisions in our loans and deposits, and strategic actions undertaken by management.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II.	OTHER INFORMATION


Item 1.	Legal Proceedings

For a description of legal proceedings, see Note 13: Litigation and Regulatory Matters to our condensed consolidated financial statements.


Item 1A.	Risk Factors

There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2016 .


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

Issuer Purchases of Equity Securities

The table below sets forth information regarding purchases of our common stock related to our share repurchase program and employee transactions that were made by us or on our behalf during the most recent quarter.

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program ⁽¹⁾	Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs ⁽¹⁾
January 1 - 31, 2017
Repurchase program ⁽¹⁾	2,353,433	$	71.11	2,353,433	$	1,339,599,844
Employee transactions ⁽²⁾	—	$	—	N/A	N/A
February 1 - 28, 2017
Repurchase program ⁽¹⁾	2,088,051	$	69.64	2,088,051	$	1,194,178,276
Employee transactions ⁽²⁾	365,831	$	68.77	N/A	N/A
March 1 - 31, 2017
Repurchase program ⁽¹⁾	2,594,672	$	70.23	2,594,672	$	1,011,959,398
Employee transactions ⁽²⁾	—	$	—	N/A	N/A

Total
Repurchase program ⁽¹⁾	7,036,156	$	70.35	7,036,156	$	1,011,959,398
Employee transactions ⁽²⁾	365,831	$	68.77	N/A	N/A


(1)	On July 14, 2016 , our board of directors approved a share repurchase program authorizing the purchase of up to $2.5 billion of our outstanding shares of common stock. This share repurchase program expires on October 31, 2017 and may be terminated at any time.


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


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

None.


Item 5.	Other Information

None.


Item 6.	Exhibits

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

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Signature

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



	Discover Financial Services (Registrant)

	By:		/s/ R. M ARK G RAF
			R. Mark Graf Executive Vice President and Chief Financial Officer

Date: May 2, 2017

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Exhibit Index



Exhibit Number		Description

10.1		Form 2017 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated Omnibus Incentive Plan.

10.2		Form 2017 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated Omnibus Incentive Plan.

12.1		Statement regarding computation of ratio of earnings to fixed charges and computation of ratio of earnings to fixed charges and preferred stock dividends.

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

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

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

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

Exhibit 10.1

DISCOVER FINANCIAL SERVICES

AMENDED AND RESTATED 2014 OMNIBUS INCENTIVE PLAN

2017 AWARD CERTIFICATE FOR

RESTRICTED STOCK UNITS

Vice President and Above

TABLE OF CONTENTS FOR AWARD CERTIFICATE



1.	Restricted Stock Units Generally.	3
2.	Vesting Schedule; Conversion; Retention Requirement.	3
3.	Special Provisions for Certain “Specified Employees”.	4
4.	Dividend Equivalent Payments.	4
5.	Death; Disability; Retirement.	4
6.	Reduction in Force.	5
7.	Change in Control.	5
8.	Termination of Employment.	6
9.	Forfeiture/Cancellation/Clawback of RSU Awards Under Certain Circumstances.	6
10.	Tax and Other Withholding Obligations.	8
11.	Satisfaction of Obligations.	8
12.	Nontransferability.	9
13.	Designation of a Beneficiary.	10
14.	Ownership and Possession.	10
15.	Securities Law Matters.	10
16.	Compliance with Laws and Regulations.	10
17.	No Entitlements.	11
18.	Consents.	12
19.	Electronic Delivery and Consent to Electronic Participation.	12
20.	Award Modification.	12
21.	Severability.	13
22.	Successors.	13
23.	Governing Law.	13
24.	Section 409A.	13
25.	Defined Terms.	14

DISCOVER FINANCIAL SERVICES

AMENDED AND RESTATED 2014 OMNIBUS INCENTIVE PLAN

2017 AWARD CERTIFICATE FOR RESTRICTED STOCK UNITS

Discover has awarded to you restricted stock units (“RSUs”) as part of your discretionary long-term incentive compensation for services provided to the Company, from the Date of the Award through the Scheduled Vesting Dates, as provided in this Award Certificate. This Award Certificate sets forth the general terms and conditions of your restricted stock unit award (your “RSU Award”). Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 25 below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 25 below have the meanings set forth in the Plan.

The number of RSUs in your RSU Award has been communicated to you separately. If you are employed outside the United States, please reference the “ International Supplement ” included herein as Appendix C , which contains supplemental terms and conditions for your RSU Award. This Award Certificate should be read in conjunction with the International Supplement, if applicable, in order for you to understand the terms and conditions of your RSU Award.

Your RSU Award is made pursuant to the Plan. References to “restricted stock units” or “RSUs” in this Award Certificate mean only those RSUs included in your RSU Award, and the terms and conditions herein apply only to such RSU Award. If you receive any other award under the Plan or another equity compensation plan, it will be governed by the terms and conditions of the applicable award documentation, which may be different from those herein.

The purpose of the RSU Award is, among other things, to align your interests with the interests of Discover and its stockholders and to reward you for your continued Employment with the Company in the future and your compliance with the Company’s policies (including, without limitation, the Company’s risk policies and Code of Conduct), to protect the Company’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, 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 9 below, and (3) satisfy obligations you owe to the Company as set forth in Section 11 below. As the Company deems appropriate and in its sole discretion, the Company will require you to provide a written certification or other evidence, from time to time, to confirm that none of the circumstances described in Section 9 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 will cancel your RSU Award. It is your responsibility to provide the Human Resources Department with your up-to-date contact information.


1.	Restricted Stock Units Generally .

Each of your RSUs corresponds to one share of Discover common stock. A RSU constitutes an unsecured promise by Discover to pay you one share of Discover common stock on the conversion date for the RSU. As the holder of RSUs, you have only the rights of a general unsecured creditor of Discover. You will not be a stockholder with respect to the shares of Discover common stock underlying your RSUs unless and until your RSUs convert to shares of Discover common stock.


2.	Vesting Schedule; Conversion; Retention Requirement .

a) Vesting Schedule. Your RSUs will vest according to the Scheduled Vesting Dates set forth in Appendix A . Except as otherwise provided in this Award Certificate, each portion of your RSUs will vest only if you continue to provide future services to the Company by remaining in continuous Employment through the applicable Scheduled Vesting Date. The special vesting terms set forth in Sections 5, 6 and 7 of this Award Certificate apply (1) if your Employment terminates by reason of your death, Disability, or Retirement, (2) if the Company terminates your Employment in an involuntary termination under the circumstances described in Section 6, or (3) upon a Change in Control. Vested RSUs are subject to the tax withholding provisions set forth in Section 10 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 of Discover common stock on the applicable Scheduled Vesting Date. The special conversion provisions set forth in Sections 5, 6 and 7 of this Award Certificate apply (i) if your Employment terminates by reason of your death, Disability, or Retirement, (ii) if the Company terminates your Employment in an involuntary termination under the circumstances described in Section 6, or (iii) upon a Change in Control.

(2) Shares of Discover common stock to which you are entitled upon conversion of RSUs under any provision of this Award Certificate shall be delivered as soon as administratively practicable thereafter and shall not be subject to any transfer restrictions, other than those that may arise under the securities laws or the Company’s policies, including, without limitation, its stock ownership guidelines and/or Section 11 below, but will be subject to forfeiture, cancellation or clawback as set forth in Section 9 below.

c) Accelerated Conversion. The Committee, in its sole discretion, may determine that any RSUs may be converted to shares of Discover common stock prior to the Scheduled Vesting Date subject to compliance with all Legal Requirements. In such case, the Committee may determine in its sole discretion that the shares may not be transferable and may remain subject to applicable vesting, retention, forfeiture, cancellation, clawback and withholding provisions.

d) Rule of Construction for Timing of Conversion. Whenever this Award Certificate provides for your RSUs to convert to shares of Discover common stock on the Scheduled Vesting Date or upon a different specified event or date, such conversion will be considered to have

been timely made, and neither you nor any of your beneficiaries or your estate shall have any claim against the Company for damages based on a delay in conversion of your RSUs (or delivery of shares of Discover common stock 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. Similarly, neither you nor any of your beneficiaries or your estate shall have any claim against the Company for damages, and the Company shall have no liability to you (or to any of your beneficiaries or your estate), based on any acceleration of the conversion of your RSUs pursuant to Section 2.c), as applicable.

e) Retention Requirement. Notwithstanding anything in the Plan or any other provisions of this Award Certificate to the contrary, following delivery thereof, you will be required to hold (and not transfer or otherwise dispose of) one-hundred percent (100%) of the Net Shares until one (1) year after the applicable Scheduled Vesting Date or such other specified event or date which accelerates the conversion of such Net Shares; provided , that this requirement shall lapse in the event of your death, Disability or a Change in Control.


3.	Special Provisions for Certain “Specified Employees” .

Notwithstanding the other provisions of this Award Certificate, to the extent necessary to comply with Section 409A of the Internal Revenue Code, if Discover reasonably considers you to be one of its “specified employees” as defined in Section 409A of the Internal Revenue Code at the time of the termination of your Employment, any RSUs to which you are entitled under this Award Certificate that constitute a deferred compensation arrangement under Section 409A of the Internal Revenue Code and that are payable upon termination of your Employment will not convert to Discover common stock until the date that is six months after the termination of your Employment (or the date of your death, if such event occurs earlier).


4.	Dividend Equivalent Payments .

Until your RSUs convert to shares of Discover common stock, 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. The decision to pay a dividend and, if so, the amount of any such dividend, is determined by Discover in its sole discretion. No dividend equivalents will be paid to you on any canceled RSUs. Discover will decide on the form of payment and may pay dividend equivalents in shares of Discover common stock, in cash or in a combination thereof. Discover will pay the dividend equivalents as soon as administratively practicable after Discover pays the corresponding dividend on its common stock. Because dividend equivalent payments are considered part of your compensation for income tax purposes, they will be subject to applicable tax and other withholding obligations, as summarized in Section 10.


5.	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 on the date your Employment terminates. On that date, your RSUs will convert to shares of Discover common stock and be delivered to the beneficiary you have designated pursuant to Section 13 or the legal representative of your estate, as applicable, as soon as administratively practicable after Discover receives appropriate notice of your death. After your death, the cancellation provisions set forth in Section 9.a) will no longer apply.

b) Disability. If your Employment terminates due to Disability, all RSUs subject to this Award Certificate will vest on the date your Employment terminates. On that date, subject to Section 3 above, your RSUs will convert to shares of Discover common stock and be delivered to you.

c) Retirement. If your Employment terminates due to Retirement, the number of RSUs that will vest on the date your Employment terminates will be determined by multiplying the RSUs subject to this Award Certificate by the Pro Ration Fraction. On that date, subject to Section 3 above, your RSUs will convert to shares of Discover common stock and be delivered to you.


6.	Reduction in Force .

If the Company terminates your Employment due to a reduction in force or an elimination of your position, each as determined by the Company in its sole discretion, the number of RSUs that will vest on the date your Employment terminates will be determined by multiplying the RSUs subject to this Award Certificate by the Pro Ration Fraction. These shares will convert to shares of Discover common stock and be delivered to you on the 60th day following your termination of Employment, subject to Section 3 above, provided that you sign (and do not revoke) an agreement and release of claims satisfactory to the Company.


7.	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 24 months after a Change in Control, all your RSUs will immediately vest and convert to shares of Discover common stock on the later of the date of a Change in Control and 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 (as defined in Section 25.c)(1)), unless otherwise determined by the Committee, in its sole discretion prior to such Change in Control, there shall be substituted for each share of Discover common stock subject to this certificate the number and class of shares of common stock of the acquiring entity into which each outstanding share of Discover common stock shall be converted pursuant to such Change in Control transactions, 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 Acquirer 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.


8.	Termination of Employment .

a) Cancellation of Unvested RSU Awards. Your unvested RSUs will be canceled if your Employment terminates for any reason other than under the circumstances set forth in this Award Certificate for death, Disability, and Retirement described in Section 5, for an involuntary termination by the Company described in Section 6, or in connection with a Change in Control as provided in Section 7.

b) General Treatment of Vested RSU Awards. Except as otherwise provided in this Award Certificate, your vested RSUs will convert to shares of Discover common stock on the applicable Scheduled Vesting Date. The tax and other withholding provisions as set forth in Section 10 of this Award Certificate will continue to apply until the date the shares of Discover common stock are delivered.


9.	Forfeiture/Cancellation/Clawback of RSU Awards Under Certain Circumstances .

The forfeiture, cancellation and/or clawback circumstances and events set forth in this Section 9 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), to protect the Company’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 9 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 9 no longer apply).

a) Breach of Restrictive Covenants. Notwithstanding your satisfaction of the vesting conditions of this Award Certificate, RSUs are not earned until the applicable Scheduled Vesting Date and, unless prohibited by applicable law, will be canceled prior to the applicable Scheduled Vesting Date in any of the circumstances set forth below. Although you will become the

beneficial owner of shares of Discover common stock following conversion of your RSUs, the Company may, upon notice, issue a transfer restriction with respect to your shares of Discover common stock following conversion of your RSUs pending any investigation or other review that impacts the determination as to whether the RSUs are cancellable under the circumstances set forth below. The shares of Discover common stock underlying such RSUs shall be forfeited 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, 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 Competitive Activity; (ii) engage in Wrongful Solicitation or (iii) breach your obligations to the Company under a confidentiality, intellectual property or other restrictive covenant, you shall be required to:

(1) pay to the Company an amount in cash equal to the value of the Net Shares that vested and converted to shares of Discover common stock on or after, or within two years prior to, your termination of Employment, which value shall be determined using a valuation methodology established by the Company as of the date the Net Shares converted, were scheduled to convert, or otherwise became taxable, as applicable; or

(2) transfer to the Company a number of shares of Discover common stock equal to the number of the Net Shares that vested and converted to shares of Discover common stock on or after, or within two years prior to, your termination of Employment.

b) Clawback. 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, was based on Discover’s material noncompliance with any financial reporting requirement under the securities laws 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 hereunder less the number of RSUs that would have been granted had your RSUs been granted based on compliance with any such financial reporting requirement under the securities laws (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 10):

(1) 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).

(2) You shall transfer to the Company the shares of Discover common stock which resulted from the conversion of the RSUs hereunder net of taxes or their equivalent dollar value such that the forfeited RSUs under paragraph (1) above plus the shares of Discover common stock or monies (excluding the impact of taxes) transferred under this paragraph (2) equals the value of the Clawback RSUs. The value of the Clawback RSUs shall be determined using a valuation methodology established by the Company, of Discover common stock on the date your RSUs converted, were scheduled to convert, or otherwise became taxable, as applicable.

c) Risk Review. No RSUs will convert to shares of Discover common stock until the Chief Human Resources Officer receives confirmation from the Chief Risk Officer that a review has been completed by the Chief Risk Officer to determine whether you engaged in any willful or reckless violation of the Company’s risk policies. If the Chief Risk Officer finds any such violation or breach, then the Company may determine that all or a portion of your RSUs will be forfeited. Additionally, if you are a Covered Employee, the Chief Risk Officer will conduct Company and/or Business Unit risk reviews as well as evaluate your individual risk goals. Based on this assessment, the Company may determine that all or a portion of your RSUs will be forfeited.

d) Authorization. You authorize the Company to deduct any amount or amounts owed by you pursuant to this Section 9 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.


10.	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 having Discover withhold shares of Discover common stock or by tendering shares of Discover common stock, in each case in an amount sufficient to satisfy the tax or other withholding obligations. Shares of Discover common stock withheld or tendered will be valued using the fair market value of Discover common stock on the date the shares of Discover common stock are scheduled to convert, or otherwise become taxable, as applicable, using a valuation methodology established by Discover. In order to comply with applicable accounting standards or the Company’s policies in effect from time to time, Discover may limit the amount of shares of Discover common stock that you may have withheld or that you may tender.


11.	Satisfaction of Obligations .

Notwithstanding any other provision of this Award Certificate, Discover 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. Discover’s determination of the amount that you owe the Company shall be conclusive. The fair market value of Discover common stock for purposes of the following provisions shall be determined using a valuation methodology established by Discover. The actions that may be taken by Discover pursuant to this Section 11 include, but are not limited to, the following:

a) Withholding of Shares of Discover Common Stock. Upon conversion of RSUs, including any accelerated conversion pursuant to Sections 5, 6, or 7 above, or, if later, upon delivery of the shares of Discover common stock, Discover may withhold a number of shares of Discover common stock 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 of Discover common stock 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 Discover common stock on the date the shares of Discover common stock are scheduled to convert, or otherwise become taxable, as applicable. To the extent that the Company retains any shares of Discover common stock or reduces the number of RSUs to cover the withholding obligations, it will do so at the minimum statutory rate. Should the Company withhold in excess of the actual tax withholding obligation, the Company will refund the excess amount to you within a reasonable period and without any interest.

b) Netting of Accelerated RSUs. In order to satisfy any taxes due upon an event which is earlier than conversion, Discover may accelerate the vesting and conversion of a portion of your unvested RSUs. 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 Discover common stock on the date of accelerated conversion. Accelerated and converted RSUs shall not exceed the value of taxes due upon such event and the resulting shares of Discover common stock will be withheld by Discover.

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 the Vesting Date. 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.


12.	Nontransferability .

You may not sell, pledge, hypothecate, assign or otherwise transfer your RSUs, other than as provided in Section 13 (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. This prohibition includes any assignment or other transfer that purports to occur by operation of law or otherwise. During your lifetime, payments relating to the RSUs will be made only to you.


13.	Designation of a Beneficiary .

You may make a written designation of beneficiary or beneficiaries to receive all or part of the shares of Discover common stock to be paid under this Award Certificate in the event of your death. To make a beneficiary designation, you must complete and file the form attached hereto as Appendix B with the Human Resources Department. Any shares of Discover common stock that become payable upon your death, and as to which a designation of beneficiary is not in effect, will be distributed to your estate. 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. If there is any question as to the legal right of any beneficiary to receive shares of Discover common stock under this RSU Award, Discover may determine in its sole discretion to deliver the shares in question to your estate. Discover’s determination shall be binding and conclusive on all persons and it will have no further liability to anyone with respect to such shares.


14.	Ownership and Possession .

a) Generally. Generally, you will not have any rights as a stockholder in the shares of Discover common stock corresponding to your RSUs prior to conversion of your RSUs. Prior to conversion of your RSUs, however, you will receive dividend equivalent payments, as set forth in Section 4 of this Award Certificate. To the extent necessary or advisable to comply with Section 409A of the Internal Revenue Code, with respect to any provision of this Award Certificate that provides for vested RSUs to convert to shares of Discover common stock on or as soon as administratively practicable after a specified event or date, such conversion will be made by the later of the end of the calendar year in which the specified event or date occurs or the 15 ^th day of the third calendar month following the specified event or date.

b) Following Conversion. Subject to the terms and conditions of this Award Certificate, following conversion of your RSUs you will be the beneficial owner of the Net Shares of Discover common stock issued to you, and you will be entitled to all rights of ownership, including voting rights and the right to receive cash or stock dividends or other distributions paid on such shares.


15.	Securities Law Matters .

Shares of Discover common stock issued upon conversion of your RSUs may be subject to restrictions on transfer by virtue of the Securities Act of 1933, as amended. 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 Discover common stock will only be maintained in book-entry form, you will not receive a stock certificate representing your interest in such shares.


16.	Compliance with Laws and Regulations .

Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of shares of Discover common stock 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.


17.	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. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your Employment by the Company or a Related Employer, or as giving you any right to continue in the employ of the Company or a Related Employer, during any period (including without limitation the period between the Date of the Award and any of the Scheduled Vesting Dates, or any portion of any of these periods), nor shall they be construed as giving you any right to be reemployed by the Company or a Related Employer following any termination of Employment.

b) No Right to Future Awards. This RSU Award, and all other awards of RSUs and other equity-based awards, are discretionary. This RSU Award 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. Discover has made this RSU Award to you in its sole discretion. This RSU Award 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 by the Company (for any reason whatsoever and whether or not in breach of local labor laws) and you irrevocably release the Company and the 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 Agreement, 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 Agreement 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; Plan 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. In the event of any conflict between the terms set forth in this Award Certificate and the terms of the Plan, the latter shall control.


18.	Consents .

Your RSU Award is conditioned upon the Company’s 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.


19.	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.


20.	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. 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.


21.	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, 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.


22.	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.


23.	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.


24.	Section 409A.

This Award Certificate and your RSU Award (including all adjustments, substitutions, dividends, valuations and distributions, and deferrals hereunder) are intended to be exempt from or comply with Section 409A of the Internal Revenue Code pursuant to the guidance issued thereunder by the U.S. Internal Revenue Service in all respects and shall be administered in a manner consistent with such intent. If an unintentional operational failure occurs with respect to requirements under Section 409A of the Internal Revenue Code, you or your beneficiary shall fully cooperate with Discover to correct the failure, to the extent possible, in accordance with any correction procedure established by the U.S. Internal Revenue Service. Any reference herein to Section 409A of the Internal Revenue Code shall be interpreted to refer to any successor section of the Internal

Revenue Code or other guidance issued by the U.S. Internal Revenue Service, or other agency with jurisdiction, as appropriate. To the extent that full or partial payment of your RSU Award that constitutes a deferral of compensation subject to Section 409A of the Internal Revenue Code is made upon a termination of Employment, a termination of Employment shall be deemed to occur only if it is a “separation from service” for purposes of Section 409Aof the Internal Revenue Code, and references in this Award Certificate to “termination,” “termination of Employment,” or like terms shall mean a “separation from service.”


25.	Defined Terms .

For purposes of this Award Certificate, the following terms shall have the meanings set forth below:

a) “ Board ” means the Board of Directors of Discover.

b) “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.

c) “Change in Control” means, except as provided otherwise below, the first to occur of any of the following events:

(x) acquires ownership of stock of the Company that, together with stock held by such person (not including the stock owned by such person any stock acquired directly from the Company other than in connection with the acquisition by the Company of a business), constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company (but only if such person did not own more than 50% of the total fair market value of the stock of the Company prior to the acquisition of additional stock), or (y) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person) ownership of the stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company (but only if such person did not own 30% or more of the total voting power of the stock of the Company prior to the acquisition of additional stock and not including the stock owned by such person any stock acquired directly from the Company other than in connection with the acquisition by the Company of a business);

(2) a change in the composition of the Board during any twelve-month period, 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, however, that any individual becoming a member of the Board subsequent to the date of 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;

(3) 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 (i) a merger or consolidation which results in the securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into 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 fifty percent (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 (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (determined pursuant to clause (1) 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 thirty percent (30%) or more of the total voting power of the stock of the Company (but only if such person did not own 30% or more of the total voting power of the stock of the Company prior to the acquisition of additional securities);

(4) the complete liquidation of the Company or 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 (i) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock, (ii) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, either by the Company or by a person or more than one person acting as a group, that owns fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company, or (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company; provided, however, that a Change in Control pursuant to this clause (4) shall not be deemed to have occurred unless a person (determined pursuant to clause (1) above) or persons acting as a group acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions.

Notwithstanding the foregoing, with respect to a Change in Control of Discover, 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 beneficial 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.

d) “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.

e) “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.

f) “Committee” means the Compensation and Leadership Development Committee of the Board, any successor committee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.

g) “ Company ” means Discover and all of its Subsidiaries.

h) “ Competitive Activity” means:

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.

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 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.

j) “Covered Employee” means an employee who, as of the Date of the Award, has been identified as a covered employee by Human Resources.

k) “ Date of the Award ” means the date set forth in Appendix A .

l) “ Disability ” means a “permanent and total disability,” as defined in Section 22(e)(3) of the Internal Revenue Code.

m) “Discover” means Discover Financial Services, a Delaware corporation.

n) “Employed” and “Employment” refer to employment with the Company and/or Related Employment.

o) “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.

p) “ Internal Revenue Code ” means the United States Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder.

q) “Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance or other legal requirement (including any foreign legal requirements).

r) “Net Shares” means RSUs that vest and convert to shares of Discover common stock, net of taxes.

s) “ Plan ” means the Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan, as in effect from time to time.

t) “Pro Ration Fraction” means a fraction, not to exceed 1.0, the numerator of which is the number of days starting with and inclusive of the first day of the calendar year of the Date of the Award and ending on the effective date of your termination of Employment and the denominator of which is the number of days in the calendar year of the Date of the Award.

u) “ 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; and, 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.

v) “ 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) your combined age and years of service at least 65 years.

w) “ Scheduled Vesting Date ” means the Scheduled Vesting Dates set forth in Appendix A as the context requires.

x) “Subsidiary” means (i) a corporation or other entity with respect to which Discover, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation’s board of directors or analogous governing body, or (ii) any other corporation or other entity in which Discover, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan.

y) “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/ D OUG R OSE

Doug Rose

Senior Vice President, Chief HR Officer

APPENDIX A

Summary of Award

Date of Award : February 22, 2017

Vesting Schedule : Scheduled Vesting Date Vesting Amount

February 1, 2018 one-third*

February 1, 2019 one-third

February 1, 2020 one-third

*Any fractional RSUs resulting from the application of the vesting schedule will be aggregated and will vest on the first Scheduled Vesting Date.

APPENDIX B

Designation of Beneficiary(ies) Under

Discover Equity Compensation Plans

This Designation of Beneficiary shall remain in effect with respect to all awards issued to me under any Discover equity compensation plan, including any awards that may be issued to me after the date hereof, unless and until I modify or revoke it by submitting a later dated beneficiary designation. This Designation of Beneficiary supersedes all my prior beneficiary designations with respect to all my equity awards.

If you have more than one primary beneficiary, benefits will be divided equally among the living beneficiaries unless you specify the percentage. The percentages for all of the primary beneficiaries must total 100%. Contingent beneficiary(ies) receive any survivor benefits with respect to your equity awards, ONLY if all primary beneficiaries predecease you. If you have more than one contingent beneficiary, benefits will be divided equally among the living beneficiaries unless you specify the percentage. The percentages for all of the contingent beneficiaries must total 100%.

I hereby designate the following beneficiary(ies) to receive any survivor benefits with respect to all my equity awards:



Primary Beneficiary(ies)		Relationship	Percentage
(1	)
(2	)
(3	)
(4	)

Contingent Beneficiary(ies)		Relationship	Percentage
(1	)
(2	)
(3	)
(4	)

Address(es) of Primary Beneficiary(ies):

(1)

(2)

(3)

(4)

Address(es) of Contingent Beneficiary(ies):

(1)

(2)

(3)

(4)

Name: (please print) Date

Signature

Please sign and email this form to ExecutiveCompensation@discover.com , or return via mail to:

Discover Financial Services

Attn: Human Resources Executive Compensation

2500 Lake Cook Road

Riverwoods, IL 60015

APPENDIX C

Discover Financial Services

International Supplement

This International Supplement to the Award Certificate for Restricted Stock Units ("Award Certificate") contains supplemental terms and conditions for the Restricted Stock Unit 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 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 Award Certificate.

Employees in the United Kingdom.

If you are Employed in the United Kingdom, the Company will act in accordance with the Data Protection Act of 1998 as amended from time to time regarding any personal information which you provide to it in connection with your Equity Award (including the amount of the award) and you consent to 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 agree 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.

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.

The Company recommends that you seek advice of your tax advisors regarding the tax treatment of your awards.

Exhibit 10.2

DISCOVER FINANCIAL SERVICES

AMENDED AND RESTATED 2014 OMNIBUS INCENTIVE PLAN

2017 AWARD CERTIFICATE FOR

PERFORMANCE STOCK UNITS

TABLE OF CONTENTS FOR AWARD CERTIFICATE



1.	Performance Stock Units Generally.	3
2.	Performance Measures.	3
3.	Vesting Schedule; Conversion; Retention Requirement.	3
4.	Special Provisions for Certain “Specified Employees”.	4
5.	Dividend Equivalent Payments.	4
6.	Death; Disability; Retirement.	5
7.	Reduction in Force.	6
8.	Change in Control.	6
9.	Termination of Employment.	7
10.	Forfeiture/Cancellation/Clawback of PSU Awards Under Certain Circumstances.	7
11.	Tax and Other Withholding Obligations.	9
12.	Satisfaction of Obligations.	10
13.	Nontransferability.	11
14.	Designation of a Beneficiary.	11
15.	Ownership and Possession.	11
16.	Securities Law Matters.	12
17.	Compliance with Laws and Regulations.	12
18.	No Entitlements.	12
19.	Consents.	13
20.	Electronic Delivery and Consent to Electronic Participation.	14
21.	Award Modification.	14
22.	Severability.	14
23.	Successors.	14
24.	Governing Law.	14
25.	Section 409A.	15
26	Defined Terms.	15

DISCOVER FINANCIAL SERVICES

AMENDED AND RESTATED 2014 OMNIBUS INCENTIVE PLAN

2017 AWARD CERTIFICATE FOR PERFORMANCE STOCK UNITS

Discover has awarded to you performance stock units (“PSUs”) as part of your discretionary long-term incentive compensation for services provided to the Company during the Performance Period and through the Scheduled Vesting Date. This Award Certificate sets forth the general terms and conditions of your performance stock unit award (your “PSU Award”). Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 26 below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 26 below have the meanings set forth in the Plan.

The number of PSUs in your Target Award has been communicated to you separately. If you are employed outside the United States, please reference the “ International Supplement ” included herein as Appendix C , which contains supplemental terms and conditions for your PSU Award. This Award Certificate should be read in conjunction with the International Supplement, if applicable, in order for you to understand the terms and conditions of your PSU Award.

Your PSU Award is made pursuant to the Plan. References to “performance stock units” or “PSUs” in this Award Certificate mean only those PSUs included in your PSU Award, and the terms and conditions herein apply only to such PSU Award. If you receive any other award under the Plan or another equity compensation plan, it will be governed by the terms and conditions of the applicable award documentation, which may be different from those herein.

The purpose of this PSU Award is, among other things, to align your interests with the interests of Discover and its stockholders and to reward you for your continued Employment with the Company in the future and your compliance with the Company’s policies (including, without limitation, the Company’s risk policies and Code of Conduct), to protect the Company’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, the number of PSUs that you earn will depend on the Company’s performance during the Performance Period. Moreover, you will earn PSUs included in your PSU Award only if you (1) remain in continuous Employment through the Scheduled Vesting Date (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 10 below, and (3) satisfy obligations you owe to the Company as set forth in Section 12 below. As the Company deems appropriate and in its sole discretion, the Company will require you to provide a written certification or other evidence, from time to time, to confirm that none of the circumstances described in Section 10 below exist or have occurred, including upon a termination of Employment and/or during a specified period of time prior to the Scheduled Vesting Date. If you fail to timely provide any required certification or other evidence, the Company will cancel your PSU Award. It is your responsibility to provide the Human Resources Department with your up-to-date contact information.


1.	Performance Stock Units Generally .

Each PSU is a Restricted Stock Unit that is subject to additional conditions as described herein and corresponds to one share of Discover common stock. A PSU constitutes a contingent and unsecured promise by Discover to pay you one share of Discover common stock on the conversion date for the PSU. As the holder of PSUs, you have only the rights of a general unsecured creditor of Discover. You will not be a stockholder with respect to the shares of Discover common stock corresponding to your PSUs unless and until your PSUs convert to shares of Discover common stock.


2.	Performance Measures .

The portion, if any, of your Target Award that you can earn will be based on Discover EPS performance as set forth in Appendix A and the other terms and conditions of this Award Certificate, and may vary from zero to 1.5 times the number of PSUs included in your Target Award.


3.	Vesting Schedule; Conversion; Retention Requirement .

(a) Vesting Schedule. Except as otherwise provided in this Award Certificate, you will vest in any PSUs that are earned in accordance with Section 2 on the Scheduled Vesting Date, so long as you continue to provide future services to the Company by remaining in continuous Employment through the Scheduled Vesting Date. The special vesting terms set forth in Sections 6, 7, and 8 of this Award Certificate apply (1) if your Employment terminates by reason of your death, Disability, or Retirement, (2) if the Company terminates your Employment in an involuntary termination under the circumstances described in Section 7, or (3) upon a Change in Control. Vested PSUs are subject to the tax withholding provisions set forth in Section 11 of this Award Certificate.

(b) Conversion.

(1) Except as otherwise provided in this Award Certificate, your PSUs, to the extent earned and vested, will convert to shares of Discover common stock (rounded to the nearest whole share) on the Scheduled Vesting Date. The special conversion provisions set forth in Sections 6, 7, and 8 of this Award Certificate apply (i) if your Employment terminates by reason of your death, Disability, or Retirement, (ii) if the Company terminates your Employment in an involuntary termination under the circumstances described in Section 7, or (iii) upon a Change in Control.

(2) The shares of Discover common stock delivered upon conversion of PSUs shall be delivered as soon as administratively practicable after the Scheduled Vesting Date and shall not be subject to any transfer restrictions, other than those that may arise under the securities laws, or the Company’s policies, including, without limitation, its stock ownership guidelines and/or Section 12 below, but will be subject to forfeiture, cancellation, or clawback as set forth in Section 10 below.

(c) Accelerated Conversion. The Committee, in its sole discretion, may determine that any PSUs may be converted to shares of Discover common stock or any dividend

equivalents may be paid prior to the Scheduled Vesting Date subject to compliance with all Legal Requirements. In such case the Committee may determine in its sole discretion that the shares or dividend equivalents may not be transferable and may remain subject to applicable vesting, retention, forfeiture, cancellation, clawback and withholding provisions.

(d) Rule of Construction for Timing of Conversion. Whenever this Award Certificate provides for your PSUs to convert to shares of Discover common stock, or your dividend equivalents to be paid, on the Scheduled Vesting Date or upon a different specified event or date, such conversion or payment will be considered to have been timely made, and neither you nor any of your beneficiaries or your estate shall have any claim against the Company for damages based on a delay in conversion of your PSUs (or delivery of shares of Discover common stock following conversion) or payment of your dividend equivalents, as applicable, 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 or payment, as applicable, 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. Similarly, neither you nor any of your beneficiaries or your estate shall have any claim against the Company for damages, and the Company shall have no liability to you (or to any of your beneficiaries or your estate), based on any acceleration of the conversion of your PSUs or payment of your dividend equivalents pursuant to Section 3(c), as applicable.

(e) Retention Requirement. Notwithstanding anything in the Plan or any other provisions of this Award Certificate to the contrary, following delivery thereof, you will be required to hold (and not transfer or otherwise dispose of) one-hundred percent (100%) of the PSUs that vest and convert to shares of Discover common stock, net of taxes ( “ Net Shares ”), until one (1) year after the Scheduled Vesting Date or such other specified event or date which accelerates the conversion of such Net Shares; provided , that this requirement shall lapse in the event of your death, Disability or a Change in Control.


4.	Special Provisions for Certain “Specified Employees” .

Notwithstanding the other provisions of this Award Certificate, to the extent necessary to comply with Section 409A of the Internal Revenue Code, if Discover reasonably considers you to be one of its “specified employees” as defined in Section 409A of the Internal Revenue Code at the time of the termination of your Employment, any PSUs to which you are entitled under this Award Certificate that constitute a deferred compensation arrangement under Section 409A of the Internal Revenue Code and that are payable upon termination of your Employment will not convert to Discover common stock until the date that is six (6) months after the termination of your Employment (or the date of your death, if such event occurs earlier).


5.	Dividend Equivalent Payments .

If Discover pays a regular or ordinary dividend on its common stock, you will be credited with cash dividend equivalents with respect to your PSU Award in an amount equal to the amount

of the dividend that would have been paid on a number of shares of Discover common stock corresponding to your Target Award. Discover will credit the dividend equivalents as soon as is administratively practicable after it pays the corresponding dividend on its common stock. Your dividend equivalents will vest and be paid at the same time as, and subject to the same vesting and cancellation provisions set forth in this Award Certificate with respect to, your PSUs (provided that, subject to Section3(d), the dividend equivalents may be paid following the date on which the PSUs convert to shares of Discover common stock as soon as administratively practicable). The amount of dividend equivalents paid to you will be based on the number of PSUs that actually convert to shares of Discover common stock (and will be paid only if your PSUs convert to shares of Discover common stock), provided that such dividend equivalents will be reduced to the extent that application of the performance measures set forth in Appendix A results in your earning less than the Target Award and will be increased to the extent that application of those performance measures results in your earning more than the Target Award. (For example, if you earn eighty percent (80%) of the Target Award based on the performance measures, twenty percent (20%) of the dividend equivalents credited in respect of regular or ordinary dividends will be canceled.) The decision to pay a dividend and, if so, the amount of any such dividend, is determined by Discover in its sole discretion. No dividend equivalents will be paid to you on any canceled PSUs. Discover will decide on the form of payment and may pay dividend equivalents in shares of Discover common stock, in cash or in a combination thereof. Because dividend equivalent payments are considered part of your compensation for income tax purposes, they will be subject to applicable tax and other withholding obligations, as summarized in Section 11.

(a) Pro Rata Reduction. If your PSU Award is subject to a pro rata reduction upon the termination of your Employment (as described below) and your PSU Award is to be paid on a date following such termination, the amount of dividend equivalents credited to you in respect of regular or ordinary dividends paid on Discover common stock following your termination shall continue to be based on the number of shares of Discover common stock corresponding to your Target Award, and the amount paid to you (subject to the other terms and conditions of this Award Certificate) shall be the amount calculated as provided above in this Section5, in each case multiplied by the Pro Ration Fraction. If your PSU Award is subject to a pro rata reduction upon the termination of your Employment and is paid out on such termination (as described below), the amount of dividend equivalents paid to you shall be calculated based on the number of shares of Discover common stock corresponding to your Target Award (adjusted, if applicable, as provided in this Section5) multiplied by the Pro Ration Fraction.

(b) Effect of Cancellation. Notwithstanding the foregoing, in the event your PSU Award is canceled in full on or before the Scheduled Vesting Date, all dividend equivalents credited to you in respect of regular or ordinary dividends will be canceled.


6.	Death; Disability; Retirement .

The following special vesting and payment terms apply to your PSUs:

(a) Death. If you die, you will vest on the Scheduled Vesting Date in the number of shares of Discover common stock as if you had you remained in Employment through the Scheduled Vesting Date, subject to the performance measures described in Appendix A , provided

that your beneficiary or estate promptly notifies the Company of your death. Any such shares of Discover common stock will convert to shares of Discover common stock on the Scheduled Vesting Date and will be delivered to the beneficiary you have designated pursuant to Section13 or the legal representative of your estate, as applicable. After your death, the cancellation provisions set forth in Section10(a) will no longer apply.

(b) Disability. If your Employment terminates due to Disability, you will vest on the Scheduled Vesting Date in the number of shares of Discover common stock as if you had you remained in Employment through the Scheduled Vesting Date, subject to the performance measures described in Appendix A . On your Scheduled Vesting Date, subject to Section 4 above, any transfer restrictions and the cancellation provisions described herein, any such shares of Discover common stock will convert to shares of Discover common stock and be delivered to you.

(c) Retirement. If your Employment terminates due to Retirement, the number of PSUs that will vest on the Scheduled Vesting Date will be determined by multiplying (1) the number of shares of Discover common stock that would have been delivered to you, based on the performance measures described in Appendix A had you remained in Employment through the Scheduled Vesting Date, by (2) the Pro Ration Fraction. On the Scheduled Vesting Date, subject to Section 4 above, any transfer restrictions and the cancellation provisions described herein, your PSUs will convert to shares of Discover common stock and be delivered to you.


7.	Reduction in Force.

If the Company terminates your Employment due to a reduction in force or an elimination of your position, each as determined by the Company in its sole discretion, the number of PSUs that will vest on the Scheduled Vesting Date will be determined by multiplying (a) the number of shares of Discover common stock that would have been delivered to you, based on the performance measures described in Appendix A had you remained in Employment through the Scheduled Vesting Date, by (b) the Pro Ration Fraction. These shares will convert to shares of Discover common stock and be delivered to you on the later of the Scheduled Vesting Date or the date that is 60 days following your termination of Employment, subject to Section 4 above, provided that you sign (and do not revoke) an agreement and release of claims satisfactory to the Company.


8.	Change in Control .

(a) During First Year of Performance Period. If, during the first year of the Performance Period, a Change in Control occurs, then your Target Award (including the value of any dividend equivalents theretofore credited to you) will be converted to a cash award valued as of the date of the Change in Control event as determined by the Company using the EPS Target multiplier set forth in Appendix A , the use of which shall be deemed to be a valuation using the target level . Any such cash award will be paid to you (subject to Section 4 above and the cancellation provisions set forth herein) on the earlier of (1) the Scheduled Vesting Date or (2) the date when the Company terminates your Employment other than for Cause, or if you terminate your Employment for Good Reason. Notwithstanding the foregoing, if, following the Change in Control event but prior to the delivery of such cash award, you voluntarily terminate your Employment other than for Good Reason or you are terminated for Cause, you will forfeit such cash award.

(b) After First Year of Performance Period. If, after the first year of the Performance Period, a Change in Control occurs, then your Target Award (including the value of any dividend equivalents theretofore credited to you) will be converted to a cash award valued as of date of the Change in Control event as determined by the Company based on the performance measures in Appendix A but applied as though the Performance Period ended with the last quarter of Discover ending simultaneously with or before the effective date of the Change in Control event, the use of which shall be deemed to be a valuation using the target level . Any such cash award will be paid to you (subject to Section 4 above and the cancellation provisions set forth herein) on the earlier of (1) the Scheduled Vesting Date or (2) the date when the Company terminates your Employment other than for Cause, or if you terminate your Employment for Good Reason. Notwithstanding the foregoing, if, following the Change in Control event but prior to the delivery of such cash award, you voluntarily terminate your Employment other than for Good Reason or you are terminated for Cause, you will forfeit such cash award.


9.	Termination of Employment .

(a) Cancellation of Unvested PSU Awards. Your unvested PSUs, including any dividend equivalents theretofore credited to you, will be canceled if your Employment terminates for any reason other than under the circumstances set forth in this Award Certificate for death, Disability, and Retirement described in Section 6, for an involuntary termination by the Company described in Section 7, or in connection with a Change in Control as provided in Section 8.

(b) General Treatment of Vested PSU Awards. Except as otherwise provided in this Award Certificate, your vested PSUs will convert to shares of Discover common stock on the Scheduled Vesting Date. The tax and other withholding provisions as set forth in Section 11 of this Award Certificate will continue to apply until the date the shares of Discover common stock are delivered.


10.	Forfeiture/Cancellation/Clawback of PSU Awards Under Certain Circumstances.

The forfeiture, cancellation, and/or Clawback circumstances and events set forth in this Section 10 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), to protect the Company’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 10 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 10 no longer apply).

(a) Breach of Restrictive Covenants. Notwithstanding Discover’s performance based on the measures set forth in Appendix A or your satisfaction of the vesting conditions of this Award Certificate, PSUs (and any dividend equivalents credited thereon) are not earned until the Scheduled Vesting Date and, unless prohibited by applicable law, will be canceled prior to the Scheduled Vesting Date in any of the circumstances set forth below. Although you will become the beneficial owner of shares of Discover common stock following conversion of your

PSUs, the Company may, upon notice, issue a transfer restriction with respect to your shares of Discover common stock following conversion of your PSUs (and any dividend equivalents credited thereon) pending any investigation or other review that impacts the determination as to whether the PSUs (and any dividend equivalents credited thereon) are cancellable under the circumstances set forth below. The shares of Discover common stock underlying such PSUs (and any dividend equivalents credited thereon) shall be forfeited in the event the Company determines that the PSUs were cancellable under the circumstances set forth below . Notwithstanding any provision of this Award Certificate to the contrary, 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 Competitive Activity; (ii) engage in Wrongful Solicitation or (iii) breach your obligations to the Company under a confidentiality, intellectual property or other restrictive covenant, you shall be required to:

(b) Clawback.

(1) 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 PSUs were granted, was based on Discover’s material noncompliance with any financial reporting requirement under the securities laws which requires Discover to file a restatement of its financial statements, you will forfeit the number of PSUs that were granted during the three-year period preceding the date on which Discover is required to prepare an accounting restatement, less the number of PSUs that would have been granted had your PSUs been granted based on compliance with any such financial reporting requirement under the securities laws (such number of PSUs, the “ Clawback PSUs ”, 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 11).

(2) In the event and to the extent the Committee reasonably determines that the performance certified by the Committee, and on the basis of which PSUs were converted to shares of Discover common stock, was based on Discover’s material noncompliance with any financial reporting requirement under the securities laws which requires Discover to file a restatement of its financial statements, you will be obligated to repay to the Company: (i) the number of shares that were delivered upon conversion of your PSUs during the three-year period preceding the date on which Discover is required to prepare an accounting restatement, less the number of shares of Discover common stock

that would have been delivered had your PSUs converted to shares of Discover common stock based on compliance with any such financial reporting requirement under the securities laws (such number of shares determined in each case by the Committee in its sole discretion and before satisfaction of tax or other withholding obligations pursuant to Section 11) (the “ Clawback Shares ”), net of taxes (or, in the alternative, an amount equal to the number of Clawback Shares net of taxes so transferred multiplied by the fair market value, determined using a valuation methodology established by the Company, of Discover common stock on the date your PSUs were scheduled to convert or otherwise became taxable, as applicable); plus (ii) any dividend equivalents, net of taxes, that were paid on the Clawback Shares when your PSUs converted to shares of Discover common stock.

(c) Risk Review. No PSUs will convert to shares of Discover common stock until (1) the Committee certifies the extent to which the performance criteria set forth in Appendix A have been satisfied, and (2) the Chief Human Resources Officer receives confirmation from the Chief Risk Officer that a review has been completed by the Chief Risk Officer to determine whether you engaged in any willful or reckless violation of the Company’s risk policies. If the Chief Risk Officer finds any such violation or breach, then the Company may determine that all or a portion of your PSUs will be forfeited. Additionally, if you are a Covered Employee, the Chief Risk Officer will conduct Company and / or Business Unit risk reviews as well as evaluate your individual risk goals. Based on this assessment, the Company may determine that all or a portion of your PSUs will be forfeited.

(d) Authorization. You authorize the Company to deduct any amount or amounts owed by you pursuant to this Section 10 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.


11.	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 PSUs or upon any taxable event by paying cash or by having Discover withhold shares of Discover common stock or by tendering shares of Discover common stock, in each case in an amount sufficient to satisfy the tax or other withholding obligations. Shares of Discover common stock withheld or tendered will be valued using the fair market value of Discover common stock on the date the shares of Discover common stock are scheduled to convert, or otherwise become taxable, as applicable, using a valuation methodology established by Discover. In order to comply with applicable accounting standards or the Company’s policies in effect from time to time, Discover may limit the amount of shares of Discover common stock that you may have withheld or that you may tender.


12.	Satisfaction of Obligations .

Notwithstanding any other provision of this Award Certificate, Discover may, in its sole discretion, take various actions affecting your PSUs in order to collect amounts sufficient to satisfy any obligation that you owe to the Company and any tax or other withholding obligations. Discover’s determination of the amount that you owe the Company shall be conclusive. The fair market value of Discover common stock for purposes of the foregoing provisions shall be determined using a valuation methodology established by Discover. The actions that may be taken by Discover pursuant to this Section 12 include, but are not limited to, the following:

(a) Withholding of Shares of Discover common stock. Upon conversion of PSUs, including any accelerated conversion pursuant to Sections 6, 7, or 8 above, or, if later, upon delivery of the shares of Discover common stock, Discover may withhold a number of shares of Discover common stock 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 of Discover common stock 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 Discover common stock on the date the shares of Discover common stock are scheduled to convert, or otherwise become taxable, as applicable. To the extent that the Company retains any shares of Discover common stock or reduces the number of PSUs to cover the withholding obligations, it will do so at the minimum statutory rate. Should the Company withhold in excess of the actual tax withholding obligation, the Company will refund the excess amount to you within a reasonable period and without any interest.

(b) Withholding of Other Compensation. Discover may withhold the payment of dividend equivalents on your PSUs 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.

(c) 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 the Vesting Date. 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.


13.	Nontransferability .

You may not sell, pledge, hypothecate, assign or otherwise transfer your PSUs, other than as provided in Section 14 (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. This prohibition includes any assignment or other transfer that purports to occur by operation of law or otherwise. During your lifetime, payments relating to the PSUs will be made only to you.


14.	Designation of a Beneficiary .

You may make a written designation of beneficiary or beneficiaries to receive all or part of the shares of Discover common stock and any dividend equivalents credited to you pursuant to Section 5 hereof to be paid under this Award Certificate in the event of your death. To make a beneficiary designation, you must complete and file the form attached hereto as Appendix B with the Human Resources Department. Any shares of Discover common stock that become payable upon your death, and as to which a designation of beneficiary is not in effect, will be distributed to your estate. 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 PSUs granted pursuant to this PSU Award. You may replace or revoke your beneficiary designation at any time. If there is any question as to the legal right of any beneficiary to receive shares of Discover common stock under this PSU Award, Discover may determine in its sole discretion to deliver the shares of Discover common stock in question to your estate. Discover’s determination shall be binding and conclusive on all persons and it will have no further liability to anyone with respect to such shares of Discover common stock.


15.	Ownership and Possession .

(a) Generally. Generally, you will not have any rights as a stockholder in the shares of Discover common stock corresponding to your PSUs prior to conversion of your PSUs. Prior to conversion of your PSUs, however, you will receive dividend equivalent credits, as set forth in Section 5 of this Award Certificate. To the extent necessary or advisable to comply with Section 409A of the Internal Revenue Code, with respect to any provision of this Award Certificate that provides for vested PSUs to convert to shares of Discover common stock on or as soon as administratively practicable after a specified event or date, such conversion will be made by the later of the end of the calendar year in which the specified event or date occurs or the 15 ^th day of the third calendar month following the specified event or date.

(b) Following Conversion. Subject to the terms and conditions of this Award Certificate, following conversion of your PSUs you will be the beneficial owner of the Net Shares of Discover common stock issued to you, and you will be entitled to all rights of ownership, including voting rights and the right to receive cash or stock dividends or other distributions paid on the shares of Discover common stock.


16.	Securities Law Matters .

Shares of Discover common stock issued upon conversion of your PSUs may be subject to restrictions on transfer by virtue of the Securities Act of 1933, as amended. 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 Discover common stock will only be maintained in book-entry form, you will not receive a stock certificate representing your interest in such shares.


17.	Compliance with Laws and Regulations .

Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of shares of Discover common stock issued upon conversion of your PSUs (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.


18.	No Entitlements .

(a) No Right to Continued Employment. This PSU 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. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your Employment by the Company or a Related Employer, or as giving you any right to continue in the employ of the Company or a Related Employer, during any period (including without limitation the period between the Date of the Award and the Scheduled Vesting Date or any portion of this period), nor shall they be construed as giving you any right to be reemployed by the Company or a Related Employer following any termination of Employment.

(b) No Right to Future Awards. This PSU Award, and all other awards of PSUs and other equity-based awards, are discretionary. This PSU Award does not confer on you any right or entitlement to receive another award of PSUs, 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. Discover has made this PSU Award to you in its sole discretion. This PSU Award 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 PSU 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 by the Company (for any reason whatsoever and whether or not in breach of local labor laws) and you irrevocably release the Company and the 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 Agreement, 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); the Company 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 Agreement 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; Plan 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. In the event of any conflict between the terms set forth in this Award Certificate and the terms of the Plan, the latter shall control.


19.	Consents .

Your PSU Award is conditioned upon the Company’s 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 PSU 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.


20.	Electronic Delivery and Consent to Electronic Participation.

The Company may, in its sole discretion, decide to deliver any documents related to the PSU Award and participation in the Plan or future PSU 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 PSU Awards and the execution of the PSU agreements through electronic signature.


21.	Award Modification .

The Committee reserves the right to modify or amend unilaterally the terms and conditions of your PSUs, 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 PSUs in a manner that would materially impair your rights in your PSUs without your consent; provided , however , that the Committee may, without your consent, amend or modify your PSUs 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 PSUs 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. Discover will notify you of any amendment of your PSUs 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.


22.	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 PSU 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 PSU Award.


23.	Successors .


24.	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 PSU Award to the substantive law of another jurisdiction.


25.	Section 409A.

This Award Certificate and your PSU Award (including all adjustments, substitutions, dividends, valuations and distributions, and deferrals hereunder) are intended to be exempt from or comply with Section 409A of the Internal Revenue Code pursuant to the guidance issued thereunder by the U.S. Internal Revenue Service in all respects and shall be administered in a manner consistent with such intent. If an unintentional operational failure occurs with respect to requirements under Section 409Aof the Internal Revenue Code, you or your beneficiary shall fully cooperate with Discover to correct the failure, to the extent possible, in accordance with any correction procedure established by the U.S. Internal Revenue Service. Any reference herein to Section 409Aof the Internal Revenue Code shall be interpreted to refer to any successor section of the Internal Revenue Code or other guidance issued by the U.S. Internal Revenue Service, or other agency with jurisdiction, as appropriate. To the extent that full or partial payment of your PSU Award that constitutes a deferral of compensation subject to Section 409Aof the Internal Revenue Code is made upon a termination of Employment, a termination of Employment shall be deemed to occur only if it is a “separation from service” for purposes of Section 409Aof the Internal Revenue Code, and references in this Award Certificate to “termination,” “termination of Employment,” or like terms shall mean a “separation from service.”


26.	Defined Terms .

For purposes of this Award Certificate, the following terms shall have the meanings set forth below:

(a) “ Board ” means the Board of Directors of Discover.

(b) “Cause” means:

(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.

(1) except as otherwise provided in clause (3) below, any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”), as such term is modified in Sections 13(d) and 14(d) of the Exchange Act), other than (i) any employee plan established by the Company or any of its Subsidiaries, (ii) any group of employees holding shares subject to agreements relating to the voting of such shares, (iii) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (iv) an underwriter temporarily holding securities pursuant to an offering of such securities, or (v) a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, either (x) acquires ownership of stock of the Company that, together with stock held by such person (not including the stock owned by such person any stock acquired directly from the Company other than in connection with the acquisition by the Company of a business), constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company (but only if such person did not own more than 50% of the total fair market value of the stock of the Company prior to the acquisition of additional stock), or (y) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person) ownership of the stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company (but only if such person did not own 30% or more of the total voting power of the stock of the Company prior to the acquisition of additional stock and not including the stock owned by such person any stock acquired directly from the Company other than in connection with the acquisition by the Company of a business);

of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, at least fifty percent (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 (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (determined pursuant to clause (1) 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 thirty percent (30%) or more of the total voting power of the stock of the Company (but only if such person did not own 30% or more of the total voting power of the stock of the Company prior to the acquisition of additional securities);

(4) the complete liquidation of the Company or 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 (i) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock, (ii) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, either by the Company or by a person or more than one person acting as a group, that owns fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company, or (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company; provided, however, that a Change in Control pursuant to this clause (4) shall not be deemed to have occurred unless a person (determined pursuant to clause (1) above) or persons acting as a group acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions.

(d) “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.

(e) “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.

(f) “Committee” means the Compensation and Leadership Development Committee of the Board, any successor committee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.

(g) “ Company ” means Discover and all of its Subsidiaries.

(h) “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.

(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 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.

(j) “Covered Employee” means an employee who, as of the Date of the Award, has been identified as a covered employee by Human Resources.

(k) “ Date of the Award ” means the date set forth in Appendix A .

(l) “ Disability ” means a “permanent and total disability,” as defined in Section 22(e)(3) of the Internal Revenue Code.

(m) “Discover” means Discover Financial Services, a Delaware corporation.

(n) “Discover EPS” means sum of EPS for each fiscal year within the Performance Period.

(o) “Employed” and “Employment” refer to employment with the Company and/or Related Employment.

(p) “ EPS ” means fully-diluted earnings per share as defined by U.S. GAAP, excluding unusual or non-recurring events identified in the Plan and not reflected in business plan assumptions, as determined by the Committee.

(q) “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:

(2) a material diminution in the authority, duties, or responsibilities of the supervisor to whom you are required to report;

(4) A material diminution of the budget over which you have authority;

(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.

(r) “ Internal Revenue Code ” means the United States Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder.

(s) “Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance or other legal requirement (including any foreign legal requirements).

(t) “Performance Period” means the period set forth in Appendix A .

(u) “ Plan ” means the Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan, as in effect from time to time.

(v) “Pro Ration Fraction” means a fraction, not to exceed 1.0, the numerator of which is the number of days starting with and inclusive of the first day of the Performance Period and ending on the effective date of your termination of Employment and the denominator of which is the number of days in the first calendar year of the Performance Period.

(w) “ 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; and, 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.

(x) “ 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) your combined age and years of service is at least 65 years.

(y) “ Scheduled Vesting Date ” means the Scheduled Vesting Date set forth in Appendix A .

(z) “Subsidiary” means (i) a corporation or other entity with respect to which Discover, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation’s board of directors or analogous governing body, or (ii) any other corporation or other entity in which Discover, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan.

(aa) “ Target Award ” means the number of PSUs that has been communicated to you separately and that will be earned, subject to the other terms and conditions of this Award Certificate, if the Discover EPS Target is achieved.

(bb) “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

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/ D OUG R OSE

Doug Rose

Senior Vice President, Chief HR Officer

APPENDIX A

Summary of Award

Date of Award : February 22, 2017

Scheduled Vesting Date : February 1, 2020

Performance Measures :

Your Target Award will be earned based on the Discover EPS. The number of PSUs that you earn based on the Discover EPS (subject to vesting and the other terms and conditions of your PSU Award) will be determined by multiplying the number of PSUs in your Target Award by a multiplier determined as follows:



Discover EPS Performance*	Target Award Multiplier
Lower than $9.97	0
$9.97 (threshold)	0
$13.95	0.5
$19.93 (target)	1.0
$22.92 (maximum)	1.5
Greater than $22.92	1.5

* If the Discover EPS is between the EPS Performance levels above, the Target Award Multiplier will be interpolated on a straight-line basis.

Performance Period : January 1, 2017 to December 31, 2019

APPENDIX B

Designation of Beneficiary(ies) Under

Discover Equity Compensation Plans

I hereby designate the following beneficiary(ies) to receive any survivor benefits with respect to all my equity awards:



Primary Beneficiary(ies)		Relationship	Percentage
(1	)
(2	)
(3	)
(4	)

Contingent Beneficiary(ies)		Relationship	Percentage
(1	)
(2	)
(3	)
(4	)

Address(es) of Primary Beneficiary(ies):

(1)

(2)

(3)

(4)

Address(es) of Contingent Beneficiary(ies):

(1)

(2)

(3)

(4)

Name: (please print) Date

Signature

Please sign and email this form to ExecutiveCompensation@discover.com , or return via mail to:

Discover Financial Services

Attn: Human Resources Executive Compensation

2500 Lake Cook Road

Riverwoods, IL 60015

APPENDIX C

Discover Financial Services

International Supplement

This International Supplement to the Award Certificate for Performance Stock Units ("Award Certificate") contains supplemental terms and conditions for the Performance Stock Unit 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.

Capitalized terms that are used without definition in this International Supplement have the meanings assigned in the Award Certificate.

Employees in the United Kingdom.

All Employees Located Outside 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.

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 PSU Award. You are encouraged to consult your advisors to ascertain whether any restrictions or obligations apply to you.

The Company recommends that you seek advice of your tax advisors regarding the tax treatment of your awards.

Exhibit 12.1

DISCOVER FINANCIAL SERVICES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

(dollars in millions)



	For the Three Months Ended March 31,				For the Calendar Years Ended December 31,								For the Fiscal Year Ended November 30, 2012		For the One Month Ended December 31, 2012
	2017		2016		2016		2015		2014		2013		For the Fiscal Year Ended November 30, 2012		For the One Month Ended December 31, 2012
Earnings:
Income before income tax expense	$	868	$	914	$	3,656	$	3,612	$	3,694	$	3,944	$	3,753	$	274
Losses from unconsolidated investees	14		13		58		50		29		18		12		1
Total earnings	$	882	$	927	$	3,714	$	3,662	$	3,723	$	3,962	$	3,765	$	275
Fixed charges: ⁽¹⁾
Total interest expense	$	386	$	334	$	1,398	$	1,263	$	1,134	$	1,146	$	1,331	$	103
Interest factor in rents	1		1		5		6		5		5		6		1
Total fixed charges	$	387	$	335	$	1,403	$	1,269	$	1,139	$	1,151	$	1,337	$	104
Combined fixed charges and preferred stock dividends: ⁽¹⁾
Total interest expense	$	386	$	334	$	1,398	$	1,263	$	1,134	$	1,146	$	1,331	$	103
Interest factor in rents	1		1		5		6		5		5		6		1
Preferred stock dividends	14		15		57		59		60		60		—		—
Total combined fixed charges and preferred stock dividends	$	401	$	350	$	1,460	$	1,328	$	1,199	$	1,211	$	1,337	$	104
Earnings before income tax expense and fixed charges	$	1,269	$	1,262	$	5,117	$	4,931	$	4,862	$	5,113	$	5,102	$	379
Earnings before income tax expense and combined fixed charges and preferred stock dividends	$	1,283	$	1,277	$	5,174	$	4,990	$	4,922	$	5,173	$	5,102	$	379

Ratio of earnings to fixed charges	3.3		3.8		3.6		3.9		4.3		4.4		3.8		3.6
Ratio of earnings to combined fixed charges and preferred stock dividends	3.2		3.6		3.5		3.8		4.1		4.3		3.8		3.6

(1)

Fixed charges are the sum of interest expensed, amortized premiums, discounts and capitalized expenses related to indebtedness, an estimate of interest within rental expense. Combined fixed charges and preferred stock requirements are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness, an estimate of interest within rental expense and preference security dividend requirements.

Exhibit 31.1

CERTIFICATION

I, David W. Nelms, certify that:


1.	I have reviewed this Quarterly Report on Form 10-Q 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: May 2, 2017



/s/ DAVID W. NELMS
David W. Nelms
Chairman of the Board and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, R. Mark Graf, certify that:


1.	I have reviewed this Quarterly Report on Form 10-Q 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: May 2, 2017



/s/ R. MARK GRAF
R. Mark Graf
Executive Vice President and 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 Quarterly Report of Discover Financial Services (the “Company”) on Form 10-Q for the period ended March 31, 2017 , as filed with the Securities and Exchange Commission (the “Report”), each of David W. Nelms, Chairman of the Board and Chief Executive Officer of the Company, and R. Mark Graf, 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: May 2, 2017



/s/ DAVID W. NELMS
David W. Nelms
Chairman of the Board and Chief Executive Officer

Date: May 2, 2017



/s/ R. MARK GRAF
R. Mark Graf
Executive Vice President and Chief Financial Officer