2012 Annual Report 2500 Lake Cook Road • Riverwoods, Illinois 60015 • discoverfinancial.com the power of a brand OUR VISION OUR MISSION OUR VALUES To be the most To help people Doing the right thing rewarding relationship spend smarter, Innovation consumers and manage debt better Simplicity businesses have with a and save more so Collaboration financial services company. they achieve a Openness brighter financial future. Volunteerism Enthusiasm Respect 2 012 Annual Report RRD5947_Cov.indd 1 2/4/13 4:02 PM 2012 Annual Report BOARD OF DIRECTORS EXECUTIVE OFFICERS PRIMARY INVESTOR CONTACT Jeffrey S. Aronin David W. Nelms Investor Relations Chairman and CEO Chairman and Chief Executive Officer Phone: 1• 224 • 405 • 4555 Paragon Pharmaceuticals [email protected] Roger C. Hochschild Mary K. Bush President and Chief Operating Officer President, Bush International R. Mark Graf Gregory C. Case Executive Vice President and TRANSFER AGENT President and CEO, Aon Corporation Chief Financial Officer Robert M. Devlin Kathryn McNamara Corley Computershare Chairman, Curragh Capital Partners Executive Vice President 480 Washington Boulevard General Counsel and Secretary Jersey City, NJ 07310-1900 Cynthia A. Glassman Phone: 1• 866 • 258 • 6590 Former Under Secretary for Economic Carlos Minetti Corporate Web site: Affairs, U.S. Department of Commerce Executive Vice President www.cpushareownerservices.com President–Consumer Banking Richard H. Lenny and Operations Operating Partner Friedman Fleischer & Lowe LLC Diane E. Offereins Executive Vice President ANNUAL SHAREHOLders’ Thomas G. Maheras President–Payment Services MEETING Founding Partner Tegean Capital Management, LLC James V. Panzarino Executive Vice President T he 2013 Annual Meeting Michael H. Moskow Chief Credit Risk Officer of Shareholders Retired President and CEO of Discover Financial Services Federal Reserve Bank of Chicago Glenn Schneider will be held on Wednesday, for itself Senior Vice President Discover made a name April 17, 2013, at 9:00 AM CST David W. Nelms Chief Information Officer by consistently exceeding customer at the company’s headquarters Chairman and CEO at 2500 Lake Cook Road, expectations in the credit card industry. Discover Financial Services Harit Talwar Executive Vice President Riverwoods, IL 60015. We have built on our brand to expand into E. Follin Smith President–U.S. Cards Retired Executive Vice President private student loans, personal loans, home CFO and CAO loans and deposit products. We have also Constellation Energy Group, Inc. expanded in the payments industry by Lawrence A. Weinbach Lead Director, Discover Financial Services partnering with innovative companies Chairman Great Western Products Holdings LLC and leading financial institutions around Managing Director Yankee Hill Capital Management LLC the world. As a result, we have produced record financial results, and we are positioning ourselves as the leading direct bank and payments partner. This Annual Report contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, which reflect management’s estimates, projections, expectations or beliefs at that time, and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of certain risks and uncertainties that may affect our future results, please see “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Business—Competition,” “Business—Supervision and Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the accompanying Annual Report on Form 10-K for the year ended November 30, 2012. 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 CheckingSM, Discover ® More® Card, Discover it TM, Discover ® MotivaSM Card, Discover® Open Road® Card, Discover® Network and Diners Club International.® All other trademarks, trade names and service marks included in this Annual Report are the property of their respective owners. ©2013 Discover Financial Services RRD5947_Cov.indd 2 2/7/13 11:54 AM The leading direct bank and payments partner DIRECT BANKING Discover is one of the largest direct banks in the United States, with $61 billion in loans and $105 billion in credit card sales volume. In addition to the company’s flagship credit card business, the Direct Banking segment includes personal loans, student loans, home loans, prepaid cards and deposit products. PAYMENT SERVICES The Payment Services segment consists of PULSE, one of the nation’s leading ATM/debit networks; Diners Club International, a global payments network; and our network partners business, which includes credit, debit and prepaid cards issued by third parties on the Discover Network. DISCOVER CARD DISCOVER NETWORK • $49.6 billion in loans • $117 billion volume • Leading cash rewards program • 30+ issuers • 1 in 4 U.S. households STUDENT LOANS • $7.7 billion in private student loans • Available at more than 1,200 colleges PULSE DEBIT NETWORK PERSONAL LOANS • $160 billion volume • $3.3 billion in loans • 4,100+ issuers • Consolidation and major purchases HOME LOANS • $2 billion of originations in 2012 DINERS CLUB • Conventional and FHA loans INTERNATIONAL • $29 billion volume SAVINGS DEPOSITS • 80 licensees • $27.9 billion direct-to-consumer deposits • 185+ countries/territories • Money market accounts, certificates of deposit and savings accounts Note: Balances are as of November 30, 2012. Volumes are for the fiscal year ended November 30, 2012. Certain historical numbers in this Annual Report are shown on an “as adjusted” basis where indicated. The as-adjusted basis assumes that the trusts used in our securitization activities were consolidated into our financial results and excludes from results income received in connection with the antitrust litigation settlement in 2009. For an explanation as to why management believes that the “as adjusted” numbers are useful to investors and for a reconciliation of these numbers, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliations of GAAP to Non-GAAP As-Adjusted Data” in the accompanying Annual Report on Form 10-K. RRD5947.indd 1 2/12/13 4:15 PM David Nelms Chairman and Chief Executive Officer To Our Shareholders 012 was one of the most successful years in Discover’s history. We achieved 2 record net income, organic growth in all of our lending products, record volume on our networks, and a very strong return on equity. We also established new partnerships in payments, diversified our direct banking product offerings, and demonstrated our commitment to returning excess capital to shareholders via stock repurchases and dividends. We are focused on being the leading direct bank and payments partner, and our results in 2012 are proof that our strategy and business model are working. Today, we are successful and profitable— and gaining market share. We are causing people to think about the Discover brand in new ways, which is leading to new opportunities for your company. Accordingly, we will continue to build on the Discover brand by further expanding our suite of direct banking products, and by partnering in payments with other innovative companies and financial institutions around the world. RRD5947.indd 2 2/4/13 3:49 PM “Our results in 2012 are proof that our strategy and business model are working.” 2012 Highlights included: customers want, but by also providing an outstanding customer experience. • Net income of $2.3 billion, or $4.46 per diluted share, and return on equity of 26% Our Discover card accomplishments • Ending loan growth of 6% in 2012 included: • Record low credit card delinquency and • Loan growth of 6% charge-off rates • Sales growth of 5% • Network volume of $306 billion, including $105 billion in Discover card • Net principal charge-off rate of 2.62% sales volume • Launch of the Discover it card • Strong expansion of merchant acceptance, domestically and around In 2012, we successfully grew credit the world card sales and loans in a challenging • Repurchase of 6% of our outstanding environment by increasing our wallet share common stock and a 40% higher quarterly dividend declared in with existing customers and achieving December 2012 double-digit new account growth. We increased customer engagement through We also leveraged the power of our our rewards program and marketing brand and the commitment of Discover initiatives, and by expanding our best-in- employees to invest for future growth as we class online and mobile capabilities. We launched Discover Home Loans, introduced also increased merchant participation in the Discover it card, and announced our rewards program, which provides payments relationships with PayPal and additional value for our cardmembers. with major financial institutions in Russia, We believe that our strong loan and China, India and elsewhere. sales growth demonstrate the effectiveness of our marketing programs, consumers’ Defining Direct Banking preference for cash rewards, and the Our credit card business is the success of our acceptance and awareness cornerstone of our direct banking initiatives. Our industry-leading prime operations, and the Discover brand is credit underwriting and loan management known for rewards, service and value