8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K

Current Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 23, 2011

DISCOVER FINANCIAL SERVICES

(Exact name of registrant as specified in its charter)

Commission File Number: 001-33378

Delaware	36-2517428
(State or other jurisdiction of incorporation)	(IRS Employer Identification No.)

2500 Lake Cook Road, Riverwoods, Illinois 60015

(Address of principal executive offices, including zip code)

(224) 405-0900

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02.           Results of Operations and Financial Condition.

On June 23, 2011, Discover Financial Services (the “Company”) released financial information with respect to the quarter ended May 31, 2011. A copy of the press release containing this information is attached hereto as Exhibit 99.1 and incorporated herein by reference. In addition, a copy of the Company's Financial Data Supplement for the quarter ended May 31, 2011 is attached hereto as Exhibit 99.2 and incorporated herein by reference.

The information contained in this Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 and Exhibit 99.2, is furnished pursuant to Item 2.02 of Form 8-K and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as shall be expressly stated by specific reference in such filing.

Item 9.01.           Financial Statements and Exhibits.

(d) Exhibits

Exhibit No.	Description
99.1	Press Release of the Company dated June 23, 2011 containing financial information for the quarter ended May 31, 2011
99.2	Financial Data Supplement of the Company for the quarter ended May 31, 2011

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	DISCOVER FINANCIAL SERVICES
Dated: June 23, 2011	By:	/s/ Simon Halfin
		Name:  Simon Halfin
		Title:  Vice President, Assistant General Counsel
		and Assistant Secretary

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release of the Company dated June 23, 2011 containing financial information for the quarter ended May 31, 2011
99.2	Financial Data Supplement of the Company for the quarter ended May 31, 2011

EX-99.1

Exhibit 99.1

DISCOVER FINANCIAL SERVICES REPORTS ALL-TIME RECORD QUARTERLY

NET INCOME OF $600 MILLION OR $1.09 PER DILUTED SHARE

Riverwoods, IL, June 23, 2011 – Discover Financial Services (NYSE: DFS) today reported net income of $600 million for the second quarter of 2011, as compared to $258 million for the second quarter of 2010.

Second Quarter Highlights

● Discover card sales volume showed strong year-over-year growth of 9% with $25 billion in volume in the quarter.

● Total loans increased 5% from the prior year to $52.5 billion, while credit card loans declined 1%.  Credit card loan balances grew $644 million, or 1% from the prior quarter.

● The delinquency rate for credit card loans over 30 days past due reached a 25-year record low of 2.79% and the credit card net charge-off rate declined to 5.01%.

● Payment Services continued to produce strong results with pretax income of $43 million, up 19% from the prior year. Transaction volume for the segment was $46 billion in the quarter, an increase of 24% from the prior year.

"Our all-time record results this quarter reflect the effectiveness of the Discover business model," said David Nelms, chairman and chief executive officer of Discover.  "Sustained improvements in credit performance have driven substantial releases of credit loss reserves, a portion of which has been reinvested for growth.  The benefits of these investments can be seen in both our Direct Banking and Payment Services results this quarter.  Our capital levels have also benefited from this outstanding performance, leading us to our recent announcement of a $1 billion share repurchase program.  While the U.S. economy has yet to show significant strengthening, we are confident that we can continue to achieve profitable growth in all of our lending businesses, complemented by the contribution from our payments activities."

Segment Results:

Direct Banking

Direct Banking pretax income of $883 million in the second quarter of 2011 was a $497 million improvement from the second quarter of 2010.  Pretax income included $25 million related to The Student Loan Corporation.

Total loans ended the quarter at $52.5 billion, up 5% compared to the prior year, reflecting a $3.7 billion increase in private student loans and a $640 million increase in personal loans, partially offset by a $367 million decline in credit card loans.  The increase in student loans includes the acquisition of $3.1 billion in private student loans in the first quarter of 2011.  Credit card loans grew $644 million, or 1%, from the prior quarter, ending the quarter at $45.0 billion.  Discover personal loans increased $193 million, or 10%, from the prior quarter as the company continues to diversify its loan portfolio.

Net interest margin was 9.15%, relatively unchanged from the prior year and down 7 basis points from the first quarter of 2011.  Credit card yield decreased 36 basis points from the prior year and 8 basis points from the prior quarter.  The decline in yield reflects the impacts of the CARD Act and an increase in promotional rate balances, partially offset by lower interest charge-offs.  Interest expense as a percent of loans decreased 31 basis points from the prior year and 10 basis points from the prior quarter as the company continued to take advantage of available low rate funding.

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Net interest income increased $46 million from the prior year, primarily driven by an increase in loan balances related to the student loan acquisition and lower funding related costs. This was partially offset by a decrease in interest income on credit cards reflecting the lower yield.

The delinquency rate for credit card loans over 30 days past due reached an all-time low of 2.79%, an improvement of 206 basis points from the prior year, and 80 basis points from the prior quarter.  The credit card net charge-off rate decreased to 5.01% for the second quarter of 2011, down 355 basis points from the prior year and 95 basis points from the prior quarter.

Provision for loan losses of $176 million decreased $548 million, or 76%, from the prior year, driven by lower charge-offs and a reduction in the allowance for loan losses.  Principal charge-offs decreased $424 million from the prior year. Improvement in the outlook for credit performance resulted in a reserve release of $401 million in the second quarter of 2011 versus a release of $277 million in the second quarter of 2010.

Other income increased $22 million, or 5%, from the prior year. The second quarter of 2010 included a reduction in income related to overlimit fee charge-offs.  The second quarter of 2011 included transition services revenue related to The Student Loan Corporation and an increase in the value of the federal student loans held for sale.

Expenses were up $119 million, or 25%, from the prior year, reflecting higher investments in marketing and advertising, higher compensation expense, higher costs related to recovering charged-off accounts, increased fraud costs and expenses related to The Student Loan Corporation.  The second quarter of 2011 also included reserves for various pending litigation.

Payment Services

Payment Services pretax income of $43 million in the quarter was up $7 million, or 19%, from the prior year driven principally by a $9 million increase in revenues partially offset by a $2 million increase in expenses.  The increase in revenue was driven by an increase in transactions on the PULSE network and higher margins.

Payment Services dollar volume was a record $45.9 billion for the second quarter, up 24% from the prior year, driven by higher PULSE, Diners Club International and third-party issuer volume.  The number of transactions on the PULSE network increased 25%.

Effective Tax Rate

The company's effective tax rate was 35.2% for the second quarter of 2011 compared to 38.9% in the second quarter of 2010. The second quarter of 2011 included a tax benefit due to the reversal of a tax valuation allowance related to a previous realized capital loss.

Share Repurchase Program

On June 15, 2011, the companyannounced that its Board of Directors has approved a share repurchase program, authorizing the company to purchase up to $1 billion of its common stock.  The program expires on June 14, 2013, and may be terminated at any time. The company expects to make share repurchases under the program from time to time based on market conditions and other factors, subject to legal and regulatory restrictions.

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Proposed Acquisition of Mortgage Origination Business

On May 12, 2011, the company announced it had reached a definitive agreement to acquire substantially all of the operating and related assets of Home Loan Center, a subsidiary of Tree.com, Inc., for approximately $55.9 million, which will add a residential mortgage component to Discover's direct-to-consumer banking business.  The company intends to originate eligible consumer mortgages to sell in secondary markets on a servicing-released basis. The acquisition is subject to closing conditions, including the approvals of regulators and Tree.com, Inc. stockholders, and is expected to close by the end of 2011.

Conference Call and Webcast Information

The company will host a conference call to discuss its second quarter results on Thursday, June 23, 2011, at 10:00 a.m. Central time.  Interested parties can listen to the conference call via a live audio webcast at http://investorrelations.discoverfinancial.com.

About Discover

Discover Financial Services (NYSE: DFS) is a direct banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company operates the Discover card, America's cash rewards pioneer, and offers personal and student loans, online savings accounts, certificates of deposit and money market accounts through its Discover Bank subsidiary. Its payment businesses consist of Discover Network, with millions of merchant and cash access locations; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global payments network with acceptance in more than 185 countries and territories. For more information, visit www.discoverfinancial.com.

Contacts:

Investors:

Craig Streem, 224-405-3575

craigstreem@discover.com

Media:

Jon Drummond, 224-405-1888

jondrummond@discover.com

A financial summary follows. Financial, statistical, and business related information, as well as information regarding business and segment trends, is included in the financial supplement filed as Exhibit 99.2 to the company’s Current Report on Form 8-K filed today with the Securities and Exchange Commission (“SEC”). Both the earnings release and the financial supplement are available online at the SEC’s website (http://www.sec.gov) and the company’s website (http://investorrelations.discoverfinancial.com).

This press release 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 the company’s 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 press release, and there is no undertaking to update or revise them as more information becomes available.

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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 and the levels of consumer confidence and consumer debt, and investor sentiment; the impact of current, pending and future legislation, regulation and regulatory and legal actions, including new laws and rules related to financial regulatory reform, new laws and rules limiting or modifying certain credit card practices, new laws and rules affecting securitizations, funding and liquidity, and bank holding company regulations and supervisory guidance; the actions and initiatives of current and potential competitors; the company’s ability to manage its expenses; the company’s ability to successfully achieve card acceptance across its networks and maintain relationships with network participants; the company’s ability to sustain and grow its private student loan business; the company’s ability to manage its 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 the company’s investment portfolio; restrictions on the company’s operations resulting from financing transactions; the company’s ability to increase or sustain Discover card usage or attract new customers; the company’s ability to attract new merchants and maintain relationships with current merchants; the effect of political, economic and market conditions, geopolitical events and unforeseen or catastrophic events; fraudulent activities or material security breaches of key systems; the company’s ability to introduce new products or services; the company’s ability to sustain its investment in new technology and manage its relationships with third-party vendors; the company’s ability to collect amounts for disputed transactions from merchants and merchant acquirers; the company’s ability to attract and retain employees; the company’s ability to protect its reputation and its intellectual property; difficulty obtaining regulatory approval for, financing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. The company routinely evaluates and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or the company's debt or equity securities.  The company’s upcoming acquisition of the mortgage origination business of Tree.com, Inc. is subject to closing conditions including, among others, approvals of regulators and Tree.com, Inc. stockholders.  For additional information regarding the acquisition, see the company’s Current Report on Form 8-K filed with the SEC on May 12, 2011.

Additional factors that could cause the company’s results to differ materially from those described in the forward-looking statements can be found under “Risk Factors,” “Business – Competition,” “Business – Supervision and Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the company's Annual Report on Form 10-K for the year ended November 30, 2010 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the company's Quarterly Report on Form 10-Q for the quarter ended February 28, 2011, which are filed with the SEC and available at the SEC's internet site (http://www.sec.gov).

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DISCOVER FINANCIAL SERVICES
(unaudited, in millions, except per share statistics)
	Quarter Ended
	May 31, 2011			Feb 28, 2011			May 31, 2010
EARNINGS SUMMARY
Interest Income		$1,573			$1,553			$1,552
Interest Expense		380			383			405
Net Interest Income		1,193			1,170			1,147
Discount/Interchange Revenue		489			468			443
Rewards		223			207			174
Discount and Interchange Revenue, net		266			261			269
Fee Products Revenue		105			108			101
Loan Fee Income		81			86			70
Transaction Processing Revenue		45			43			36
Other Income		47			65			37
Total Other Income		544			563			513
Revenue Net of Interest Expense		1,737			1,733			1,660
Provision for Loan Losses		176			418			724
Employee Compensation and Benefits		230			213			203
Marketing and Business Development		124			136			98
Information Processing & Communications		66			65			63
Professional Fees		105			90			78
Premises and Equipment		18			17			18
Other Expense		92			74			54
Total Other Expense		635			595			514
Income Before Income Taxes		926			720			422
Tax Expense		326			255			164
Net Income		$600			$465			$258
Net Income Allocated to Common Stockholders		$593			$459			$185
PER SHARE STATISTICS
Basic EPS		$1.09			$0.84			$0.34
Diluted EPS		$1.09			$0.84			$0.33
Common Stock Price (period end)		$23.84			$21.75			$13.45
Dividend per share		$0.06			$0.06			$0.02
Book Value per share		$13.79			$12.65			$11.10
SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking		$883			$677			$386
Payment Services		43			43			36
Total		$926			$720			$422
BALANCE SHEET SUMMARY
Total Assets		$63,438			$63,507			$62,154
Total Liabilities		$55,915			$56,608			$56,116
Total Equity		7,523			6,899			6,038
Total Liabilities and Stockholders' Equity		$63,438			$63,507			$62,154
TOTAL LOAN RECEIVABLES STATISTICS
Ending Loans 1, 2		$52,510			$51,663			$50,025
Average Loans 1, 2		$51,727			$51,488			$49,819
Interest Yield		11.93	%		12.10	%		12.25	%
Net Principal Charge-off Rate		4.42	%		5.42	%		7.97	%
Net Principal Charge-off Rate Excluding PCI Loans3		4.69	%		5.64	%		7.97	%
Delinquency Rate (over 30 days) 3		2.68	%		3.44	%		4.52	%
Delinquency Rate (over 90 days) 3		1.44	%		1.88	%		2.45	%
Net Charge-off Dollars		$577			$689			$1,001
Loans Delinquent Over 30 Days 3		$1,329			$1,673			$2,264
Loans Delinquent Over 90 Days 3		$715			$915			$1,225
Allowance for Loan Loss (period end)		$2,632			$3,033			$3,931
Change in Loan Loss Reserves		($401	)		($271	)		($277	)
Reserve Rate 4		5.01	%		5.87	%		7.86	%
Reserve Rate Excluding PCI Loans 3, 4		5.31	%		6.23	%		7.86	%
CREDIT CARD LOANS STATISTICS
Ending Loans		$44,961			$44,317			$45,328
Average Loans		$44,288			$45,443			$45,280
Interest Yield		12.57	%		12.65	%		12.93	%
Net Principal Charge-off Rate		5.01	%		5.96	%		8.56	%
Delinquency Rate (over 30 days)		2.79	%		3.59	%		4.85	%
Delinquency Rate (over 90 days)		1.51	%		1.99	%		2.63	%
Net Charge-off Dollars		$559			$668			$977
Loans Delinquent Over 30 Days		$1,256			$1,590			$2,196
Loans Delinquent Over 90 Days		$681			$882			$1,193
Allowance for Loan Loss (period end)		$2,519			$2,939			$3,826
Change in Loan Loss Reserves		($420	)		($270	)		($266	)
Reserve Rate		5.60	%		6.63	%		8.44	%
Total Discover Card Volume		$26,927			$25,759			$24,247
Discover Card Sales Volume		$24,844			$23,990			$22,859
NETWORK VOLUME
PULSE Network		$36,719			$34,380			$28,646
Third-Party Issuers		1,838			1,772			1,678
Diners Club International 5		7,380			6,998			6,708
Total Payment Services		45,937			43,150			37,032
Discover Network - Proprietary		25,684			24,784			23,632
Total		$71,621			$67,934			$60,664

1  Total Loans includes mortgages and other loans.

2 Purchased Credit Impaired ("PCI") loans were acquired in The Student Loan Corporation transaction on December 31, 2010. PCI loans are loans for which a deterioration in credit quality occurred between the origination date and the acquisition date.  These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the loans are contractually past due. PCI loans are private student loans and are included in total loan receivables.

3 Excludes PCI loans (described above) that were acquired as part of The Student Loan Corporation transaction 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 the company is recognizing interest income on a pool of loans, it is all considered to be performing.

4 The Reserve Rate includes federal student loans held for sale.

5 Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment.

  Note:  A Glossary of Financial Terms is included in the financial supplement filed as Exhibit 99.2 to the company's Current Report on Form 8-K. This is available online at the SEC's website (http://www.sec.gov) and the company's website (http://investorrelations.discoverfinancial.com).

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EX-99.2

Exhibit 99.2

DISCOVER FINANCIAL SERVICES
EARNINGS SUMMARY
(unaudited, in millions, except per share statistics)
	Quarter Ended															May 31, 2011						Six Months Ended
	May 31, 2011			Feb 28, 2011			Nov 30, 2010			Aug 31, 2010			May 31, 2010			vs. May 31, 2010						May 31, 2011			May 31, 2010			2011 vs. 2010
EARNINGS SUMMARY
Interest Income		$1,573			$1,553			$1,499			$1,536			$1,552			$21			1	%		$3,126			$3,111			$15			0	%
Interest Expense		380			383			375			389			405			(25	)		(6	%)		763			819			(56	)		(7	%)
Net Interest Income		1,193			1,170			1,124			1,147			1,147			46			4	%		2,363			2,292			71			3	%
Discount/Interchange Revenue		489			468			453			468			443			46			10	%		957			872			85			10	%
Rewards		223			207			203			194			174			49			28	%		430			341			89			26	%
Discount and Interchange Revenue, net		266			261			250			274			269			(3	)		(1	%)		527			531			(4	)		(1	%)
Fee Products Revenue		105			108			103			104			101			4			4	%		213			205			8			4	%
Loan Fee Income		81			86			72			92			70			11			16	%		167			175			(8	)		(5	%)
Transaction Processing Revenue		45			43			40			40			36			9			25	%		88			69			19			28	%
Other Income		47			65			7			54			37			10			27	%		112			79			33			42	%
Total Other Income		544			563			472			564			513			31			6	%		1,107			1,059			48			5	%
Revenue Net of Interest Expense		1,737			1,733			1,596			1,711			1,660			77			5	%		3,470			3,351			119			4	%
Provision for Loan Losses		176			418			383			713			724			(548	)		(76	%)		594			2,111			(1,517	)		(72	%)
Employee Compensation and Benefits		230			213			200			204			203			27			13	%		443			398			45			11	%
Marketing and Business Development		124			136			150			131			98			26			27	%		260			183			77			42	%
Information Processing & Communications		66			65			67			62			63			3			5	%		131			129			2			2	%
Professional Fees		105			90			104			85			78			27			35	%		195			154			41			27	%
Premises and Equipment		18			17			17			18			18			0			0	%		35			36			(1	)		(3	%)
Other Expense		92			74			90			66			54			38			70	%		166			89			77			87	%
Total Other Expense		635			595			628			566			514			121			24	%		1,230			989			241			24	%
Income Before Income Taxes		926			720			585			432			422			504			119	%		1,646			251			1,395			NM
Tax Expense		326			255			235			171			164			162			99	%		581			97			484			NM
Net Income		$600			$465			$350			$261			$258			$342			133	%		$1,065			$154			$911			NM
Net Income Allocated to Common Stockholders		$593			$459			$347			$258			$185			$408			NM			$1,052			$63			$989			NM
Effective Tax Rate		35.2	%		35.4	%		40.3	%		39.7	%		38.9	%								35.3	%		38.6	%
Net Interest Margin		9.15	%		9.22	%		9.28	%		9.16	%		9.14	%		1		bps				9.18	%		9.07	%		11		bps
ROE		33	%		28	%		22	%		17	%		16	%								30	%		5	%
Ending Common Shares Outstanding		546			545			545			545			544			2			0	%		546			544			2			0	%
Weighted Average Common Shares Outstanding		546			545			545			544			544			2			0	%		545			544			1			0	%
Weighted Average Common Shares Outstanding (fully diluted)		546			546			545			547			552			(6	)		(1	%)		546			552			(6	)		(1	%)
PER SHARE STATISTICS
Basic EPS		$1.09			$0.84			$0.64			$0.47			$0.34			$0.75			NM			$1.93			$0.12			$1.81			NM
Diluted EPS		$1.09			$0.84			$0.64			$0.47			$0.33			$0.76			NM			$1.93			$0.12			$1.81			NM
Common Stock Price (period end)		$23.84			$21.75			$18.28			$14.51			$13.45			$10.39			77	%		$23.84			$13.45			$10.39			77	%
Dividend per share		$0.06			$0.06			$0.02			$0.02			$0.02			$0.04			200	%		$0.12			$0.04			$0.08			200	%
Book Value per share		$13.79			$12.65			$11.85			$11.22			$11.10			$2.69			24	%		$13.79			$11.10			$2.69			24	%
SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking		$883			$677			$554			$395			$386			$497			129	%		$1,560			$178			$1,382			NM
Payment Services		43			43			31			37			36			7			19	%		86			73			13			18	%
Total		$926			$720			$585			$432			$422			$504			119	%		$1,646			$251			$1,395			NM
TRANSACTIONS PROCESSED ON NETWORKS
Discover Network		422			410			413			418			393			29			7	%		832			774			58			7	%
PULSE Network		1,006			929			901			882			805			201			25	%		1,935			1,525			410			27	%
Total		1,428			1,339			1,314			1,300			1,198			230			19	%		2,767			2,299			468			20	%
NETWORK VOLUME
PULSE Network		$36,719			$34,380			$31,334			$30,582			$28,646			$8,073			28	%		$71,099			$56,264			$14,835			26	%
Third-Party Issuers		1,838			1,772			1,768			1,794			1,678			160			10	%		3,610			3,240			370			11	%
Diners Club International 1		7,380			6,998			7,328			6,542			6,708			672			10	%		14,378			13,263			1,115			8	%
Total Payment Services		45,937			43,150			40,430			38,918			37,032			8,905			24	%		89,087			72,767			16,320			22	%
Discover Network - Proprietary		25,684			24,784			24,075			24,880			23,632			2,052			9	%		50,468			46,804			3,664			8	%
Total		$71,621			$67,934			$64,505			$63,798			$60,664			$10,957			18	%		$139,555			$119,571			$19,984			17	%

1 Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment.

Note:  See Glossary of Financial Terms for definitions of financial terms.

1

DISCOVER FINANCIAL SERVICES
BALANCE SHEET STATISTICS
(unaudited, in millions)
	Quarter Ended															May 31, 2011
	May 31, 2011			Feb 28, 2011			Nov 30, 2010			Aug 31, 2010			May 31, 2010			vs. May 31, 2010
BALANCE SHEET SUMMARY
Assets
Cash and Investment Securities		$10,344			$11,463			$11,913			$10,209			$12,467			($2,123	)	(17	%)
Total Loan Receivables		52,510			51,663			48,836			50,131			50,025			2,485		5	%
Allowance for Loan Losses		(2,632	)		(3,033	)		(3,304	)		(3,744	)		(3,931	)		1,299		33	%
Net Loan Receivables		49,878			48,630			45,532			46,387			46,094			3,784		8	%
Premises and Equipment, net		471			459			461			457			469			2		0	%
Goodwill and Intangible Assets, net		447			449			444			446			448			(1	)	(0	%)
Other Assets		2,298			2,506			2,435			2,559			2,676			(378	)	(14	%)
Total Assets		$63,438			$63,507			$60,785			$60,058			$62,154			$1,284		2	%
Liabilities & Stockholders' Equity
Direct to Consumer and Affinity Deposits		$22,923			$21,795			$20,597			$19,069			$17,527			$5,396		31	%
Brokered Deposits and Other Deposits		12,296			13,065			13,816			15,178			17,495			(5,199	)	(30	%)
Deposits		35,219			34,860			34,413			34,247			35,022			197		1	%
Borrowings		18,039			19,090			17,706			17,709			18,311			(272	)	(1	%)
Accrued Expenses and Other Liabilities		2,657			2,658			2,209			1,991			2,783			(126	)	(5	%)
Total Liabilities		55,915			56,608			54,328			53,947			56,116			(201	)	(0	%)
Total Equity		7,523			6,899			6,457			6,111			6,038			1,485		25	%
Total Liabilities and Stockholders' Equity		$63,438			$63,507			$60,785			$60,058			$62,154			$1,284		2	%
BALANCE SHEET STATISTICS
Total Common Equity		$7,523			$6,899			$6,457			$6,111			$6,038			$1,485		25	%
Total Common Equity/Total Assets		11.9	%		10.9	%		10.6	%		10.2	%		9.7	%
Total Common Equity/Net Loans		15.1	%		14.2	%		14.2	%		13.2	%		13.1	%
Tangible Assets		$62,991			$63,058			$60,341			$59,612			$61,706			$1,285		2	%
Tangible Common Equity1		$7,076			$6,450			$6,013			$5,665			$5,590			$1,486		27	%
Tangible Common Equity/Tangible Assets 1		11.2	%		10.2	%		10.0	%		9.5	%		9.1	%
Tangible Common Equity/Net Loans 1		14.2	%		13.3	%		13.2	%		12.2	%		12.1	%
Tangible Common Equity per share  1		$12.97			$11.83			$11.04			$10.40			$10.28			$2.69		26	%
REGULATORY CAPITAL RATIOS
Total Risk Based Capital Ratio		16.8	%		16.0	%		15.9	%		15.5	%		15.3	%
Tier 1 Risk Based Capital Ratio		13.2	%		12.4	%		12.2	%		11.7	%		11.6	%
Tier 1 Leverage Ratio		11.3	%		10.2	%		9.9	%		9.5	%		9.0	%
LIQUIDITY
Liquidity Investment Portfolio		$8,724			$10,232			$10,132			$9,111			$10,862			($2,138	)	(20	%)
Undrawn Credit Facilities 2		15,532			14,414			12,492			11,659			12,098			3,434		28	%
Total Liquidity		$24,256			$24,646			$22,624			$20,770			$22,960			$1,296		6	%

1  Tangible Common Equity ("TCE") is a non-GAAP measure.  The Company believes TCE is a more meaningful measure to investors of the net asset value of the Company.  For corresponding reconciliation of TCE to a GAAP financial measure see Reconciliation of GAAP to non-GAAP data schedule.

2  Excludes $1.1 billion of investments pledged to the Federal Reserve, which is included within the liquidity investment portfolio.

Note:  See Glossary of Financial Terms for definitions of financial terms.

2

DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended															May 31, 2011						Six Months Ended
	May 31, 2011			Feb 28, 2011			Nov 30, 2010			Aug 31, 2010			May 31, 2010			vs. May 31, 2010						May 31, 2011			May 31, 2010			2011 vs. 2010
TOTAL LOAN RECEIVABLES
Ending Loans 1, 2		$52,510			$51,663			$48,836			$50,131			$50,025			$2,485			5	%		$52,510			$50,025			$2,485			5	%
Average Loans 1, 2		$51,727			$51,488			$48,597			$49,687			$49,819			$1,908			4	%		$51,609			$50,678			$931			2	%
Interest Yield		11.93	%		12.10	%		12.24	%		12.16	%		12.25	%		(32	)	bps				12.01	%		12.20	%		(19	)	bps
Net Principal Charge-off Rate		4.42	%		5.42	%		6.58	%		7.18	%		7.97	%		(355	)	bps				4.92	%		8.24	%		(332	)	bps
Net Principal Charge-off Rate excluding PCI Loans3		4.69	%		5.64	%		6.58	%		7.18	%		7.97	%		(328	)	bps				5.17	%		8.24	%		(308	)	bps
Delinquency Rate (over 30 days) 3		2.68	%		3.44	%		3.89	%		4.16	%		4.52	%		(184	)	bps				2.68	%		4.52	%		(184	)	bps
Delinquency Rate (over 90 days) 3		1.44	%		1.88	%		2.03	%		2.19	%		2.45	%		(101	)	bps				1.44	%		2.45	%		(101	)	bps
Net Charge-off Dollars		$577			$689			$797			$900			$1,001			($424	)		(42	%)		$1,266			$2,083			($817	)		(39	%)
Loans Delinquent Over 30 Days 3		$1,329			$1,673			$1,902			$2,083			$2,264			($935	)		(41	%)		$1,329			$2,264			($935	)		(41	%)
Loans Delinquent Over 90 Days 3		$715			$915			$994			$1,099			$1,225			($510	)		(42	%)		$715			$1,225			($510	)		(42	%)
Allowance for Loan Loss (period end)		$2,632			$3,033			$3,304			$3,744			$3,931			($1,299	)		(33	%)		$2,632			$3,931			($1,299	)		(33	%)
Change in Loan Loss Reserves		($401	)		($271	)		($414	)		($187	)		($277	)		($124	)		(45	%)		($672	)		$28			($700	)	NM
Reserve Rate 4		5.01	%		5.87	%		6.77	%		7.47	%		7.86	%		(285	)	bps				5.01	%		7.86	%		(285	)	bps
Reserve Rate Excluding PCI Loans3, 4		5.31	%		6.23	%		6.77	%		7.47	%		7.86	%		(255	)	bps				5.31	%		7.86	%		(255	)	bps
CREDIT CARD LOANS
Ending Loans		$44,961			$44,317			$45,157			$45,248			$45,328			($367	)		(1	%)		$44,961			$45,328			($367	)		(1	%)
Average Loans		$44,288			$45,443			$44,670			$44,905			$45,280			($991	)		(2	%)		$44,859			$46,450			($1,591	)		(3	%)
Interest Yield		12.57	%		12.65	%		12.68	%		12.86	%		12.93	%		(36	)	bps				12.61	%		12.81	%		(20	)	bps
Net Principal Charge-off Rate		5.01	%		5.96	%		6.95	%		7.73	%		8.56	%		(355	)	bps				5.48	%		8.79	%		(331	)	bps
Delinquency Rate (over 30 days)		2.79	%		3.59	%		4.06	%		4.39	%		4.85	%		(206	)	bps				2.79	%		4.85	%		(206	)	bps
Delinquency Rate (over 90 days)		1.51	%		1.99	%		2.12	%		2.35	%		2.63	%		(112	)	bps				1.51	%		2.63	%		(112	)	bps
Net Charge-off Dollars		$559			$668			$774			$875			$977			($418	)		(43	%)		$1,226			$2,035			($809	)		(40	%)
Loans Delinquent Over 30 Days		$1,256			$1,590			$1,831			$1,986			$2,196			($940	)		(43	%)		$1,256			$2,196			($940	)		(43	%)
Loans Delinquent Over 90 Days		$681			$882			$958			$1,062			$1,193			($512	)		(43	%)		$681			$1,193			($512	)		(43	%)
Allowance for Loan Loss (period end)		$2,519			$2,939			$3,209			$3,647			$3,826			($1,307	)		(34	%)		$2,519			$3,826			($1,307	)		(34	%)
Change in Loan Loss Reserves		($420	)		($270	)		($412	)		($179	)		($266	)		($154	)		(58	%)		($690	)		$35			($725	)	NM
Reserve Rate		5.60	%		6.63	%		7.11	%		8.06	%		8.44	%		(284	)	bps				5.60	%		8.44	%		(284	)	bps
Total Discover Card Volume		$26,927			$25,759			$25,054			$25,553			$24,247			$2,680			11	%		$52,686			$48,092			$4,594			10	%
Discover Card Sales Volume		$24,844			$23,990			$23,219			$23,993			$22,859			$1,985			9	%		$48,834			$45,258			$3,576			8	%

1 Total Loans includes mortgages and other loans.

2 Purchased Credit Impaired ("PCI") loans were acquired in The Student Loan Corporation transaction on December 31, 2010. PCI loans are loans for which a deterioration in credit quality occurred between the origination date and the acquisition date.  These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the loans are contractually past due. PCI loans are private student loans and are included in total loan receivables.

3 Excludes PCI loans (described above) that were acquired as part of The Student Loan Corporation transaction 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 the company is recognizing interest income on a pool of loans, it is all considered to be performing.

4 The Reserve Rate includes federal student loans held for sale.

Note:  See Glossary of Financial Terms for definitions of financial terms.

3

DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended															May 31, 2011						Six Months Ended
	May 31, 2011			Feb 28, 2011			Nov 30, 2010			Aug 31, 2010			May 31, 2010			vs. May 31, 2010						May 31, 2011			May 31, 2010			2011 vs. 2010
FEDERAL STUDENT LOANS
Ending Loans 1		$757			$767			$789			$2,247			$2,239			($1,482	)		(66	%)		$757			$2,239			($1,482	)		(66	%)
PRIVATE STUDENT LOANS
Ending Loans		$4,567			$4,545			$999			$881			$820			$3,747		NM				$4,567			$820			$3,747		NM
Ending PCI Loans 2		$2,947			$3,011			-			-			-			$2,947		NM				$2,947			-			$2,947		NM
Interest Yield		7.42	%		7.40	%		6.04	%		5.81	%		5.82	%		160		bps				7.41	%		5.53	%		188		bps
Net Principal Charge-off Rate		0.18	%		0.11	%		0.63	%		0.31	%		0.12	%		6		bps				0.16	%		0.16	%		0		bps
Net Principal Charge-off Rate excluding PCI Loans3		0.51	%		0.29	%		0.63	%		0.31	%		0.12	%		39		bps				0.43	%		0.16	%		27		bps
Delinquency Rate (over 30 days)3		0.55	%		0.72	%		0.50	%		0.80	%		0.24	%		31		bps				0.55	%		0.24	%		31		bps
Reserve Rate4		0.92	%		0.43	%		1.86	%		1.67	%		1.55	%		(63	)	bps				0.92	%		1.55	%		(63	)	bps
Reserve Rate Excluding PCI Loans3, 4		2.60	%		1.29	%		1.86	%		1.67	%		1.55	%		105		bps				2.60	%		1.55	%		105		bps
PERSONAL LOANS
Ending Loans		$2,213			$2,020			$1,878			$1,707			$1,573			$640			41	%		$2,213			$1,573			$640			41	%
Interest Yield		11.90	%		11.71	%		11.59	%		11.40	%		11.32	%		58		bps				11.81	%		11.30	%		51		bps
Net Principal Charge-off Rate		2.88	%		4.10	%		4.70	%		5.67	%		5.97	%		(309	)	bps				3.46	%		6.36	%		(290	)	bps
Delinquency Rate (over 30 days)		0.96	%		1.20	%		1.57	%		1.75	%		2.12	%		(116	)	bps				0.96	%		2.12	%		(116	)	bps
Reserve Rate		3.35	%		3.68	%		4.05	%		4.70	%		5.73	%		(238	)	bps				3.35	%		5.73	%		(238	)	bps

1 Federal Student Loans are held-for-sale as of November 30, 2010.

2 Purchased Credit Impaired ("PCI") loans were acquired in The Student Loan Corporation transaction on December 31, 2010. PCI loans are loans for which a deterioration in credit quality occurred between the origination date and the acquisition date.  These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the loans are contractually past due. PCI loans are private student loans and are included in total loan receivables.

3 Excludes PCI loans (described above) that were acquired as part of The Student Loan Corporation transaction 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 the company is recognizing interest income on a pool of loans, it is all considered to be performing.

4 The Reserve Rate includes federal student loans held for sale.

Note:  See Glossary of Financial Terms for definitions of financial terms.

4

DISCOVER FINANCIAL SERVICES
SEGMENT RESULTS
(unaudited, in millions)
	Quarter Ended															May 31, 2011						Six Months Ended
	May 31, 2011			Feb 28, 2011			Nov 30, 2010			Aug 31, 2010			May 31, 2010			vs. May 31, 2010						May 31, 2011			May 31, 2010			2011 vs. 2010
DIRECT BANKING
Interest Income		$1,573			$1,553			$1,499			$1,536			$1,552			$21			1	%		$3,126			$3,111			$15			0	%
Interest Expense		380			383			375			389			405			(25	)		(6	%)		763			819			(56	)		(7	%)
Net Interest Income		1,193			1,170			1,124			1,147			1,147			46			4	%		2,363			2,292			71			3	%
Other Income		470			486			404			496			448			22			5	%		956			928			28			3	%
Revenue Net of Interest Expense		1,663			1,656			1,528			1,643			1,595			68			4	%		3,319			3,220			99			3	%
Provision for Loan Losses		176			418			383			713			724			(548	)		(76	%)		594			2,111			(1,517	)		(72	%)
Total Other Expense		604			561			591			535			485			119			25	%		1,165			931			234			25	%
Income Before Income Taxes		$883			$677			$554			$395			$386			$497			129	%		$1,560			$178			$1,382		NM
Net Interest Margin		9.15	%		9.22	%		9.28	%		9.16	%		9.14	%		1		bps				9.19	%		9.07	%		12		bps
Pretax Return on Loan Receivables		6.78	%		5.33	%		4.57	%		3.16	%		3.07	%		371		bps				6.06	%		0.71	%		535		bps
PAYMENT SERVICES
Interest Income		$-			$-			$-			$-			$-			$-		NM				$-			$-			$-		NM
Interest Expense		-			-			-			-			-			-		NM				-			-			-		NM
Net Interest Income		-			-			-			-			-			-		NM				-			-			-		NM
Other Income		74			77			68			68			65			9			14	%		151			131			20			15	%
Revenue Net of Interest Expense		74			77			68			68			65			9			14	%		151			131			20			15	%
Total Other Expense		31			34			37			31			29			2			7	%		65			58			7			12	%
Income Before Income Taxes		$43			$43			$31			$37			$36			$7			19	%		$86			$73			$13			18	%

Note:  See Glossary of Financial Terms for definitions of financial terms.

5

Discover Financial Services

Glossary of Financial Terms

Book Value per share represents total equity divided by ending common shares outstanding.

Capital Ratios are regulatory measures used to evaluate capital adequacy. To be considered "well-capitalized," total risk-based, tier 1 risk-based, and tier 1 leverage ratios of 10%, 6% and 5% respectively must be maintained. Total Risk Based Capital Ratio represents total capital divided by risk-weighted assets. Tier 1 Capital Ratio represents tier 1 capital divided by risk-weighted assets. Tier 1 Leverage Ratio represents tier 1 capital divided by average total assets.

Delinquency Rate (Over 30 Days) represents loans delinquent over thirty days divided by ending loans (total or respective loans, as appropriate).

Delinquency Rate (Over 90 Days) represents loans delinquent over ninety days divided by ending loans (total or respective loans, as appropriate).

Earnings Per Share represents net income allocated to common stockholders divided by the weighted average common shares outstanding.

Effective Tax Rate represents tax expense divided by income before income taxes.

Interest Yield represents interest income on loan receivables (annualized) divided by average loans for the reporting period.

Liquidity Investment Portfolio represents cash and cash equivalents (excluding cash-in-process) and other investments.

Net Income Allocated to Common Stockholders represents net income less (i) dividends and accretion of discount on shares of preferred stock and (ii) income allocated to participating securities.

Net Interest Margin represents net interest income (annualized) divided by average total loans for the period.

Net Principal Charge-off Rate represents net principal charge-off dollars (annualized) divided by average loans for the reporting period.

Pretax Return on Loan Receivables represents income before income taxes (annualized) divided by total average loans for the period.

Proprietary Network Volume represents gross proprietary sales volume on the Discover Network.

Reserve Rate represents the allowance for loan losses divided by total loans.

Return on Equity represents net income (annualized) divided by average total equity for the reporting period.

Tangible Assets represents total assets less goodwill and intangibles.

Tangible Common Equity ("TCE"), a non-GAAP financial measure, represents total common equity less goodwill and intangibles. The Company believes TCE is a more meaningful measure to investors of the net asset value of the Company. For corresponding reconciliation of TCE to a GAAP financial measure, see Reconciliation of GAAP to Non-GAAP Data schedule.

Tangible Common Equity/Net Loans,a non-GAAP measure,represents total common equity less goodwill and intangibles divided by total loans less the allowance for loan loss (period end).

Tangible Common Equity per Share,a non-GAAP measure,represents total common equity less goodwill and intangibles divided by ending common shares outstanding.

Tangible Common Equity/Tangible Assets, a non-GAAP measure,represents total common equity less goodwill and intangibles divided by total assets less goodwill and intangibles.

Undrawn Credit Facilities represents asset-backed conduit funding facilities, committed unsecured credit facility and Federal Reserve discount window (excluding investments pledged to the Federal Reserve, which are included within the liquidity investment portfolio).

Discover Financial Services
Reconciliation of GAAP to Non-GAAP Data
(unaudited, in millions)
	Quarter Ended															Six Months Ended
	May 31, 2011			Feb 28, 2011			Nov 30, 2010			Aug 31, 2010			May 31, 2010			May 31, 2011			May 31, 2010
GAAP Total Common Equity		$7,523			$6,899			$6,457			$6,111			$6,038			$7,523			$6,038
Less: Goodwill		(255	)		(255	)		(255	)		(255	)		(255	)		(255	)		(255	)
Less: Intangibles		(192	)		(194	)		(189	)		(191	)		(193	)		(192	)		(193	)
Tangible Common Equity		$7,076			$6,450			$6,013			$5,665			$5,590			$7,076			$5,590
GAAP Book Value per share		$13.79			$12.65			$11.85			$11.22			$11.10			$13.79			$11.10
Less: Goodwill		(0.47	)		(0.47	)		(0.47	)		(0.47	)		(0.47	)		(0.47	)		(0.47	)
Less: Intangibles		(0.35	)		(0.35	)		(0.34	)		(0.35	)		(0.35	)		(0.35	)		(0.35	)
Tangible Common Equity per share		$12.97			$11.83			$11.04			$10.40			$10.28			$12.97			$10.28

Tangible common equity ("TCE"), a non-GAAP financial measure, represents common equity less goodwill and intangibles.  A reconciliation of TCE to common equity, a GAAP financial measure, is shown above.  Other financial services companies may also use TCE and definitions may vary, so we advise users of this information to exercise caution in comparing TCE of different companies.  TCE is included because management believes that common equity excluding goodwill and intangibles is a more meaningful measure to investors of the true net asset value of the company.

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