Good morning. My name is Chelsea. I will be your conference operator today. At this time, I would like to welcome everyone to the Discover Financial Services Business Update Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. If you should need operator assistance, please press star zero. Thank you. I will now turn the call over to Mr. Eric Wasserstrom, Head of Investor Relations. Please go ahead. Thank you, Chelsea, thanks everyone for joining us for this morning's call. Our call will include brief remarks from our Interim CEO, John Owen. Also in the room this morning is John Greene, our Chief Financial Officer. After we conclude our comments, both executives will be available for a question-and-answer session. During the Q&A session, we request that you ask only one question and only one follow-up question. After your follow-up question, please return to the queue. Finally, let me remind you that our discussion today may contain certain forward-looking statements that are subject to risks and uncertainties. Please refer to the notices regarding forward-looking statements that appear in our second quarter 10-Q filing. With that, let me turn the call over to John Owen. Thank you, Eric. Thanks to our listeners for joining today's call. I'll start by briefly introducing myself. I joined Discover's board of directors in June of 2022 after a 38-year career spanning financial services and information technology. For the 14 years preceding my retirement in 2021, I was a senior executive at Regions Financial, where I served in several leadership roles, including as the Chief Operating Officer of the company. The first topic I'd like to address this morning is why we're making this change. As we discussed in public forums throughout this year, the company is focused on reaching its full potential across all aspects of the business. Our commitment to compliance, risk management, and corporate governance remains a top priority. Given this, we feel that now is the right time to transition the CEO position. I'd like to take this moment to acknowledge Roger's contributions to this organization over the past 25 years and thank him for his service to the company. We have begun the process to identify a new Chief Executive Officer. The board has retained an executive search firm to assist in a rigorous search process that will include both internal and external candidates. We are acting with urgency on this process. We'll take the appropriate amount of time required to identify the best individual for this role. In my capacity as interim CEO, I have three goals. The first is to continue driving the build-out of our compliance management system. We have made significant investments in this area, but still have work to do in order to strengthen our corporate governance structures and simplify operations. Second, I plan to preserve and enhance the elements that make Discover such an outstanding company, including our leading customer service and profitable long-term growth that generates high returns and capital. The resiliency of our earnings power underscores the strength of our business model. My third goal is to keep Discover a great place to work, as evidenced by our many Employer of Choice awards over the past several years. In conclusion, we will take action to drive sustainable, long-term performance and enable us to achieve excellence in all parts of our business. John Greene and I look forward to providing additional information on these topics on our third quarter earnings conference call in late October. With that, I'll turn the call back to Eric. Thanks, John. As a reminder, both John Owen and John Greene are available for Q&A. Chelsea, can we please open the queue? At this time, if you would like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star two. We remind you to please pick up your handset for optimal sound quality. We'll take our first question from Sanjay Sakhrani. Thanks. Good morning. I guess my question, first question is for John Owen. Can you just tell me what you think you might do differently than what Roger would have done? Is there anything that the board felt Roger couldn't do that someone like you or whomever your successor will be, can come in and, and affect? No, thanks for the question. What I would tell you is really, we're going to focus on three key priorities. First and foremost, we're going to remain focused on risk management and compliance framework. We have made progress over the last 18 months on building out a better risk and compliance framework. We're going to stay very focused on that, and we have still a fair amount of work to do there. Second, we're going to remain focused on delivering great customer experience. We have to get out there and make sure our digital experience and every touch point with our customers is a good experience and grow that customer base. Third, we're going to remain focused on profitable long-term growth that generates high returns and good capital returns. I think for the most part, we're going to stay the course. We are going to bolster our risk and compliance capabilities. Other than that, I think we're going to execute with the plan we have. Okay. I guess my follow-up question, maybe for John Greene, I mean, is there any more color you could offer in terms of some of the compliance issues? Has anything else come up since sort of your last public disclosures? I'm curious when we might get some more on the consent order. Yeah. Hey, Sanjay. No, no new news on the compliance front. You know, we disclosed a card tiering issue on the second quarter call. You know, the investigation into that matter is nearing an end. The proposed consent order from the FDIC is still that, we don't have a final consent order, and I would expect the agency will make that public when they're ready. We did touch upon this, that proposed consent order did not focus on 2022 and 2023. There could be other regulatory follow-ups from that, from the FDIC or other agencies. We'll know those and make those public at an appropriate time in concurrence with the regulator's direction. Okay. Thank you. Thank you. Our next question comes from Richard Shane with JPMorgan. Thanks for taking my questions this morning. John, curious, when you think about the review that you're conducting currently, do you think that this is going to, in any way, change consumer interaction? Is there anything that's been identified that you think impacts how customers interact with Discover and the economics, the top-line economics of the core product? No, I, I, I don't think we see anything at this point that would make us change how we interact with customers. Again, it's early. We don't have that final report, but I think what you'll see us do is take that information and incorporate into action plans that really fit more into our compliance and risk management framework and how we strengthen monitoring and as part of compliance. Got it. Hey, we appreciate the transparency, and thank you. Thank you. Our next question will come from Ryan Nash with Goldman Sachs. Hey, good morning, John. Good morning. You know, you mentioned that, you know, the internal review is, is almost complete. John Greene, you gave us a lot of color on the call regarding, you know, compliance costs and the increases that you've seen from 2019 to 2023. You know, I think as we look across the market, you know, when we've seen these sort of compliance issues, the costs have had a tendency to really skyrocket over a multiyear period. Any change in the thought in what you foresee this costing you? Anything you can share that'll sort of make the market feel better, that you think you have a good hold on, you know, what the ultimate cost of fixing all these compliance and regulatory issues are? Thanks. Yeah. Thanks. Thanks, Ryan. So, yeah, we, we tried to provide as much transparency on, on, on the cost as we could. Just to refresh, folks' memory, you know, what we said was, risk and compliance costs increased from 2019 through 2023 by over $300 million. That, that remains the case. You know, we're gonna invest whatever we need to invest in order to ensure our compliance management system and risk systems are as good as we want them to be and meet, certainly meet and exceed regulator expectations. So, you know, right now, you know, what, what we're seeing is, you know, a number of about $460 million in 2023. In 2024, we haven't finalized our budget and shared it with the board, you know, I wouldn't expect it to go down. We'll be as transparent regarding, you know, the outlook of that as we can be. And- I will tell you this, you know, we're, we're not expecting any, any cost synergies or, or cost productivity in those, those areas in, in 2024. Then maybe just as, as a follow-up, you know, the, you know, the organization has experienced, you know, fast growth the past few years, you know, driven by, you know, best-in-class customer acquisition. You know, as you look forward and think about the regulatory and risk and compliance changes, how does the review and all of these things, you know, impact the way both the organization thinks about growth on a go-forward basis, as well as any potential thoughts from regulators regarding the pace of growth, given, you know, the, the risk management and compliance issues that the company's facing at this point? Thank you. Yeah. Yeah. What, what I would say is, you know, the growth that we experienced, was, was based on, you know, our traditional conservative underwriting. You know, we, we acquire new, new customers, and, embedded in that model is, is a, strong, strong view or analytics around long-term profitability of the customer relationship and midterm profitability of that customer relationship. That has not changed whatsoever. You know, we're gonna continue to take a look at, all of our products and make sure that, they're generating, nice returns over the, over the, midterm and long term. Thanks. Those are my questions. Thank you. Our next question will come from Betsy Graseck with Morgan Stanley. Hey, good morning. It's actually Jeffrey Adelson on for Betsy. Thanks for taking my questions. I guess, was just wondering, did anything change since the news came out on earnings last month about some of the consent order and compliance issues? I, I guess just related to that, wondering how investors should be thinking about the regulatory requirements from here, and why you feel this necessitated a change in the CEO? Is there something coming from your regulators, or was it more from the board side of things? Just me wondering if you can give us a little more insight into that decision. Sure. The board and Roger agreed that now is the right time to make a transition like this, and the board's been discussing this for several weeks, weeks, as you would imagine. We based that decision on timing, really on a couple things. First, we think we've got a very strong management team in place, with a good mix of long-term Discover associates. We've also recently added some new talent as well. Over the last few months, we've added a new chief information officer, added a new general counsel, added a new chief compliance officer. We look at the team, good balance of long-tenured Discover associates that understand the business, understand how we've grown over the years, mixed with some new talent that has dealt with the compliance issues, at other companies. The second factor, we consider heavily was the strength of our business model and the strength of our returns and the strength of our capital. With those two, combined, we thought it was the right time to make a change. You know, going forward, as we've mentioned, we are doing a search, and we are going to look at both internal talent and external talent, and we'll pick the best individual for the role going forward. Okay, thanks. Just as a follow-up, is there any point at which you would consider potentially, you know, reevaluating your business strategy with maybe some of the non-core segments that you have, if those are driving any of the regulatory issues at this point? You know, what I would tell you is, you know, a company like Discover, just like many large companies, we often look at our businesses and assess whether they are core or not. That's just a normal course of business for us. I would tell you that we do evaluate businesses for fit, we'll continue to do that. Okay, thanks for taking my questions. Thank you. Our next question will come from John Pancari with Evercore ISI. Morning, John. Good morning. In, in terms of, just to clarify, Roger's stepping down, was that at all a move directed by the regulators? Separately, do you see other management changes on the way within the senior management team that, that could be on the coming? Thanks. You know, the only thing I would add beyond what I've already said on Roger, again, Roger's been here 25 years, been a big part of the growth over 25 years. I think given the regulatory environment and the consent orders we're facing, it's time to make some changes in the management. You'll see that we've had some changes already in the senior management team that I mentioned, new Chief Information Officer, new General Counsel, new Chief Compliance Officer. We've made a lot of changes. I think where we are today, we've got that good mix of seasoned Discover employees and new. I think our goal is to keep this team in place for the foreseeable future and let this team execute on our business plans going forward. Okay, thank you. Separately, on, on financials, on the expense side, I heard you in terms of your investments in risk and compliance. What does that mean for your low double-digit expense outlook that you provided in July? On the, on the buyback front, I know you mentioned the account tiering investigation is almost finished. Could that completion of that investigation bring the buybacks back, or are they likely to remain suspended? Thanks. Yeah. No, no change to the expense outlook. When, when we came out with the second quarter results, we, you know, we had contemplated the, the numbers that I just shared. In terms of the buyback, what I would say on that is the board authorization remains intact. Our capital allocation priorities haven't, haven't changed, invest in growth and returning capital to shareholders as the second priority. Our capital position remains strong and, you know, there was a concern regarding the interchange issue and any, any secondary impacts, secondary impacts from the card tiering disclosure. The, those, those, you know, ended up coming out exactly as we thought. In terms of the buyback pause, we'll, we'll assess over the next month or two, share thoughts with our board and then resume as soon as, as soon as appropriate. Okay, great. Thank you. Thank you. Our next question will come from Donald Fandetti with Wells Fargo. Yes. John, you know, given the move with Roger, it just seems like something's changed incrementally after Q2 earnings. I guess, do you have a better sense of the depth of the FDIC consent? John O, you mentioned consent orders, do you think there'll be additional ones? Could you clarify that? Sure, this is John O. I'll start first. On the consent orders, when I use plural, it's really talking about CFPB, which has been out for a while, and the FDIC, which is, which is coming. One point I would make on timing, John mentioned that the FDIC consent order is based on a prior period. We've not been sitting still since that prior period, which was quite a few months back. We've been hiring quite a few new compliance officers, over 200 over that last several months, that are experienced compliance officers from other companies that had to deal with challenges similar to this. We are making progress. We have made investments several months ago. We're making good progress, but I would tell you, we still have a lot of work to do. When we do get the FDIC consent order, whenever that comes out and becomes public, we'll be taking those outcomes, putting them into action plans and really getting those things resolved as quickly as possible. John Greene, there a scenario where the buyback can be reinstated even though you heard back from the FDIC on the consent? Yeah, there, there's certainly a scenario that, that it could. You know, we're going to take a look at all of, all of the circumstances, interactions with, our regulators, as well as, you know, the financial position of the company and how, how we're feeling about, our, our internal compliance and, and risk management and, you know, make that recommendation to the board. You know, I'm, I'm, I'm hopeful that, we'll be able to, you know, provide, provide a, an update with our third quarter, earnings. Okay. Thanks. Thank you. Our next question will come from Robert Napoli with William Blair. Thank you, and good morning. I guess, the number 1 question we're getting from investors, and, I mean, there's a lot of questions, but, and you're answering some of them, I appreciate it. The earnings power, that how, discussions with regulators and how much information do you have, that, that gives you confidence that the earnings power of Discover isn't going to be materially changed by any changes you're going to have to make, you know, from a regulatory perspective? Yeah, here, here's, here's what, what I, I certainly know. You know, we've, we've got a, a great customer base, and our ability to underwrite and identify, profitable customers remains intact. You know, we've got, high margins. You know, our, our loss rate in terms of kind of charge-offs is normalizing, but all within expected, expected views. Card franchise is, extremely, extremely powerful. You know, our deposit franchise is strong and, and continues to get stronger with the launch of the Cashback Debit program. You know, overall, we feel very good about the, the earnings power of the firm today and into the future. Okay. Thank you. I mean, obviously, if you resume that buyback, that would be a pretty good sign. You know, as you look for the next CEO, maybe for John or, you know, what exactly are you-- I mean, we look at-- I mean, you have a unique franchise, global payment network, and, you know, we've always thought that the payment network was under, you know, underutilized, if you would. You know, generating 25% return on equity is hard to argue with. What are you looking for? Are you looking for somebody with maybe a broader strategically, obviously, to maintain the core business as strong as it is, but to also drive other areas of growth, revenue growth, to accelerate growth of the overall company? No, I think you hit several of the points. I mean, the company, we have a very robust succession planning process that has been around for many, many years, and the board reviews multiple times a year, both internal candidates that are potential and, and, and what those potential candidates might look like, both internally and externally. You know, again, we're looking for somebody that understands this business, knows how to drive this business, knows how to grow this business, but also comes from a very mindset of compliance and risk management frameworks, and really has that balance of how do we grow the business? How do we do it in a compliant and risk-effective way? How do we really grow that customer base and deliver great customer service? Thanks. I'm sorry to squeeze one more in, I've gotten this question several times. Do you Benchmark, and for John Greene, do you Benchmark your compliance investment versus others? How do you feel? How do you look at your compliance investment and how do you Has it, you know, versus the industry? Yeah. What I would say is, you know, the company historically underinvested, and, you know, we're paying the price right now. We're going to make sure we don't underinvest going forward. You know, our business model is frankly, simpler than many other institutions that have run into these sorts of these issues. You know, I don't know that it, that it, it Benchmark against another financial services institution means as much as investing in the right areas, getting the right people in place, and, you know, driving accountability, and ensuring that we don't put profits before compliance excellence. I'm not saying that that was an overt choice that the company made historically, but we do need to make sure that we invest enough to achieve compliance and risk management excellence, and we're going to do that. Thank you. Thanks, Rob. Chelsea, next questioner, please. All right. Next, we have Erika Najarian with UBS. Hi, good morning. I, I guess, I have to re-ask this question because this is so important for your investors. You know, a lot of financial institutions that you probably don't want to compare yourself with in this light, like Wells Fargo and Citigroup, when they announced CEO transitions, you know, they did announce a permanent successor, rather than an interim successor when that happened. Of course, those were related to similar issues as well. John, I'm just wondering, if you have such a robust succession process, you know, why are you here? Why are, why are we in this process where, you know, such a crucial point for the company and you're, you're, you're, you're looking on the outside? Is it really that you did want to give yourself a chance to look outside of the company for a fresh set of eyes as you take Discover to the next chapter? No, great question. I think what I mentioned earlier about our succession planning process, I think companies that get this right take the time to really evaluate both internal and external. Many companies that promote an internal candidate quickly, I think, don't take the time to do due diligence on external candidates. We will be taking that time to do that. That's why we put an interim in the role, so we could do this at the right pace and make sure we get the right individual. Clearly, we know our internal candidates very well, but it's very hard to assess external candidates until you really have an active search and a job that you can really talk about and describe. I think this is a great job for someone. I think we will have a strong list. We do have a strong list of candidates, both internally and externally, and I think we'll get the right person in the role, in a fairly quick manner. Got it. My follow-up question is for John Greene. You know, I guess it's a 2-prong question. You know, John Owen just said that, you know, you want to prioritize resolving the issues, and I think that's what your investors want as well. As we think about the forward outlook, number 1, you know, I presume you're going to spend what you need to spend in 2024, and you'll frame that for us later to get to, you know, an elegant solution more quickly in terms of your systems and processes. Second, while you do have 120 basis points of excess capital, how do you balance the fact that you do have excess capital relative to your target versus being kind of in a good guy, conservative box relative to the regulators, if that makes sense? Yeah. You know, we, we have traditionally been conservative on multiple fronts in, in, in terms of capital and ensuring that we have a significant amount of, I'll say, differentiation between regulatory minimums and our capital target, and we'll continue to do that. You know, the thing that I don't want lost on anyone here is that the earnings power of the firm remains very, very strong, despite the fact of us investing significantly more in risk and compliance. We're going to, we're going to continue to invest what we need to, as, as, as I mentioned previously, and, and, and you picked up on. The earnings power is strong, the capital generation power of the firm remains strong. You know, we're going to be conservative in our decisions, but also very, very mindful that return of capital is an important piece of the investment thesis of our investors. You know, we're going to, we're going to try to hit the right balance. Thank you. Thank you. [crosstalk] Chelsea, I think we have time for, for one last questioner, please. Okay. Our last question will come from Bill Carcache with Wolfe Research. Thank you. Good morning, thanks for taking my question. I wanted to ask John Owen, you mentioned that your plan is really to stay the course and execute on the plan that you have. I think it's also fair to say that Roger was highly regarded by the investment community, his departure was certainly seen as abrupt. Can you give any color on perhaps the extent to which his departure might have been influenced by a lack of tolerance among regulators in this environment following the March bank failures? Perhaps, you know, this is just a reflection of greater urgency that regulators want to impress on the banks that they supervise. Any color there would be helpful. Sure. What I, what I would tell you again, the board is actively engaged in its oversight responsibilities, and part of that is making sure that we have the right senior management team in place. I think you've seen us take actions on that, and it's really directed by the board, from the board, not from the regulators. I think we have. If you look at our management changes that I already mentioned, you'll see we have replaced about half the senior team through either retirements or individuals being asked to leave roles. That's something that I think will build a better organization going forward. I think you'll see us continue to drive strong results in the coming quarters. Thank you. I wanted to ask you a question we've been getting from investors. Would love to hear your thoughts on the idea that, you know, some people are asking whether Roger's departure could potentially spark a greater willingness to entertain M&A discussions. If you could share any thoughts on that, that would, that would be helpful. You know, on the M&A front, I, I really can't add much to that. I mean, that's not something that, that we really can comment on. I would tell you our first priority is executing our plan and organic growth and driving the business model we have. We get good, solid returns where we are, and again, I can't really disclose anything on the M&A front. Understood. Thank you for taking my questions. All right. Well, I think we're going to conclude our call here. I know there's a few people still in queue, so feel free to reach out to us. John Greene and the IR team are available all day for calls. Thank you for joining us, and Chelsea, we'll turn it back to you. Thank you, ladies and gentlemen. This does conclude today's program. We appreciate your participation. You may disconnect at any time.