The table below reflects our current credit ratings and outlooks: | | | | | | | | | | | | | | | | | | | Moody’s Investors Service(1) | | Standard & Poor’s | | Fitch Ratings | Discover Financial Services | | | | | | Senior unsecured debt | Baa3 | | BBB- | | BBB+ | Outlook for Discover Financial Services senior unsecured debt | Under Review | | Stable | | Stable | Discover Bank | | | | | | Senior unsecured debt | Baa2 | | BBB | | BBB+ | Outlook for Discover Bank senior unsecured debt | Under Review | | Stable | | Stable | Subordinated debt | Baa2 | | BBB- | | BBB | Discover Card Execution Note Trust (DCENT) | | | | | | Class A(2) | Aaa(sf) | | AAA(sf) | | AAA(sf) | | | | | | | | Moody’s Investors Service | | Standard & Poor’s | | Fitch Ratings | Discover Financial Services | | | | | | Senior unsecured debt | Baa3 | | BBB- | | BBB+ | Outlook for Discover Financial Services senior unsecured debt | Stable | | Stable | | Stable | Discover Bank | | | | | | Senior unsecured debt | Baa2 | | BBB | | BBB+ | Outlook for Discover Bank senior unsecured debt | Stable | | Stable | | Stable | Subordinated debt | Baa3 | | 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. |
(1)On December 7, 2022, Moody’s Investors Service placed all of the long-term ratings and assessments for Discover Financial Services and Discover Bank on review for upgrade.
(2)An “sf” in the rating denotes rating agency identification for structured finance product ratings. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization, and eachorganization. Each rating should be evaluated independently of any other rating. A credit rating outlook reflects an agency's opinion regarding the likely rating direction over the medium term, often a period of about a year, and indicates the agency's belief that the issuer's credit profile is consistent with its current rating level at that point in time. Liquidity We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy debt obligations under stressed and normal operating conditions. In addition to the funding sources discussed in the previous section, we also maintain highly liquid, unencumbered assets in our liquidity portfolio that we expect to be able to convert to cash quickly and with little loss of value using either the repo market or outright sales. We maintain a liquidity risk and funding management policy, which outlines the overall framework and general principles we follow in managing liquidity risk across our business. The policy is approved by the Board of Directors with implementation responsibilities delegated toapproves the policy and the Asset and Liability Management Committee (the “ALCO”). is responsible for its implementation. Additionally, we maintain a liquidity management framework document whichthat outlines the general strategies, objectives and principles we utilize to manage our liquidity position and the various liquidity risks inherent in our business model. 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 theThe ALCO, which is chaired by our Treasurer, and has cross-functional membership.membership, and manages liquidity risk centrally. The ALCO monitors the liquidity risk profiles of DFS and Discover Bank and oversees any actions Corporate Treasury may take to ensure that we maintain ready access to our funding sources and sufficient liquidity to meet current and projected needs. In addition, the ALCO and our Board of Directors regularly review our compliance with our liquidity limits at DFS and Discover Bank, which are established in accordance with the liquidity risk appetite set by our Board of Directors. We employ a variety of metrics to monitor and manage liquidity. We utilize early warning indicators (“EWIs”) to detect the initial phases ofemerging 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. In addition, we conduct liquidity stress tests regularly and ensure contingency funding is in place to address potential liquidity shortfalls. We evaluate a range of stress scenarios that are designed in accordance withaccording to 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 contingentcontingency liquidity sources include our liquidity portfolio securities, which we could sell, repo or borrow against, and private securitizations with unused borrowing capacity. In addition, we could borrow FHLB advances by pledging securities to the FHLB of Chicago. Moreover, we have unused borrowing capacity with the Federal Reserve discount window, which provides an additional source of contingentcontingency liquidity. 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 such an environment, we may also take actions to curtail the size of our balance sheet, which would reduce the need for funding and liquidity. At December 31, 2019,2022, our liquidity portfolio is comprisedwas composed 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 U.S. GSEs and residential mortgage-backed securities (“RMBS”) issued by U.S. government housing agencies or government-sponsored enterprises.U.S. GSEs. 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 uponon the size of our balance sheet as well as operational requirements, market conditions and interest rate risk management policies. For example, we have altered the composition of our liquidity portfolio to mitigate the potential volatility of earnings that may arise from changes in interest rates.objectives.
At December 31, 2019,2022, our liquidity portfolio and undrawn credit facilities were $56.3$67.3 billion, which was $3.4$14.4 billion higher than the balance at December 31, 2018.2021. Our liquidity portfolio and undrawn credit facilities grew primarily as a result of the purchase of Treasury securities and additional borrowing capacity with the Federal Reserve. During the yearyears ended December 31, 2019,2022 and 2021, the average balance of our liquidity portfolio was $18.1 billion.$16.3 billion and $23.4 billion, respectively. Our liquidity portfolio and undrawn facilities consist of the following (dollars in millions): | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | Liquidity portfolio | | | | Cash and cash equivalents(1) | $ | 7,585 | | | $ | 8,080 | | | | | | Investment securities(2) | 12,213 | | | 6,879 | | Total liquidity portfolio | 19,798 | | | 14,959 | | Private asset-backed securitizations(3) | 3,500 | | | 3,500 | | Federal Home Loan Bank of Chicago | 1,712 | | | 150 | | Primary liquidity sources | 25,010 | | | 18,609 | | Federal Reserve discount window(3) | 42,268 | | | 34,254 | | Total liquidity portfolio and undrawn credit facilities | $ | 67,278 | | | $ | 52,863 | | | | | |
(1)Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes. | | | | | | | | | | December 31, | | 2019 | | 2018 | | (dollars in millions) | Liquidity portfolio | | | | Cash and cash equivalents(1) | $ | 6,406 |
| | $ | 12,832 |
| Investment securities(2) | 10,202 |
| | 3,091 |
| Total liquidity portfolio | 16,608 |
| | 15,923 |
| Private asset-backed securitizations(3) | 5,500 |
| | 5,500 |
| Primary liquidity sources | 22,108 |
| | 21,423 |
| Federal Reserve discount window(3) | 34,220 |
| | 31,486 |
| Total liquidity portfolio and undrawn credit facilities | $ | 56,328 |
| | $ | 52,909 |
| | | | |
(2)Excludes $97 million and $27 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of December 31, 2022 and 2021, respectively. | | (1) | Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes. |
| | (2) | Excludes $121 million and $42 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of December 31, 2019 and 2018, respectively.(3)See “— Additional Funding Sources” for additional information. |
| | (3) | See “— Additional Funding Sources” for additional information. |
Bank Holding Company Liquidity The primary uses of funds at the unconsolidated DFS level include debt service obligations (interest payments and return of principal) and capital service and management activities, which includeincluding dividend payments on capital instruments and the periodic repurchase of shares of our common stock. Our primary sources of funds at the bank holding company level include the proceeds from the issuance of unsecured debt and capital securities, as well as dividends from our subsidiaries, particularlynotably 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 ServicesDFS can meet upcoming funding obligations, including common and preferred stock dividend payments and debt service obligations, using existing cash resources. We In managing this metric, we structure our debt maturity schedule to minimizemanage
prudently the amount of debt maturing within a short period of time.period. See Note 9: Long-Term Borrowings to our consolidated financial statements for further information regarding our debt. Capital Our primary sources of capital are the earnings generated by our businesses and the proceeds from issuances of capital securities. We seek to manage capital to a level and composition sufficient to support theour businesses’ growth, andaccount for their risks, of our businesses and to meet regulatory requirements, rating agency targets and debt investor expectations. Within these constraints, we are focused on deploying capital in a manner that provides attractive returns to our stockholders. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments. Under regulatory capital requirements adopted by the Federal Reserve and the FDIC, DFS, along with Discover Bank, must maintain minimum levels of capital.capital levels. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a direct material effect on our financial positioncondition and operating results. We must meet specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidance and regulations. Current or future legislative or regulatory reforms, such as those related to the future implementationadoption of the CECL accounting model, may require us to hold more capital or adversely impact our capital level. We consider the potential impacts of these reforms in managing our capital position. Discover Financial ServicesDFS and Discover Bank are subject to regulatory capital requirements that became effective January 2015 under final rules issued by the Federal Reserve and the Federal Deposit Insurance Corporation
to implement the provisionsFDIC, respectively, under the Basel Committee’s December 2010 framework (“Basel III rules”). TheUnder the Basel III rules, require Discover Financial Services and Discover Bank to maintain minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios. Under Basel III rules for regulatory capital, DFS and Discover Bank are classified as “Standardized Approach”“standardized approach” entities defined as they are U.S. banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposures less than $10 billion. AsThe Basel III rules require DFS and Discover Bank to maintain minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios.
In March 2020, federal bank regulatory agencies announced an interim and now final rule that allows banks that have implemented the CECL accounting model to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, we have elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, the estimated impact of CECL on regulatory capital will be phased in over three years, beginning in 2022. Electing this option raised our Common Equity Tier 1 ("CET1") capital ratios in 2022 and 2021. The phase-in of the CECL accounting model decreased CET1 by $537 million as of January 1, 2019, thresholds within the Basel III rules are fully phased in with the exception of certain transition provisions that were frozen pursuant to regulation issued in November 2017. Pursuant to a final rule issued in July 2019, the transition provisions that were previously frozen will be replaced with new permanent thresholds as discussed below.2022. For additional information regarding the risk-based capital and leverage ratios, see Note 17: Capital Adequacy to our consolidated financial statements. The Basel III rules also introduced aIn March 2020, the Federal Reserve announced the SCB final rule, which imposes limitations on DFS’ capital conservation buffer (“CCB”) on top of the minimum risk-weighted asset ratios. The buffer is designed to absorb losses during periods of economic stress. The application of the buffer was subject to phase-in periods that ended December 31, 2019. Then beginning January 1, 2019, the CCB effectively results in minimum regulatorydistributions if we do not maintain our risk-based capital ratios (including the CCB) of (i) Common Equity Tier 1 (“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 threshold will face constraints on dividends, equity repurchases and compensationabove stated regulatory minimum ratios based on the results of supervisory stress tests. Under this rule, DFS is required to assess whether our planned capital actions are consistent with the effective capital distribution limitations that will apply on a pro-forma basis throughout the planning horizon.
The SCB requirement is institution-specific and is calculated as the greater of (i) 2.5% and (ii) the sum of (a) the difference between DFS' actual CET1 ratio at the beginning of the forecast and the projected minimum CET1 ratio based on the Federal Reserve's models in its nine-quarter Severely Adverse stress scenario, plus (b) the sum of the dollar amount of DFS' planned common stock dividend distributions for each of the shortfall. There isfourth through seventh quarters of its nine-quarter capital planning horizon, expressed as a proposal under regulatory review bypercentage of risk-weighted assets. For Category IV firms, including DFS, the Federal Reserve calculates each firm’s SCB biennially in even-numbered calendar years, and did so in 2022. In odd-numbered years, each firm subject to Category IV standards that would effectively replacedid not opt-in to such year’s supervisory stress tests as part of the CCB with a new bufferFederal Reserve’s CCAR process receives an adjusted SCB requirement for DFS that is linkedupdated to supervisory stress testing results (i.e.,reflect its planned common stock dividends per the Stressfirm’s annual capital plan. In August 2021, the Federal Reserve notified DFS of its adjusted SCB requirement of 3.6% based on the planned common stock dividends in the 2021 Capital Buffer), see “—Plan. DFS' SCB was effective in October 2021 and slightly increased from our SCB in effect for the preceding year, which was 3.5%. See "— Regulatory Environment and Developments.”Developments — Banking — Capital Standards and Stress Testing" for additional information. The Basel III rules provide for certain threshold-based deductions from and adjustments
DFS elected not to CET1, to the extent that any one such category exceeds 10% of CET1 or all such categoriesparticipate in the aggregate exceed 15%Federal Reserve’s supervisory stress test in 2021, but did participate in 2022. As part of CCAR, DFS submitted an annual capital plan by the April 5, 2022 due date (“2022 Capital Plan”). In July 2019, federal banking regulators issued a final rule that, among other things, revises certainOn June 23, 2022, the Federal Reserve released results of the 2022 CCAR stress test. Discover’s results showed strong capital levels under stress, well above regulatory minimums. These results were used to set the new SCB effective October 1, 2022. On August 4, 2022, the Federal Reserve disclosed the new SCB for DFS is 2.5%, the lowest possible requirement. At December 31, 2022, DFS and Discover Bank met the requirements for Standardized Approach banks by raising“well-capitalized” status under the 10% of CET1 deduction threshold for certain itemsFederal Reserve’s Regulation Y and the prompt corrective action rules and corresponding FDIC requirements, respectively, exceeding the regulatory minimums to 25% and eliminateswhich they were subject under the 15% combined deduction threshold applying to these items. These changes will become effective for all Standardized Approach banking institutions in April 2020, although banks have the option to adopt early beginning on January 1, 2020.applicable rules. Basel III rules also require disclosures relating to market discipline. This series of disclosures is commonly referred to as “Pillar"Pillar 3.”" The objective is to increase the 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 exposures and risk-weighted assets. TheWe make the Pillar 3 disclosures are made publicly available on our website in a report called “Basel"Basel III Regulatory Capital Disclosures.” At December 31, 2019, DFS 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."
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 meaningful measure to investors as a measure of our true net asset value. As ofAt December 31, 2019,2022, tangible common equity is considered to be a non-GAAP financial measure as it is not formally defined by U.S. GAAP or codified in the federal banking regulations and, as such, is considered to be a non-GAAP financial measure.regulations. Other financial services companies may also disclose this measure and definitions may vary, so wevary. We advise users of this information to exercise caution in comparing this measure for different companies. The following table reconciles total common stockholders’ equity (a GAAP financial measure) to tangible common equity (dollars in millions): | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | Total common stockholders’ equity(1) | $ | 13,534 | | | $ | 12,352 | | Less: goodwill | (255) | | | (255) | | Tangible common equity | $ | 13,279 | | | $ | 12,097 | | | | | |
(1)Total common stockholders’ equity is calculated as total stockholders’ equity less preferred stock.
The following table provides a reconciliation of total common stockholders’ equity (a U.S. GAAP financial measure) to tangible common equity (dollars in millions): | | | | | | | | | | December 31, | | 2019 | | 2018 | Total common stockholders’ equity(1) | $ | 11,296 |
| | $ | 10,567 |
| Less: goodwill | (255 | ) | | (255 | ) | Less: intangible assets, net | (155 | ) | | (161 | ) | Tangible common equity | $ | 10,886 |
| | $ | 10,151 |
| | | | |
Our Board of Directors declared the following common stock dividends during 2022, 2021 and 2020: | | | | | | | | | | | | | | | | | | | | | (1)Declaration Date | | Record Date | | Payment Date | | Dividend per Share | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | | | | | | October 18, 2022 | | November 23, 2022 | | December 08, 2022 | | $ | 0.60 | | July 20, 2022 | | August 25, 2022 | | September 08, 2022 | | 0.60 | | April 27, 2022 | | May 26, 2022 | | June 09, 2022 | | 0.60 | | January 18, 2022 | | February 17, 2022 | | March 03, 2022 | | 0.50 | | Total common stockholders’ equity is calculated as total stockholders’ equity less preferred stock.stock dividends | | $ | 2.30 | | | | | | | | | 2021 | | | | | | | October 19, 2021 | | November 24, 2021 | | December 09, 2021 | | $ | 0.50 | | July 20, 2021 | | August 19, 2021 | | September 02, 2021 | | 0.50 | | April 20, 2021 | | May 20, 2021 | | June 03, 2021 | | 0.44 | | January 19, 2021 | | February 18, 2021 | | March 04, 2021 | | 0.44 | | Total common stock dividends | | $ | 1.88 | | | | | | | | | 2020 | | | | | | | October 20, 2020 | | November 19, 2020 | | December 03, 2020 | | $ | 0.44 | | July 21, 2020 | | August 20, 2020 | | September 03, 2020 | | 0.44 | | April 21, 2020 | | May 21, 2020 | | June 04, 2020 | | 0.44 | | January 21, 2020 | | February 20, 2020 | | March 05, 2020 | | 0.44 | | Total common stock dividends | | $ | 1.76 | | | | | | | | |
Additionally,On January 17, 2023, we are subject to regulatory requirements imposed by the Federal Reserve as part of its stress testing framework and CCAR program. Refer to “— Regulatory Environment and Developments” for more information.
For the period between July 1, 2019 and June 30, 2020, the Federal Reserve pre-approved capital distributions up to a maximum amount for each Category IV bank, including Discover. The Federal Reserve based these capital distribution limits on results from the 2018 supervisory stress test. Notwithstanding the pre-approval, we were still required to prepare a capital plan to be approved by our Board of Directors. This plan outlined our contemplated capital distributions for the period from July 1, 2019 to June 30, 2020, which were within the Federal Reserve’s pre-approved amount.
After our Board of Directors approved our capital plan, we submitted our planned capital actions to the Federal Reserve in April 2019. Pursuant to that plan, we are returning capital to our shareholders by paying dividends on our common and preferred stock and repurchasing shares of our common stock. We recently declared a quarterly cash dividend on our common stock of $0.44$0.60 per share, payable on March 5, 20209, 2023 to holders of record on February 20, 2020,23, 2023, which is consistent with the quarterly amount paid in 2022.
Our Board of Directors declared the thirdfollowing Series C preferred stock dividends during 2022, 2021 and fourth quarters2020: | | | | | | | | | | | | | | | | | | | | | Declaration Date | | Record Date | | Payment Date | | Dividend per Depositary Share | 2022 | | | | | | | July 20, 2022 | | October 14, 2022 | | October 31, 2022 | | $ | 27.50 | | January 18, 2022 | | April 15, 2022 | | May 02, 2022 | | 27.50 | | Total Series C preferred stock dividends | | $ | 55.00 | | | | | | | | | 2021 | | | | | | | July 20, 2021 | | October 15, 2021 | | November 01, 2021 | | $ | 27.50 | | January 19, 2021 | | April 15, 2021 | | April 30, 2021 | | 27.50 | | Total Series C preferred stock dividends | | $ | 55.00 | | | | | | | | | 2020 | | | | | | | July 21, 2020 | | October 15, 2020 | | October 30, 2020 | | $ | 27.50 | | January 21, 2020 | | April 15, 2020 | | April 30, 2020 | | 27.50 | | Total Series C preferred stock dividends | | $ | 55.00 | | | | | | | | |
Our Board of Directors declared the following Series D preferred stock dividends during 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | Declaration Date | | Record Date | | Payment Date | | Dividend per Depositary Share | 2022 | | | | | | | July 20, 2022 | | September 08, 2022 | | September 23, 2022 | | $ | 30.625 | | January 18, 2022 | | March 08, 2022 | | March 23, 2022 | | 30.625 | | Total Series D preferred stock dividends | | $ | 61.250 | | | | | | | | | 2021 | | | | | | | July 20, 2021 | | September 08, 2021 | | September 23, 2021 | | $ | 30.625 | | January 19, 2021(1) | | March 08, 2021 | | March 23, 2021 | | 46.110 | | Total Series D preferred stock dividends | | $ | 76.735 | | | | | | | | |
(1)The dividend includes $30.63 semi-annual dividend per depositary share plus $15.48 to account for the long first dividend period. On January 17, 2023, we declared a semi-annual cash dividend on our Series C and Series D preferred stock of $2,750 per share, equal to $27.50 and $30.625 per depositary share, respectively, payable on April 30, 2020May 1, 2023 and March 23, 2023, respectively, to holders of record on April 15, 2020, which is consistent with the amount paid in the second14, 2023 and fourth quarters of 2019. On July 18, 2019, ourMarch 8, 2023, respectively. Our Board of Directors approved a new share repurchase program authorizing the repurchase ofin April 2022. The new program authorizes up to $2.2$4.2 billion of our outstanding shares of common stock. The program expires on Septembershare repurchases through June 30, 2020 and may be terminated at any time.2023. This programshare repurchase authorization replaced the prior $3.0a $2.4 billion share repurchase program, which had $1.2 billionexpired on March 31, 2022. During the three months ended December 31, 2022, we repurchased approximately 5.9 million shares, or 2.2% of remaining authorization.our outstanding common stock as of September 30, 2022, for approximately $600 million. During the year ended December 31, 2019,2022, we repurchased approximately 2221.5 million shares, or 7%,7.5% of our outstanding common stock as of December 31, 2021, for $1.7$2.3 billion. We expect to continuemay use various methods to repurchase shares under our program from time to time based on market conditions and other factors, subject to legal and regulatory requirements and restrictions, including limitations from the Federal Reserve as 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 uponon our results of operations, financial condition, capital levels, cash requirements, future prospects, regulatory review and other factors, such asfactors. In July 2022, we suspended our existing share repurchase program because of an internal investigation related to our student loan servicing practices and related compliance matters conducted under the implementationoversight of CECL.a board-appointed independent special committee. In November 2022, the investigation was completed and we resumed share repurchases under the existing program. We continue to communicate with the supervisory staff of our regulators regarding the internal investigation, and we may be subject to reviews, investigations, proceedings, fines or other actions in connection with our student loan servicing practices and related compliance matters. The declaration and payment of future dividends as well asand 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, andoutstanding. No dividend may be declared or paid or set aside for payment on our common stock if full dividends have not been declared and paid on all outstanding shares of preferred stock in any dividend period, no dividend may be declared or paid or set aside for payment on our common stock.period. In addition, as noted above, banking laws and regulations and our banking regulators may limit our ability to pay dividends and make share repurchases, including limitations on the extent to which our banking subsidiariessubsidiary (Discover Bank) can provide funds to us through dividends, loans or otherwise. Further, current or future regulatory reforms may require us to hold more capital or could adversely impact our capital level. ThereAs a result, there can be no assurance that we will declare and pay any dividends or repurchase any shares of our common stock in the future. For more information, including conditions
Item 7A. Quantitative and limits on our ability to pay dividends and repurchase our stock, see “Business — Supervision and Regulation — Capital, Dividends and Share Repurchases,” “Risk Factors — Credit,Qualitative Disclosures About Market and Liquidity Risk — We may be limited in our ability to pay dividends on and repurchase our stock” and “— We are a holding company and depend on payments from our subsidiaries” and Note 17: Capital Adequacy to our consolidated financial statements. 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 18: Commitments, Contingencies and Guarantees to our 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 include deposits, long-term borrowings, operating lease obligations, interest payments on fixed-rate debt, purchase obligations and other liabilities. Our future cash payments associated with our contractual obligations are summarized below (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | Payments Due By Period | At December 31, 2019 | Total | | Less Than One Year | | One Year Through Three Years | | Four Years Through Five Years | | More Than Five Years | Deposits(1)(2) | $ | 72,746 |
| | $ | 57,341 |
| | $ | 10,272 |
| | $ | 3,222 |
| | $ | 1,911 |
| Borrowings(3) | 25,701 |
| | 5,247 |
| | 9,329 |
| | 5,884 |
| | 5,241 |
| Operating leases | 128 |
| | 14 |
| | 27 |
| | 28 |
| | 59 |
| Interest payments on fixed-rate debt | 2,648 |
| | 614 |
| | 922 |
| | 576 |
| | 536 |
| Purchase obligations(4) | 1,237 |
| | 641 |
| | 369 |
| | 180 |
| | 47 |
| Other liabilities(5) | 301 |
| | 53 |
| | 72 |
| | 42 |
| | 134 |
| Total contractual obligations | $ | 102,761 |
| | $ | 63,910 |
| | $ | 20,991 |
| | $ | 9,932 |
| | $ | 7,928 |
| | | | | | | | | | |
| | (1) | Deposits do not include interest payments because payment amounts and timing cannot be reasonably estimated as certain deposit accounts have early withdrawal rights and the option to roll interest payments into the balance. |
| | (2) | Deposits due in less than one year include deposits with indeterminate maturities. |
| | (3) | See Note 9: Long-Term Borrowings to our consolidated financial statements for further discussion. Total future payment of interest charges for the floating-rate notes is estimated to be $392 million as of December 31, 2019, utilizing the current interest rates as of that date.
|
| | (4) | Purchase obligations for goods and services include payments under, among other things, consulting, outsourcing, data, advertising, sponsorship, software license, telecommunications agreements and global acceptance contracts. Purchase obligations also include payments under rewards program agreements with merchants. Purchase obligations at December 31, 2019 reflect the minimum purchase obligation under legally binding contracts with contract terms that are both fixed and determinable. These amounts exclude obligations for goods and services that already have been incurred and are reflected on our consolidated statement of financial condition.
|
| | (5) | Other liabilities include our expected benefit payments associated with our pension plan, the contingent liability associated with our other investments accounted for under the equity method and a commitment to purchase certain when-issued mortgage-backed securities under an agreement with the Delaware State Housing Authority as part of our community reinvestment initiatives. |
As of December 31, 2019 our consolidated statement of financial condition reflects a liability for unrecognized tax benefits of $61 million and approximately $17 million of accrued interest and penalties. Since the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, the estimated income tax obligations about which there is uncertainty have been excluded from the contractual obligations table. See Note 15: Income Taxes to our consolidated financial statements for further information concerning our tax obligations.
We extend credit for consumer loans, primarily arising 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 established in the related agreement. At December 31, 2019, our unused credit arrangements were approximately $206.7 billion. These arrangements, substantially all of which we can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification. In addition, in the ordinary course of business, we guarantee payment on behalf of subsidiaries relating to contractual obligations with external parties. The activities of the subsidiaries covered by any such guarantees are included in our consolidated financial statements.
| | Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses for an investment position or portfolio. We are exposed to market risk primarily from changes in interest rates. Interest Rate Risk We borrow money from a variety ofvarious depositors and institutions in order to provide loans to our customers as well asand invest in other assets and our business. These loans to customers and other assets earn interest, which we use to pay interest on the money borrowed. Our net interest income and, therefore, earnings will be reduced if the interest rate earned on assets increases at a slower pace than the interest rate paid on our borrowings. Changes in interest rates and our
competitors’ responses to those changes may influence customer payment rates, loan balances or deposit account activity. As a result, we may incur higher funding costs which maythat could decrease our earnings. Our interest rate risk management policies are designed to measure and manage the potential volatility of earnings that may arise from changes in interest rates by having a financing portfolio that reflects our mix of variable- and fixed-rate assets.assets and liabilities. To the extent that the repricing characteristics of the assets and liabilities in a particular portfolio are not sufficiently matched, we may utilize interest rate derivative contracts, such as swap agreements, to achieve our objectives. Interest rate swap agreements effectively convert the underlying asset or liability from fixed- to floating-rate or from floating- to fixed-rate. See Note 21: Derivatives and Hedging Activities to our consolidated financial statements for information on our derivatives activity. We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12-month period12 months from our reporting date, we assume that all interest rate sensitiveinterest-rate-sensitive assets and liabilities will be impacted byare subject to a hypothetical, immediate 100 basis point change in interest rates relative to market consensus expectations as of the beginning of the period. The sensitivity is based uponsimulation includes the hypothetical assumption that all relevant types of interest rates would change instantaneously, simultaneously and to the same degree. Our interest rate sensitiveinterest-rate-sensitive assets include our variable-rate loan receivables and thecertain assets that make upin our liquidity portfolio. We have limitations on our ability to mitigate interest rate risk by adjusting rates on existing balances andbalances. Further, competitive actions may limit our ability to increase the rates that we charge to customers for new loans. At December 31, 2019,2022, the majority of our credit card and private student loans charge variable rates. Assets with ratesFixed-rate assets that are fixed at period end but which will mature or otherwise contractually reset to a market-based indexed rate or other fixed ratefixed-rate prior to the end of the 12-month measurement period are considered to be rate sensitive. The latter category includes certain revolving credit card loans that may be offered at below-market rates for an introductory period, such as balance transfers and special promotional programs, after which the loans will contractually reprice in accordance with our normal market-based pricing structure. For assets that havewith a fixed interest rate butthat contractually will, or areis 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 sensitiveinterest-rate-sensitive assets, earnings sensitivity is calculated net of expected loan losses, which forcredit losses. For purposes of this analysis, expected credit losses are assumed to remain unchanged relative to our baseline expectations over the analysis horizon. Interest rate sensitiveInterest-rate-sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12-month period.12 months. Thus, liabilities that vary with changes in a market-based index, such as the federal funds rate or London Interbank OfferedSecured Overnight Financing Rate (“SOFR”), which will reset before the end of the 12-month period,next 12 months, or liabilities whosethat have fixed rates are fixed at the fiscal period end but will mature and are assumed to be replaced with a market-based indexed rate prior to the end of the 12-month period,next 12 months, are also considered to be rate sensitive. For these fixed-rate liabilities, earnings sensitivity is measured from the expected maturity date.
Net interest income sensitivity requiressimulations require assumptions to be made regarding market conditions, consumer behavior and the overall growth and composition of theour balance sheet. These assumptionsThe degree by which our deposit rates change when benchmark interest rates change, our deposit “beta,” is one of the most significant of these assumptions. Assumptions about deposit beta and other matters are inherently uncertain and, as a result, actual earnings may differ from the simulated earnings presented below. Our actual earnings depend on multiple factors including, but not limited to, the direction and timing of changes in interest rates, the movement of short-term versusinterest rates relative to long-term rates, balance sheet composition, competitor actions affecting pricing decisions in our loans and deposits, the mix of promotional balances in our card portfolio, the level of interest charge-offs and recoveries, the influence of loan repayment rates on revolving balances and strategic actions undertaken by our management.
The following table shows the impacts to net interest income over the following 12-month period that we estimate would result from an immediate and parallel change in interest rates affecting all interest rate sensitive assets and liabilities (dollars in millions): | | | | | | | | | | | | | | | | At December 31, 2019 | | At December 31, 2018 | Basis point change | $ | | % | | $ | | % | +100 | $ | 12 |
| | 0.12 | % | | $ | 192 |
| | 2.01 | % | -100 | $ | (13 | ) | | (0.13 | )% | | $ | (194 | ) | | (2.03 | )% | | | | | | | | |
Our current short-term interest rate risk position is modestly asset-sensitive. We believe this position is prudent given benchmark interest rates have been prone to rise as the Federal Reserve has raised its federal funds rate target in response to high inflation. The following table shows the impacts to net interest income over the following 12-month period that we estimate would result from an immediate and parallel change in interest rates affecting all interest rate sensitive assets and liabilities (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | Basis point change | $ | | % | | $ | | % | +100 | $ | 183 | | | 1.40 | % | | $ | 154 | | | 1.51 | % | -100 | $ | (190) | | | (1.45) | % | | NM | | NM | | | | | | | | |
An estimated impact on net interest income of a decrease in interest rates at December 31, 2021, was not provided as many of our interest-rate-sensitive assets and liabilities were tied to interest rates (i.e., prime and federal funds) that were near their historical minimum levels and, therefore, could not materially decrease.
| | Item 8. | Financial Statements and Supplementary Data |
Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Discover Financial Services Riverwoods, IL Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Discover Financial Services (the “Company”) as of December 31, 2019,2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial condition, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows as of and for the year ended December 31, 2019,2022, of the Company and our report dated February 26, 2020,23, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. | | | | | | /s/ DELOITTEDeloitte & TOUCHETouche LLP | | Chicago, Illinois | | February 26, 202023, 2023 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Discover Financial Services Riverwoods, IL Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of Discover Financial Services (the “Company”) as of December 31, 20192022 and 2018,2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2019,2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control —- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2020,23, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit MattersMatter The critical audit mattersmatter communicated below are mattersis a matter arising from the current-period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates. Allowance for Credit Card Loan Losses — Refer to Notes 1, 2 and 4 to the financial statementsstatements. Critical Audit Matter Description The Company originates unsecured credit card loans. At December 31, 2019, these loans totaled $77 billion. The Company estimates and records an allowance for credit card loans that are impaired on a pool basis using credit loss models that incorporate historical loss data, current portfolio characteristics, and other qualitative factors. There was a significant amount of judgment required by management in selecting model inputs and in analyzing the results produced by the models to determine the recorded allowance.
Auditing the credit loss models and related inputs used to determine the allowance involved especially subjective auditor judgment due to the nature and extent of evidence provided and required significant effort, including the use of credit modeling specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the allowance for credit card loan losses balance included the following procedures, among others:
We tested the design and operating effectiveness of management’s controls over the allowance for loan losses including controls over data integrity and model assumptions.
We tested the completeness and accuracy of the historical borrower data, including collection data, bankruptcy statistics, portfolio characteristics, and other data used in management’s models.
We used our credit modeling specialists to assist us in evaluating the appropriateness of the models used to determine the allowance. We also evaluated the reasonableness of the economic assumptions used in the models by comparing such assumptions to independent sources.
We evaluated the model results considering economic conditions, including recent trends in national credit card loan delinquencies and charge-offs data, and performed a peer analysis to evaluate the trends in the Company’s allowance for loan losses over time and as compared to its peers.
We assessed the reasonableness of the model results by comparing modeled losses to actual historical losses.
Disclosure of Accounting Standard Update (“ASU”) 2016-13 Adoption — Refer to Note 1 to the financial statements
Critical Audit Matter Description
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses, which introduces a forward-looking “expected loss” model (the “Current Expected Credit Losses (CECL)” model) to estimate credit losses over the remaining expected life of the Company’s loan portfolio. Estimates of expected credit losses under the CECLCurrent Expected Credit Losses (“CECL”) model, in accordance with ASU 2016-13, are based on relevant information about current conditions, historical experiencesexperience and reasonable and supportable forward-looking forecasts regarding collectability of the loan portfolio.
In order to estimate the expected credit losses, new credit loss models were implemented to align with the CECL model. Assumptions used to estimate expected credit losses under the CECL model included, but were not limited to, key economic assumptions applied over a reasonable and supportable forecast period and, for the credit card portfolio, the application of a credit card payment allocation policy.
During the year ended December 31, 2022, the economic environment resulted in increased uncertainty and more
judgment to derive the CECL estimate. Specifically, the unknown impacts of the cessation of fiscal policy assistance and recent monetary policy actions, in response to inflation, have increased the uncertainty associated with the macroeconomic outlook and CECL estimate. The Company disclosed thatselection of key assumptions and evaluation of model output required significant judgment from management. At December 31, 2022, the impact of adoption on January 1, 2020 will result in an increase of $2.5 billiontotal allowance for loans was $7.4 billion. Given the significant estimates and assumptions management makes to estimate the allowance for credit losses an increase of $0.6 billion to other assets and a $1.9 billion decrease in retained earnings. Given the estimation of credit losses significantly changes under the CECL model, including the application of new accounting policies, the use of new subjective judgments, and changes made to the loss estimation models,economic environment, performing audit procedures to evaluate the disclosurereasonableness of ASU 2016-13 adoption involvedmanagement’s estimates and assumptions required a high degree of auditor judgment and required significantan increased extent of effort, including the need to involve our credit modeling specialists.
How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the disclosure of ASU 2016-13 adoptionallowance for credit losses balance included the following procedures, among others: •We tested the design and operating effectiveness of management’s controls over the CECL estimate including controls over data integrity,determination and review of model methodology, significant assumptions and model validation.overlays, if applicable •We evaluated whether the method (including the model), data, and significant assumptions are appropriate in the context of the applicable financial reporting framework •We tested the relevance and reliability of internal and external data used within the models, including whether the data is accurate and complete when internally derived •With assistance from credit modeling specialists, we evaluated whether the model is suitable for determining the estimate, which included understanding the model methodology and logic and whether the selected method for estimating loan losses is appropriate for each loan portfolio •We evaluated whether the significant economic assumptions were reasonable and internally and externally consistent •We evaluated the Company’s accounting policies, methodologies,reasonableness and elections involvedconsistency of the reasonable and supportable forecast period •We evaluated whether judgments have been applied consistently to the model and that any adjustments to the output of the model are consistent with the measurement objective of the applicable financial reporting framework and are appropriate in the adoptioncircumstances •We considered any contradictory evidence that arose while performing our procedures, and whether or not this evidence was indicative of the CECL model.management bias •We testedevaluated the completeness and accuracy of the historical borrower data, including collection data, bankruptcy statistics, portfolio characteristics, and other data used in management’s models. We used ourCompany’s allowance for credit modeling specialists to assist us in evaluating the appropriateness of the models used to determine the CECL estimate and examine logic for selected components of the model.
We also evaluated the reasonableness of the economic assumptions used in the models by comparing such assumptions to independent sources.
We evaluated the reasonable and supportable forecast period over which the key economic assumptions are applied, by reviewing the historical accuracy of economic forecasts and other underlying economic information management used as the basis for the selected reasonable and supportable period.
For the credit card loan portfolio, we evaluated the assumption of how expected credit card payments are applied to existing credit card balances to determine if it is reasonable and consistent with the CECL standard. We used our credit modeling specialists to evaluate if the approach was consistently applied in the model in accordance with the Company’s selected policy.
We evaluated the completeness of the Company’slosses disclosures related to adoption of ASU 2016-13.
| | | | | | /s/ DELOITTEDeloitte & TOUCHETouche LLP | | Chicago, Illinois | | February 26, 202023, 2023 | |
We have served as the Company’s auditor since the spin-off from its former parent company in 2007 and as Discover Bank’s (a wholly-ownedwholly owned subsidiary of the Company) auditor since 1985.
DISCOVER FINANCIAL SERVICES Consolidated Statements of Financial Condition | | | | | | | | | | December 31, | | 2019 | | 2018 | | (dollars in millions, except share amounts) | Assets | | | | Cash and cash equivalents | $ | 6,924 |
| | $ | 13,299 |
| Restricted cash | 40 |
| | 1,846 |
| Investment securities (includes $10,323 and $3,133 at fair value at December 31, 2019 and 2018, respectively) | 10,595 |
| | 3,370 |
| Loan receivables | | | | Loan receivables | 95,894 |
| | 90,512 |
| Allowance for loan losses | (3,383 | ) | | (3,041 | ) | Net loan receivables | 92,511 |
| | 87,471 |
| Premises and equipment, net | 1,057 |
| | 936 |
| Goodwill | 255 |
| | 255 |
| Intangible assets, net | 155 |
| | 161 |
| Other assets | 2,459 |
| | 2,215 |
| Total assets | $ | 113,996 |
| | $ | 109,553 |
| Liabilities and Stockholders’ Equity | | | | Liabilities | | | | Deposits | | | | Interest-bearing deposit accounts | $ | 71,955 |
| | $ | 67,084 |
| Non-interest bearing deposit accounts | 791 |
| | 675 |
| Total deposits | 72,746 |
| | 67,759 |
| Long-term borrowings | 25,701 |
| | 27,228 |
| Accrued expenses and other liabilities | 3,690 |
| | 3,436 |
| Total liabilities | 102,137 |
| | 98,423 |
| Commitments, contingencies and guarantees (Notes 15, 18 and 19) |
| |
| Stockholders’ Equity | | | | Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 566,653,650 and 564,851,848 shares issued at December 31, 2019 and 2018, respectively | 6 |
| | 6 |
| Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 5,700 shares issued and outstanding and aggregate liquidation preference of $570 at December 31, 2019 and 2018 | 563 |
| | 563 |
| Additional paid-in capital | 4,206 |
| | 4,130 |
| Retained earnings | 21,290 |
| | 18,906 |
| Accumulated other comprehensive loss | (119 | ) | | (156 | ) | Treasury stock, at cost; 256,496,492 and 233,406,005 shares at December 31, 2019 and 2018, respectively | (14,087 | ) | | (12,319 | ) | Total stockholders’ equity | 11,859 |
| | 11,130 |
| Total liabilities and stockholders’ equity | $ | 113,996 |
| | $ | 109,553 |
| | | | |
(dollars in millions, except for share amounts) | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | Assets | | | | Cash and cash equivalents | $ | 8,856 | | | $ | 8,750 | | Restricted cash | 41 | | | 2,582 | | | | | | Investment securities (includes available-for-sale securities of $11,987 and $6,700 reported at fair value with associated amortized cost of $12,167 and $6,549 at December 31, 2022 and 2021, respectively) | 12,208 | | | 6,904 | | Loan receivables | | | | Loan receivables | 112,120 | | | 93,684 | | Allowance for credit losses | (7,374) | | | (6,822) | | Net loan receivables | 104,746 | | | 86,862 | | Premises and equipment, net | 1,003 | | | 983 | | Goodwill | 255 | | | 255 | | | | | | Other assets | 4,519 | | | 3,906 | | Total assets | $ | 131,628 | | | $ | 110,242 | | Liabilities and Stockholders’ Equity | | | | Liabilities | | | | Deposits | | | | Interest-bearing deposit accounts | $ | 90,151 | | | $ | 70,818 | | Non-interest-bearing deposit accounts | 1,485 | | | 1,575 | | Total deposits | 91,636 | | | 72,393 | | Short-term borrowings | — | | | 1,750 | | Long-term borrowings | 20,108 | | | 18,477 | | Accrued expenses and other liabilities | 5,294 | | | 4,214 | | Total liabilities | 117,038 | | | 96,834 | | Commitments, contingencies and guarantees (Notes 15, 18 and 19) | | | | Stockholders’ Equity | | | | Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 569,689,007 and 568,830,897 shares issued at December 31, 2022 and 2021, respectively | 6 | | | 6 | | Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at December 31, 2022 and 2021 | 1,056 | | | 1,056 | | Additional paid-in capital | 4,468 | | | 4,369 | | Retained earnings | 28,453 | | | 24,766 | | Accumulated other comprehensive loss | (339) | | | (94) | | Treasury stock, at cost; 302,305,216 and 280,502,577 shares at December 31, 2022 and 2021, respectively | (19,054) | | | (16,695) | | Total stockholders’ equity | 14,590 | | | 13,408 | | Total liabilities and stockholders’ equity | $ | 131,628 | | | $ | 110,242 | | | | | |
The table below presents the carrying amounts of certain assets and liabilities of Discover Financial Services’ consolidated variable interest entities (“VIEs”), which are included in the consolidated statements of financial condition above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated VIEs. The liabilities in the table below include third-party liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts for which creditors have recourse to the general credit of Discover Financial Services. | | | December 31, | | | | | | | | | | | | 2019 | | 2018 | | December 31, | | (dollars in millions) | | 2022 | | 2021 | Assets | | | | Assets | | | | Restricted cash | $ | 40 |
| | $ | 1,846 |
| Restricted cash | $ | 41 | | | $ | 2,582 | | Loan receivables | $ | 31,840 |
| | $ | 33,424 |
| Loan receivables | $ | 25,937 | | | $ | 25,449 | | Allowance for loan losses allocated to securitized loan receivables | $ | (1,179 | ) | | $ | (1,150 | ) | | Allowance for credit losses allocated to securitized loan receivables | | Allowance for credit losses allocated to securitized loan receivables | $ | (1,152) | | | $ | (1,371) | | Other assets | $ | 5 |
| | $ | 7 |
| Other assets | $ | 3 | | | $ | 4 | | Liabilities | | | | Liabilities | | Long-term borrowings | $ | 14,284 |
| | $ | 16,917 |
| | Short- and long-term borrowings | | Short- and long-term borrowings | $ | 10,259 | | | $ | 9,539 | | Accrued expenses and other liabilities | $ | 15 |
| | $ | 18 |
| Accrued expenses and other liabilities | $ | 14 | | | $ | 6 | | | | | | |
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES Consolidated Statements of Income | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | | (dollars in millions, except per share amounts) | Interest income | | | | | | Credit card loans | $ | 9,690 |
| | $ | 8,835 |
| | $ | 7,907 |
| Other loans | 1,871 |
| | 1,726 |
| | 1,560 |
| Investment securities | 179 |
| | 40 |
| | 27 |
| Other interest income | 253 |
| | 292 |
| | 154 |
| Total interest income | 11,993 |
| | 10,893 |
| | 9,648 |
| Interest expense | | | | | | Deposits | 1,587 |
| | 1,238 |
| | 846 |
| Long-term borrowings | 943 |
| | 901 |
| | 802 |
| Total interest expense | 2,530 |
| | 2,139 |
| | 1,648 |
| Net interest income | 9,463 |
| | 8,754 |
| | 8,000 |
| Provision for loan losses | 3,231 |
| | 3,035 |
| | 2,579 |
| Net interest income after provision for loan losses | 6,232 |
| | 5,719 |
| | 5,421 |
| Other income | | | | | | Discount and interchange revenue, net | 1,066 |
| | 1,074 |
| | 1,052 |
| Protection products revenue | 194 |
| | 204 |
| | 223 |
| Loan fee income | 449 |
| | 402 |
| | 363 |
| Transaction processing revenue | 197 |
| | 178 |
| | 167 |
| Other income | 90 |
| | 97 |
| | 92 |
| Total other income | 1,996 |
| | 1,955 |
| | 1,897 |
| Other expense | | | | | | Employee compensation and benefits | 1,738 |
| | 1,627 |
| | 1,512 |
| Marketing and business development | 883 |
| | 857 |
| | 776 |
| Information processing and communications | 409 |
| | 350 |
| | 315 |
| Professional fees | 753 |
| | 672 |
| | 655 |
| Premises and equipment | 107 |
| | 102 |
| | 99 |
| Other expense | 503 |
| | 469 |
| | 424 |
| Total other expense | 4,393 |
| | 4,077 |
| | 3,781 |
| Income before income tax expense | 3,835 |
| | 3,597 |
| | 3,537 |
| Income tax expense | 878 |
| | 855 |
| | 1,438 |
| Net income | $ | 2,957 |
| | $ | 2,742 |
| | $ | 2,099 |
| Net income allocated to common stockholders | $ | 2,908 |
| | $ | 2,689 |
| | $ | 2,031 |
| Basic earnings per common share | $ | 9.09 |
| | $ | 7.81 |
| | $ | 5.43 |
| Diluted earnings per common share | $ | 9.08 |
| | $ | 7.79 |
| | $ | 5.42 |
| | | | | | |
(dollars in millions, except for share amounts) | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Interest income | | | | | | Credit card loans | $ | 10,632 | | | $ | 8,717 | | | $ | 8,985 | | Other loans | 1,870 | | | 1,734 | | | 1,817 | | Investment securities | 179 | | | 182 | | | 252 | | Other interest income | 183 | | | 18 | | | 41 | | Total interest income | 12,864 | | | 10,651 | | | 11,095 | | Interest expense | | | | | | Deposits | 1,257 | | | 661 | | | 1,231 | | Short-term borrowings | 2 | | | — | | | 32 | | Long-term borrowings | 606 | | | 473 | | | 602 | | Total interest expense | 1,865 | | | 1,134 | | | 1,865 | | Net interest income | 10,999 | | | 9,517 | | | 9,230 | | Provision for credit losses | 2,359 | | | 218 | | | 5,134 | | Net interest income after provision for credit losses | 8,640 | | | 9,299 | | | 4,096 | | Other income | | | | | | Discount and interchange revenue, net | 1,424 | | | 1,224 | | | 933 | | Protection products revenue | 172 | | | 165 | | | 180 | | Loan fee income | 632 | | | 464 | | | 414 | | Transaction processing revenue | 249 | | | 227 | | | 195 | | (Losses) gains on equity investments | (214) | | | 424 | | | 80 | | Other income | 75 | | | 66 | | | 56 | | Total other income | 2,338 | | | 2,570 | | | 1,858 | | Other expense | | | | | | Employee compensation and benefits | 2,139 | | | 1,986 | | | 1,894 | | Marketing and business development | 1,035 | | | 810 | | | 659 | | Information processing and communications | 513 | | | 500 | | | 540 | | Professional fees | 871 | | | 797 | | | 717 | | Premises and equipment | 118 | | | 92 | | | 113 | | Other expense | 560 | | | 620 | | | 596 | | Total other expense | 5,236 | | | 4,805 | | | 4,519 | | Income before income taxes | 5,742 | | | 7,064 | | | 1,435 | | Income tax expense | 1,350 | | | 1,615 | | | 294 | | Net income | $ | 4,392 | | | $ | 5,449 | | | $ | 1,141 | | Net income allocated to common stockholders | $ | 4,304 | | | $ | 5,351 | | | $ | 1,104 | | Basic earnings per common share | $ | 15.52 | | | $ | 17.85 | | | $ | 3.60 | | Diluted earnings per common share | $ | 15.50 | | | $ | 17.83 | | | $ | 3.60 | | | | | | | |
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES Consolidated Statements of Comprehensive Income | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | | (dollars in millions) | Net income | $ | 2,957 |
| | $ | 2,742 |
| | $ | 2,099 |
| Other comprehensive income, net of tax | | | | | | Unrealized gains (losses) on available-for-sale investment securities, net of tax | 102 |
| | 16 |
| | (2 | ) | Unrealized (losses) gains on cash flow hedges, net of tax | (39 | ) | | 9 |
| | 23 |
| Unrealized pension and post-retirement plan (losses) gains, net of tax | (26 | ) | | — |
| | (12 | ) | Other comprehensive income | 37 |
| | 25 |
| | 9 |
| Comprehensive income | $ | 2,994 |
| | $ | 2,767 |
| | $ | 2,108 |
| | | | | | |
(dollars in millions) | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Net income | $ | 4,392 | | | $ | 5,449 | | | $ | 1,141 | | Other comprehensive (loss) income, net of tax | | | | | | Unrealized (losses) gains on available-for-sale investment securities, net of tax | (250) | | | (170) | | | 172 | | Unrealized (losses) gains on cash flow hedges, net of tax | (5) | | | 3 | | | 5 | | Unrealized pension and post-retirement plan gains (losses), net of tax | 10 | | | 28 | | | (13) | | Other comprehensive (loss) income | (245) | | | (139) | | | 164 | | Comprehensive income | $ | 4,147 | | | $ | 5,310 | | | $ | 1,305 | | | | | | | |
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES Consolidated Statements of Changes in Stockholders’ Equity (dollars in millions, shares in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | Total Stockholders’ Equity | | | | | | | | | Shares | | Amount | | Shares | | Amount | | | | | | Balance at December 31, 2019 | 6 | | | $ | 563 | | | 566,654 | | | $ | 6 | | | $ | 4,206 | | | $ | 21,290 | | | $ | (119) | | | $ | (14,087) | | | $ | 11,859 | | Cumulative effect of ASU No. 2016-13 adoption | — | | | — | | | — | | | — | | | — | | | (1,902) | | | — | | | — | | | (1,902) | | Net income | — | | | — | | | — | | | — | | | — | | | 1,141 | | | — | | | — | | | 1,141 | | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 164 | | | — | | | 164 | | Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (348) | | | (348) | | Common stock issued under employee benefit plans | — | | | — | | | 192 | | | — | | | 10 | | | — | | | — | | | — | | | 10 | | Common stock issued and stock-based compensation expense | — | | | — | | | 1,052 | | | — | | | 41 | | | — | | | — | | | — | | | 41 | | Preferred stock issued | 5 | | | 493 | | | — | | | — | | | — | | | — | | | — | | | — | | | 493 | | Dividends — common stock ($1.76 per share) | — | | | — | | | — | | | — | | | — | | | (543) | | | — | | | — | | | (543) | | Dividends — Series C preferred stock ($5,500 per share) | — | | | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2020 | 11 | | | 1,056 | | | 567,898 | | | 6 | | | 4,257 | | | 19,955 | | | 45 | | | (14,435) | | | 10,884 | | | | | | | | | | | | | | | | | | | | Net income | — | | | — | | | — | | | — | | | — | | | 5,449 | | | — | | | — | | | 5,449 | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (139) | | | — | | | (139) | | Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,260) | | | (2,260) | | Common stock issued under employee benefit plans | — | | | — | | | 88 | | | — | | | 9 | | | — | | | — | | | — | | | 9 | | Common stock issued and stock-based compensation expense | — | | | — | | | 845 | | | — | | | 103 | | | — | | | — | | | — | | | 103 | | | | | | | | | | | | | | | | | | | | Dividends — common stock ($1.88 per share) | — | | | — | | | — | | | — | | | — | | | (569) | | | — | | | — | | | (569) | | Dividends — Series C preferred stock ($5,500 per share) | — | | | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | | Dividends — Series D preferred stock ($7,674 per share) | — | | | — | | | — | | | — | | | — | | | (38) | | | — | | | — | | | (38) | | Balance at December 31, 2021 | 11 | | | 1,056 | | | 568,831 | | | 6 | | | 4,369 | | | 24,766 | | | (94) | | | (16,695) | | | 13,408 | | | | | | | | | | | | | | | | | | | | Net income | — | | | — | | | — | | | — | | | — | | | 4,392 | | | — | | | — | | | 4,392 | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (245) | | | — | | | (245) | | Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,359) | | | (2,359) | | Common stock issued under employee benefit plans | — | | | — | | | 107 | | | — | | | 10 | | | — | | | — | | | — | | | 10 | | Common stock issued and stock-based compensation expense | — | | | — | | | 751 | | | — | | | 89 | | | — | | | — | | | — | | | 89 | | | | | | | | | | | | | | | | | | | | Dividends — common stock ($2.30 per share) | — | | | — | | | — | | | — | | | — | | | (643) | | | — | | | — | | | (643) | | Dividends — Series C preferred stock ($5,500 per share) | — | | | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | | Dividends — Series D preferred stock ($6,125 per share) | — | | | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | | Balance at December 31, 2022 | 11 | | | $ | 1,056 | | | 569,689 | | | $ | 6 | | | $ | 4,468 | | | $ | 28,453 | | | $ | (339) | | | $ | (19,054) | | | $ | 14,590 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Stockholders’ Equity | | | | | | | | | Shares | | Amount | | Shares | | Amount | | | | | | | (dollars in millions, shares in thousands) | Balance at December 31, 2016 | 575 |
| | $ | 560 |
| | 562,414 |
| | $ | 5 |
| | $ | 3,962 |
| | $ | 15,130 |
| | $ | (161 | ) | | $ | (8,173 | ) | | $ | 11,323 |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 2,099 |
| | — |
| | — |
| | 2,099 |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
| | — |
| | 9 |
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,081 | ) | | (2,081 | ) | Common stock issued under employee benefit plans | — |
| | — |
| | 79 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | 5 |
| Common stock issued and stock-based compensation expense | — |
| | — |
| | 1,005 |
| | 1 |
| | 75 |
| | — |
| | — |
| | — |
| | 76 |
| Dividends — common stock ($1.30 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (490 | ) | | — |
| | — |
| | (490 | ) | Dividends — Series B preferred stock ($65.00 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (37 | ) | | — |
| | — |
| | (37 | ) | Redemption of Series B preferred stock | (575 | ) | | (560 | ) | | — |
| | — |
| | — |
| | (15 | ) | | — |
| | — |
| | (575 | ) | Issuance of Series C preferred stock, net of issuance costs | 6 |
| | 563 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 563 |
| Balance at December 31, 2017 | 6 |
| | 563 |
| | 563,498 |
| | 6 |
| | 4,042 |
| | 16,687 |
| | (152 | ) | | (10,254 | ) | | 10,892 |
| Cumulative effect of ASU No. 2018-02 adoption | — |
| | — |
| | — |
| | — |
| | — |
| | 29 |
| | (29 | ) | | — |
| | — |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 2,742 |
| | — |
| | — |
| | 2,742 |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25 |
| | — |
| | 25 |
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,065 | ) | | (2,065 | ) | Common stock issued under employee benefit plans | — |
| | — |
| | 96 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | 6 |
| Common stock issued and stock-based compensation expense | — |
| | — |
| | 1,258 |
| | — |
| | 82 |
| | — |
| | — |
| | — |
| | 82 |
| Dividends — common stock ($1.50 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (521 | ) | | — |
| | — |
| | (521 | ) | Dividends — Series C preferred stock ($5,500 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | — |
| | — |
| | (31 | ) | Balance at December 31, 2018 | 6 |
| | 563 |
| | 564,852 |
| | 6 |
| | 4,130 |
| | 18,906 |
| | (156 | ) | | (12,319 | ) | | 11,130 |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 2,957 |
| | — |
| | — |
| | 2,957 |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 37 |
| | — |
| | 37 |
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,768 | ) | | (1,768 | ) | Common stock issued under employee benefit plans | — |
| | — |
| | 97 |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | 7 |
| Common stock issued and stock-based compensation expense | — |
| | — |
| | 1,705 |
| | — |
| | 69 |
| | — |
| | — |
| | — |
| | 69 |
| Dividends — common stock ($1.68 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (542 | ) | | — |
| | — |
| | (542 | ) | Dividends — Series C preferred stock ($5,500 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | — |
| | — |
| | (31 | ) | Balance at December 31, 2019 | 6 |
| | $ | 563 |
| | 566,654 |
| | $ | 6 |
| | $ | 4,206 |
| | $ | 21,290 |
| | $ | (119 | ) | | $ | (14,087 | ) | | $ | 11,859 |
| | | | | | | | | | | | | | | | | | |
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES Consolidated Statements of Cash Flows | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | | (dollars in millions) | Cash flows from operating activities | | | | | | Net income | $ | 2,957 |
| | $ | 2,742 |
| | $ | 2,099 |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | Provision for loan losses | 3,231 |
| | 3,035 |
| | 2,579 |
| Depreciation and amortization | 436 |
| | 435 |
| | 393 |
| Amortization of deferred revenues and accretion of accretable yield on acquired loans | (421 | ) | | (403 | ) | | (399 | ) | Net loss on investments and other assets | 37 |
| | 45 |
| | 55 |
| Other, net | (51 | ) | | (107 | ) | | 361 |
| Changes in assets and liabilities | | | | | | Increase in other assets | (202 | ) | | (7 | ) | | (502 | ) | Increase (decrease) in accrued expenses and other liabilities | 209 |
| | (549 | ) | | 622 |
| Net cash provided by operating activities | 6,196 |
| | 5,191 |
| | 5,208 |
| | | | | | | Cash flows from investing activities | | | | | | Maturities of other short-term investments | 1,000 |
| | — |
| | — |
| Purchases of other short-term investments | (1,000 | ) | | — |
| | — |
| Maturities of available-for-sale investment securities | 140 |
| | 838 |
| | 200 |
| Purchases of available-for-sale investment securities | (7,183 | ) | | (2,554 | ) | | — |
| Maturities of held-to-maturity investment securities | 31 |
| | 18 |
| | 16 |
| Purchases of held-to-maturity investment securities | (66 | ) | | (82 | ) | | (40 | ) | Net principal disbursed on loans originated for investment | (7,844 | ) | | (8,480 | ) | | (8,701 | ) | Proceeds from returns of investment | — |
| | — |
| | 17 |
| Purchases of other investments | (68 | ) | | (65 | ) | | (65 | ) | Purchases of premises and equipment | (284 | ) | | (254 | ) | | (218 | ) | Net cash used for investing activities | (15,274 | ) | | (10,579 | ) | | (8,791 | ) | | | | | | | Cash flows from financing activities | | | | | | Proceeds from issuance of securitized debt | 3,519 |
| | 4,766 |
| | 5,059 |
| Maturities and repayment of securitized debt | (6,287 | ) | | (4,447 | ) | | (4,959 | ) | Proceeds from issuance of other long-term borrowings | 1,340 |
| | 2,233 |
| | 1,127 |
| Maturities and repayment of other long-term borrowings | (286 | ) | | (1,756 | ) | | (404 | ) | Proceeds from issuance of common stock | 7 |
| | 6 |
| | 5 |
| Purchases of treasury stock | (1,768 | ) | | (2,065 | ) | | (2,081 | ) | Net increase in deposits | 4,945 |
| | 8,961 |
| | 6,753 |
| Proceeds from issuance of preferred stock | — |
| | — |
| | 563 |
| Payments on redemption of preferred stock | — |
| | — |
| | (575 | ) | Dividends paid on common and preferred stock | (573 | ) | | (552 | ) | | (527 | ) | Net cash provided by financing activities | 897 |
| | 7,146 |
| | 4,961 |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (8,181 | ) | | 1,758 |
| | 1,378 |
| Cash, cash equivalents and restricted cash, at beginning of period | 15,145 |
| | 13,387 |
| | 12,009 |
| Cash, cash equivalents and restricted cash, at end of period | $ | 6,964 |
| | $ | 15,145 |
| | $ | 13,387 |
| | | | | | | Reconciliation of cash, cash equivalents and restricted cash | | | | | | Cash and cash equivalents | $ | 6,924 |
| | $ | 13,299 |
| | $ | 13,306 |
| Restricted cash | 40 |
| | 1,846 |
| | 81 |
| Cash, cash equivalents and restricted cash, at end of period | $ | 6,964 |
| | $ | 15,145 |
| | $ | 13,387 |
| | | | | | | Supplemental disclosures of cash flow information | | | | | | Cash paid during the period for | | | | | | Interest expense | $ | 2,407 |
| | $ | 1,847 |
| | $ | 1,396 |
| Income taxes, net of income tax refunds | $ | 1,088 |
| | $ | 650 |
| | $ | 1,424 |
| | | | | | |
(dollars in millions) | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Cash flows provided by operating activities | | | | | | Net income | $ | 4,392 | | | $ | 5,449 | | | $ | 1,141 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | Provision for credit losses | 2,359 | | | 218 | | | 5,134 | | Deferred income taxes | (427) | | | 327 | | | (672) | | Depreciation and amortization | 561 | | | 531 | | | 485 | | Amortization of deferred revenues | (365) | | | (295) | | | (320) | | Net losses (gains) on investments and other assets | 261 | | | (382) | | | (26) | | Other, net | 125 | | | 257 | | | 200 | | Changes in assets and liabilities: | | | | | | (Increase) decrease in other assets | (846) | | | (496) | | | 118 | | Increase in accrued expenses and other liabilities | 1,080 | | | 410 | | | 136 | | Net cash provided by operating activities | 7,140 | | | 6,019 | | | 6,196 | | | | | | | | Cash flows provided by (used for) investing activities | | | | | | Maturities of other short-term investments | — | | | 2,200 | | | 5,850 | | Purchases of other short-term investments | — | | | — | | | (8,046) | | Maturities of available-for-sale investment securities | 2,084 | | | 2,727 | | | 1,007 | | Purchases of available-for-sale investment securities | (7,682) | | | (9) | | | (113) | | Maturities of held-to-maturity investment securities | 32 | | | 82 | | | 54 | | Purchases of held-to-maturity investment securities | (50) | | | (28) | | | (44) | | Net change in principal on loans originated for investment | (19,961) | | | (4,574) | | | 3,045 | | Proceeds from the sale of available for sale securities | — | | | 5 | | | — | | Proceeds from the sale of other investments | 336 | | | 1 | | | 94 | | Purchases of other investments | (169) | | | (170) | | | (72) | | Proceeds from sale of premises and equipment | 9 | | | — | | | — | | Purchases of premises and equipment | (236) | | | (194) | | | (261) | | Net cash (used for) provided by investing activities | (25,637) | | | 40 | | | 1,514 | | | | | | | | Cash flows (used for) provided by financing activities | | | | | | Net change in short-term borrowings | (1,750) | | | 1,750 | | | — | | Net change in deposits | 19,208 | | | (4,533) | | | 4,128 | | Proceeds from issuance of securitized debt | 5,620 | | | 1,727 | | | — | | Maturities and repayment of securitized debt | (4,395) | | | (3,451) | | | (3,531) | | Proceeds from issuance of other long-term borrowings | 1,265 | | | — | | | 494 | | Maturities and repayments of other long-term borrowings | (834) | | | (922) | | | (1,755) | | Proceeds from issuance of common stock | 10 | | | 9 | | | 10 | | Proceeds from issuance of preferred stock | — | | | — | | | 493 | | | | | | | | Dividends paid on common and preferred stock | (703) | | | (636) | | | (576) | | Purchases of treasury stock | (2,359) | | | (2,260) | | | (348) | | Net cash provided by (used for) financing activities | 16,062 | | | (8,316) | | | (1,085) | | Net (decrease) increase in cash, cash equivalents and restricted cash | (2,435) | | | (2,257) | | | 6,625 | | Cash, cash equivalents and restricted cash, at the beginning of the period | 11,332 | | | 13,589 | | | 6,964 | | Cash, cash equivalents and restricted cash, at the end of the period | $ | 8,897 | | | $ | 11,332 | | | $ | 13,589 | | | | | | | | Reconciliation of cash, cash equivalents and restricted cash | | | | | | Cash and cash equivalents | $ | 8,856 | | | $ | 8,750 | | | $ | 13,564 | | Restricted cash | 41 | | | 2,582 | | | 25 | | Cash, cash equivalents and restricted cash, at the end of the period | $ | 8,897 | | | $ | 11,332 | | | $ | 13,589 | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | Cash paid during the period for | | | | | | Interest expense | $ | 1,666 | | | $ | 1,077 | | | $ | 1,799 | | Income taxes, net of income tax refunds | $ | 1,865 | | | $ | 1,305 | | | $ | 901 | | | | | | | |
See Notes to the Consolidated Financial Statements.
Notes to the Consolidated Financial Statements | | 1. | Background and Basis of Presentation |
1.Background and Basis of Presentation Description of Business Discover Financial Services (“DFS” or the “Company”) is a directdigital banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 as well asand a financial holding company under the Gramm-Leach-Bliley Act and thereforeAct. Therefore, the Company is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company provides directdigital 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”)., collectively known as the Discover Global Network. The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as merchant acceptance throughout the United States of America (“U.S.”) for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded credit and charge cards and/or provide card acceptance services. The Company’sCompany manages its business activities are managed in 2two segments, DirectDigital Banking and Payment Services, based on the products and services provided. ForSee Note 22: Segment Disclosures for a detailed description of theeach segment’s operations of each segment, as well asand the allocation conventions used in business segment reporting, see Note 22: Segment Disclosures.reporting. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United StatesU.S. (“GAAP”). The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. The Company believes that the estimates used in the preparation of the consolidated financial statements are reasonable. Actual results could differ from these estimates. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock unless it does not control the entity. However, the Company did not have a controlling voting interest in any entity other than its wholly-owned subsidiaries in the periods presented in the accompanying consolidated financial statements. It is also the Company’s policy to consolidate any VIEVIEs for which the Company is the primary beneficiary, as defined by GAAP. On this basis, the Company consolidates the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust (“DCENT”) as well as 2the student loan securitization trusts.trust. The Company is deemed to be the primary beneficiary of each of these trusts since it is, for each, the trust servicerServicer and the holder of both the residual interest and the majority of the most subordinated interests. Because of those involvements, the Company has, for each trust, (i) the power to direct the activities that most significantly impact the economic performance of the trust and (ii) the obligation (or right) to absorb losses (or receive benefits) of the trust that could potentially be significant. The Company has determined that it was not the primary beneficiary of any other VIE during the years ended December 31, 2019, 20182022, 2021 and 2017.2020. For investments in any entities in which the Company owns 50% or less of the outstanding voting stock but in which the Company has significant influence over operating and financial decisions, the Company applies the equity method of accounting. The Company also applies the equity method to its investments in qualified affordable housing projects and similar tax credit partnerships. In cases where the Company’s equity investment is less than 20% and significant influence does not exist, such investments are carried at cost as they typically do not have readily determinable fair values, and are adjusted for any impairment in value. Investments in actively traded stock are carried at fair value with changes in fair value recorded as an adjustment to earnings.
Recently Issued Accounting Pronouncements (Not Yet Adopted) In June 2016,March 2022, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("ASU") No. 2016-13, 2022-02, Financial Instruments—Credit Losses (Topic 326): MeasurementTroubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the troubled debt restructuring ("TDR") recognition and measurement guidance and enhances disclosures for modifications of Credit Losses on Financial Instruments. The FASB also issued subsequent ASUs that clarifyreceivables to borrowers experiencing financial difficulty. Under ASU 2022-02, the scope and provide additional guidance. This ASU replaces the incurred loss model with the current expected credit loss (“CECL”) approach. For loans carried at amortized cost, the
allowance for loan losses will be based on management’s current estimate of all expected credit losses over the remaining contractual term of the loans. Upon the originationuse of a loan, the Company will record its estimate of alldiscounted cash flow method is no longer required when measuring expected credit losses on that loan through an immediate charge to earnings. Updates to that estimate each period will be recorded through provision expense.modified loans. The CECL estimate isASU also refines existing credit-related disclosures by requiring disclosure of current-period gross charge-offs of receivables by year of origination. The amendments in the ASU are to be basedapplied prospectively to modifications and disclosures of gross charge-offs; however, adoption on historical experience, current conditions and reasonable and supportable forecasts.
The CECL approacha modified retrospective basis is expected to increasepermitted for the Company’s allowance for loan losses as a result of: (1) recording reserves for expected losses, not simply those deemed to be already incurred, (2) extendingeffect on the loss estimate period over the entire life of the loan and (3) presenting the credit loss component of the purchased credit-impaired (“PCI”) loan portfolio in the allowance for loan losses rather than embedding it within the loan carrying value. The allowance for loan losses on all loans carried at amortized cost, including loans previously referred to as PCI loans and loans modified in a troubled debt restructuring (“TDR”) will be measured under the CECL approach. Previous specialized measurement guidance for PCI loans, which the ASU refers to as purchased credit-deteriorated (“PCD”), and TDRs will be eliminated, although certain separate disclosure guidance will be retained.
Measurement of credit impairment of available-for-sale debt securities will generally remain unchanged under the new rules, but any credit impairment will be recorded through an allowance, rather than a direct write-down of the security. The Company invests in U.S. Treasury and residential mortgage-backed securities issued by government agencies, which have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and will not record an allowance for credit losses on these investments.
related to the elimination of the TDR recognition and measurement guidance. The ASU is effective for the Company on January 1, 2020 and requires modified-retrospective application, meaning2023. Management does not expect the amendments to have a cumulative-effect adjustment is recorded as ofmaterial impact on the effective date without adjusting comparative periods. Management is prepared to implement the standard and will record the following as a result of adoption: | | • | A Company's financial statements.$2.5 billion increase to the allowance for loan losses primarily representing the adjustment for recording reserves for expected losses, not simply those deemed to be already incurred, and extending the loss estimate period over the entire life of the loan;
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| | • | A $0.6 billion increase to other assets related to deferred tax assets on the larger allowance for loan losses;
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| | • | An offsetting $1.9 billion decrease, net of tax, to the opening balance of retained earnings; and
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Immaterial adjustments to the following:
| | ◦ | The carrying value of PCD loans and related accrued interest reflected in other assets; and |
| | ◦ | Accrued expenses and other liabilities to record reserves for unfunded commitments. |
Recently Adopted Accounting Pronouncements
In February 2016,December 2022, the FASB issued ASU No. 2016-02, Leases2022-06, Reference Rate Reform (Topic 842)848): Deferral of the Sunset Date of Topic 848. The temporary reference rate transition guidance requires lesseesprovided in Topic 848, which was originally set to capitalize most leasesexpire on their balance sheet whereas under previous GAAP, only leases previously identified as capital leases were recognizedDecember 31, 2022, is designed to ease the operational cost and burden of accounting for the discontinuation of the London Interbank Offered Rate (“LIBOR”). The ASU extends the expiration date of Topic 848 to December 31, 2024. The ASU was effective upon issuance and the Company intends to apply the optional exemption from contract modification accounting provided in Topic 848 to LIBOR-indexed variable-rate private student loans. These outstanding student loans will convert to a Secured Overnight Financing Rate (“SOFR”) index in 2023 when 3-month U.S. dollar (“USD”) LIBOR ceases to be a representative reference rate. The Company does not expect the conversion of these loans to a SOFR index to have a material impact on the lessee’s balance sheet. Leases previously identified as capital leases are generally identified as financing leases under the new guidance but otherwise their accounting treatment remains relatively unchanged. Leases previously identified as operating leases generally remain in that category under the new standard, but both a right-of-use asset and a liability for remaining lease payments are required to be recognized on the balance sheet for this typeCompany’s financial statements. 2. Summary of lease. The manner in which expenses associated with all leases are reported on the income statement remains mostly unchanged. Lessor accounting also remains substantially unchanged by the new standard. The new guidance became effective for the Company on January 1, 2019 and, as permitted by the standard, management elected to recognize a cumulative-effect adjustment as of the effective date without adjusting comparative prior periods. Additionally, management elected the practical expedients to not reassess prior conclusions related to (1) contracts containing leases, (2) lease classification and (3) initial direct costs. Management also made an accounting policy election to exclude short-term leases of one year or less from the balance sheet. As a result of adoption, the Company recorded immaterial adjustments to other assets and accrued expenses and other liabilities to recognize operating lease right-of-use assets of $49 million and operating lease liabilities of $56 million, respectively. Leases are not material to the Company or its consolidated financial statements.Significant Accounting Policies
| | 2. | Summary of Significant Accounting Policies |
Cash and Cash Equivalents Cash and cash equivalents is defined by the Company as cash on deposit with banks, including time deposits and other highly liquid investments with maturities of 90 days or less when purchased.purchased, excluding amounts restricted by certain contractual or other obligations. Cash and cash equivalents included $959 million$1.5 billion and $728 million$1.2 billion of cash and due from banks and $6.0$7.4 billion and $12.6$7.6 billion of interest-earning deposits at other banks at December 31, 20192022 and 2018,2021, respectively. Restricted Cash Restricted cash includes cash forin accounts from which the Company’s ability to withdraw funds at any time is contractually limited. Restricted cash is generally designated for specific purposes arising out of certain contractual or other obligations. Investment Securities At December 31, 2019,2022, investment securities consisted of debt obligations of the U.S. Treasury obligationsand government-sponsored enterprises of the U.S. (“U.S. GSEs”) and mortgage-backed securities issued by government agencies.agencies or U.S. GSEs. Investment securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost. All other investment securities are classified as available-for-sale, as the Company does not hold investment securities for trading purposes. Available-for-sale investment securities are reported at fair value with unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (“AOCI”) included in stockholders’ equity. The Company estimates the fair value of available-for-sale investment securities as more fully discussed in Note 20: Fair Value Measurements. The amortized cost for each held-to-maturity and available-for-sale investment security is adjusted for amortization of premiums or accretion of discounts, as appropriate. Such amortization or accretion is included in interest income. The Company evaluates its unrealized loss positions for other-than-temporary impairmentInterest on investment securities is accrued each month in accordance with GAAP applicable for investmentstheir contractual terms and recorded in debt securities. Realized gainsother assets in the consolidated statements of financial condition. The U.S. Treasury and U.S. GSE obligations and mortgage-backed securities issued by government agencies or U.S. GSEs in which the Company invests have long histories with no credit losses and are explicitly or implicitly guaranteed by the credit loss portionU.S. government. Therefore, management has concluded that there is no expectation of other-than-temporary impairments related tonon-payment on its investment securities are determined at the individual security level and are reported in other income.does not record an allowance for credit losses on these investments.
Loan Receivables Loan receivables consist of credit card receivables and other loans and PCI loans. Loanloan receivables. The carrying values of all classes of loan receivables also include unamortized net deferred loan origination fees and costs (also see “— Significant Revenue Recognition Accounting Policies — Loan Interest and Fee Income”). CreditThe credit card loan receivables are reported at theircarrying amount includes the principal amounts outstanding and include uncollected billed interest and fees and areis reduced for unearned revenue related to balance transfer fees (also see “— Significant Revenue Recognition Accounting Policies — Loan Interest and Fee Income”). Other loans consist of private student loans, personal loans and other loans and are reported at theirthe carrying amount of those loans includes principal amounts outstanding. For private student loans, principal amounts outstanding also include accrued interest that has been capitalized. The Company’s loan receivables are deemed to be held for investmentheld-for-investment at origination or acquisition because management has the intent and ability to hold them for the foreseeable future. Cash flows associated with loans originated or acquired for investment are classified as cash flows from investing activities, regardless of a subsequent change in intent. Purchased Credit-Impaired Loans
PCI loans are loans acquired at prices that reflected a discount related to deterioration in individual loan credit quality since origination. The Company’s PCI loans are comprised entirely of acquired private student loans.
The PCI student loans were aggregated into pools based on common risk characteristics at the time of their acquisition. Loans were grouped primarily on the basis of origination date as loans originated in a particular year generally reflect the application of common origination strategies and/or underwriting criteria. Each pool is accounted for as a single asset and each has a single composite interest rate, total contractual cash flows and total expected cash flows.
Interest income on PCI loans is recognized on the basis of expected cash flows rather than contractual cash flows. The total amount of interest income recognizable on a pool of PCI loans (i.e., its accretable yield) is the difference between the carrying amount of the loan pool and the future cash flows expected to be collected without regard to whether the expected cash flows represent principal or interest collections. Interest is recognized on an effective yield basis over the life of the loan pool.
The initial estimates of the fair value of the PCI student loans included the impact of expected credit losses, and therefore, no allowance for loan losses was recorded as of the purchase dates. The difference between contractually required cash flows and cash flows expected to be collected, as measured at the acquisition dates, is not permitted to be accreted. Charge-offs are absorbed by this non-accretable difference and do not result in a charge to earnings. However, as noted below, a charge to provision expense may be necessary to the extent that expected credit losses increase after the acquisition date.
The estimate of cash flows expected to be collected is evaluated each reporting period to ensure it reflects management’s latest expectations of future credit losses and borrower prepayments, and interest rates in effect in the current period. To the extent expected credit losses increase after the acquisition dates, the Company will record an allowance for loan losses through the provision for loan losses, which will reduce net income. Changes in expected cash flows related to changes in prepayments or interest rate indices for variable-rate loans generally are recorded prospectively as adjustments to interest income.
To the extent that a significant increase in cash flows due to lower expected losses is deemed probable, the Company will first reverse any previously established allowance for loan losses and then increase the amount of remaining accretable yield. The increase to yield would be recognized prospectively over the remaining life of the loan pool. An increase in the accretable yield would reduce the remaining non-accretable difference available to absorb subsequent charge-offs. Disposals of loans, which may include sales of loans or receipt of payments in full from the borrower or charge-offs, result in removal of the loans from their respective pools.
Delinquent Loans and Net Charge-Offs The entire balance of an account is contractually past due if the minimum payment is not received by the specified date on the customer’s billing statement. Delinquency is reported on loans that are 30 days or more past due. Credit card loans are charged off at the end of the month during which an account becomes 180 days past due. Closed-end unsecured consumer loan receivables are charged off at the end of the month during which an account becomes 120 days contractually past due. Customer bankruptcies and probate accounts are charged off by the end of the month 60 days following the receipt of notification of the bankruptcy or death, but not later than the 180-day or 120-day time frame described above. Receivables associated with alleged or potential fraudulent transactions are adjusted toreserved for at their net realizable value upon receipt of notification of such fraud through a charge to other expense and are subsequently written off at the end of the month 90 days following notification, but not later than the contractual 180-day or 120-day time frame described above. The Company’s charge-off policies are designed to comply with guidelines established by the Federal Financial Institutions Examination Council (“FFIEC”). The Company’s net charge-offs include the principal amount of loans charged off less principal recoveries and exclude charged-off interest and fees, recoveries of interest and fees and fraud losses. The practice of re-aging an account also may affect loan delinquencies and charge-offs. A re-age is intended to assist delinquent customers who have experienced financial difficulties but who demonstrate both an ability and willingness to repay. Accounts meeting specific criteria are re-aged when the Company and the customer agree on a temporary repayment schedule that may include concessionary terms. With re-aging, the outstanding balance of a delinquent account is returned to a current status. Customers may also qualify for a workout re-age when either a longer term or permanent hardship exists. The Company’s re-age practices are designed to comply with FFIEC guidelines. Allowance for LoanCredit Losses The Company maintains an allowance for loancredit losses at a level that is appropriate to absorb probablenet credit losses inherent inanticipated over the remaining expected life of loan portfolio.receivables as of the balance sheet date. The estimate of probable incurredexpected credit losses considers uncollectible principal, interest and fees associated with the Company’sCompany's loan receivables.receivables existing as of the balance sheet date. Additionally, the estimate includes expected recoveries of amounts that were either previously charged off or are expected to be charged off. The allowance is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for loancredit losses. Charge-offs of principal amounts of loans outstanding are deducted from the allowance and subsequent recoveries of such amounts increase the allowance. Charge-offs of loan balances representing unpaid interest and fees result in a reversal of interest and fee income, respectively, which is effectively a reclassification of the provision for loan losses (also see “— Significant Revenue Recognition Accounting Policies — Loan Interest and Fee Income”).credit losses. The Company calculates its allowance for loancredit losses by estimating probableexpected credit losses separately for classes of the loan portfolioreceivables with similar loan characteristics, which generallyrisk characteristics. This results in segmenting the portfolio by loan product type.
Thetype, which is the level that the Company basesdevelops and documents its methodology for determining the allowance for credit losses. The estimate of expected credit losses for each loan lossesproduct type is based on: (i) a reasonable and supportable forecast period; (ii) a reversion period; and (iii) a post-reversion period based on severalhistorical information covering the remaining life of the loan, all of which is netted with expected recoveries. The lengths of the reasonable and supportable forecast and reversion periods can vary and are subject to a quarterly assessment that considers the economic outlook and level of variability among macroeconomic forecasts. In benign economic conditions, the Company expects to apply a
straight-line method to revert from the reasonable and supportable forecast period to the post-reversion period, but in certain stressed scenarios, a weighted approach may be deemed more appropriate. Several analyses thatare used to help estimate incurredcredit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. While the Company’sThe Company's estimation process includes models that predict customer losses based on risk characteristics and portfolio attributes, macroeconomic variables and historical data and analysis, thereanalysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance. For substantially all of its loan receivables,credit card loans, the Company uses a migration analysismodeling framework that includes the following components for estimating expected credit losses: •Probability of default: this component estimates the probability of charge-off at different points in time over the life of each loan. •Exposure at default: this component estimates the portion of the balance sheet date balance remaining at any given time of charge-off for each loan. Given that there is no stated life of a receivable balance on a revolving credit card account, the Company applies a percentage of expected payments to estimate the likelihoodportion of the balance that awould remain at the time of charge-off. •Loss given default: this component estimates the percentage of exposure (i.e., net loss) at time of charge-off that cannot be recovered, with the offsetting forecast recoveries being the driver of this estimate. •Recoveries from previously charged-off accounts are estimated separately and are netted as part of the aggregation of all of the components of the card loss modeling framework. For private student loans and personal loans, the Company uses vintage-based models that estimate expected credit losses over the life of the loan, will progress throughnet of recovery estimates, impacted mainly by time elapsed since origination, credit quality of origination vintages and macroeconomic forecasts. The components described above for credit card, private student and personal loans are developed utilizing historical data and applicable macroeconomic variable inputs based on statistical analysis and customer behavioral relationships with credit performance. Expected recoveries from loans charged off as of the various stages of delinquency.balance sheet date are modeled separately and included in the allowance estimate. The Company uses other analysesleverages these models and recent macroeconomic forecasts for the portion of the estimate associated with the reasonable and supportable forecast period. To estimate expected credit losses for the remainder of the life of the credit card loans, the Company reverts to historical experience of credit card loans with characteristics similar to those as of the balance sheet date and observed over various phases of a credit cycle. To estimate expected credit losses incurred on non-delinquentfor the remainder of the life of private student and bankrupt accounts. personal loans, the Company generally reverts to use of average macroeconomic variables over an appropriate historical period. The considerations in these analysesmodels include past and current loan performance, loan growth and seasoning, current risk management practices, account collection strategies, economic conditions, bankruptcy filings, policy changes and forecasting uncertainties. Consideration of past and current loan performance includes the post-modification performance of loans modified in a troubled debt restructuring. For the majority of itscredit card loan portfolio, the Company estimates its allowance for loancredit losses on a pooledloan-level basis, which includes loans that are delinquent and/or no longer accruing interest and/or certain loans that have defaulted frombeen restructured. For the remainder of its portfolio, including private student, personal and other loans, the Company estimates its credit losses on a pooled basis. For all loan modification program.types, recoveries are estimated at a pooled level based on estimates of future cash flows derived using historical experience. Accrued interest receivable on credit card loans is included in the estimate of expected credit losses once billed to the customer (i.e., once the interest becomes part of the loan balance). Except as noted in the following sentence, an allowance for credit losses is not recorded for unbilled credit card interest or accrued interest receivable on other loan classes as the impact to the allowance for credit losses is not material. Accrued interest receivable on student loans that have not yet entered repayment is included in the estimate of expected credit losses. No liability for expected credit losses is required for unused lines of credit on the Company’s credit card loans because they are unconditionally cancellable. The Company records a liability for expected credit losses for unfunded commitments on all other loans, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition. This liability is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for credit losses.
As part of certain collection strategies, the Company may modify the terms of loans to customers experiencing financial hardship. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on private student loans and certain grants of private student loan forbearance are generally accounted for as troubled debt restructurings. The Company classifies a modified loan in which a concession has been granted to the borrower as a troubled debt restructuring based on the cumulative length of the concession period and credit quality of the borrower. Loan receivables other than PCI loans, that have been modified under a troubled debt restructuring are evaluated separately from the pools of receivables that are subject to the collective analysessame requirements for the accrual of expected credit loss over their expected remaining lives as described above. Loan receivables modifiedabove for unmodified loans. The effects of all loan modifications, whether the TDR designation applies or not, are reflected in a troubled debt restructuring arethe allowance for credit losses. An adjustment to the allowance for credit losses is not recorded at their present values with impairment measuredfor reasonably expected TDRs as the difference betweenimpact is not material. When the recorded investment in the loan and the discounted present value of cash flows expected to be collected. Consistent with the Company’s measurement of impairment of modified loans on a pooled basis, the discount rate used for credit card loans in internal programs is the average current annual percentage rate applied to non-impaired credit card loans, which approximates what would have applied to the pool of modified loans prior to modification. The discount rate used for credit card loans in external programs reflects a rate that is consistent with rates offered to cardmembers not in a program that have similar risk characteristics. For student and personal loans, the discount rate used is the average contractual rate prior to modification. Changes in the present value are recorded in the provision for loan losses. Allimpact of the Company’s troubled debt restructurings, which are evaluated collectively on an aggregated (by loan type) basis, haveconcession can only be captured by use of a relateddiscounted cash flow method (or a reconcilable method), such method is used to measure the allowance for loancredit losses. Premises and Equipment, net Premises and equipment, net, are stated at cost less provisions for impairment and accumulated depreciation and amortization. Accumulated depreciation and amortization which is computed using the straight-line method over the estimated useful lives of the assets. The Company periodically reviews the estimated useful lives and may adjust them as necessary. Buildings are depreciated over a period of 39 years.thirty-nine years. The costs of improvements are capitalized and depreciated either over the asset’s estimated useful life, typically ten years to fifteen years, or over the remaining term of the lease, when applicable. Furniture and fixtures are depreciated over a period of five years to ten years.years. Equipment is depreciated over three years to ten years.years. Maintenance and repairs are immediately expensed when incurred, while the costs of significant improvements are capitalized. Purchased software and capitalized costs related to internally developed software are amortized over their useful lives of three years to ten years.years. Costs incurred during the application development stage related to internally developed software are capitalized. Costs are expensed as incurred during the preliminary project stage and post implementation stage. Once the capitalization criteria as defined in GAAP have been met, external direct costs incurred for materials and services used in developing or obtaining internal-use computer software and payroll and payroll-related costs for employees who are directly associated with the internal-use computer software project (to the extent those employees devoted time directly to the project) are capitalized. Amortization of capitalized costs begins when the software is ready for its intended use. Capitalized software is included in premises and equipment, net in the Company’s consolidated statements of financial condition. See Note 6: Premises and Equipment for further information about the Company’s premises and equipment. Cloud computing arrangements involving the licensing of software that meet certain criteria are recognized as the acquisition of software. Such assets are measured at the present value of the license obligation, if the license is to be paid over time, in addition to any capitalized upfront costs and amortized over the life of the arrangement. Cloud computing arrangements that do not meet the criteria to be recognized as acquired software are accounted for as service contracts. To date, none of the Company’s cloud computing arrangements have met the criteria to be recognized as acquired software.
Premises and equipment are subject to impairment testing when events or conditions indicate that the carrying value of the asset may not be fully recoverable from future cash flows. See “— Intangible Assets” for additional details on impairment testing. Goodwill
Goodwill is recorded as part of the Company’s acquisitions of businesses when the purchase price exceeds the fair value of the net tangible and separately identifiable intangible assets acquired. The Company’s goodwill is not amortized, but rather is subject to an impairment test at the reporting unit level annually as of October 1, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s reported goodwill relates to PULSE, which it acquired in 2005. The Company’s goodwill is tested for impairment by comparing the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. NaN impairment was identified during the impairment test conducted as of October 1, 2019.
Intangible Assets
The Company’s identifiable intangible assets consist of both amortizable and non-amortizable intangible assets. The Company’s amortizable intangible assets consist primarily of acquired customer relationships and certain trade name intangibles. All of the Company’s amortizable intangible assets are carried at net book value and are amortized over their estimated useful lives. The amortization periods approximate the periods over which the Company expects to generate future net cash inflows from the use of these assets. The Company’s policy is to amortize intangibles in a manner that reflects the pattern in which the projected net cash inflows to the Company are expected to occur, where such pattern can be reasonably determined, as opposed to the straight-line basis. This method of amortization typically results in a greater portion of the intangible asset being amortized in the earlier years of its useful life.
All of the Company’s amortizable intangible assets, as well as other amortizable or depreciable long-lived assets such as premises and equipment are subject to impairment testing when events or conditions indicate that the carrying value of the asset may not be fully recoverable from future cash flows. A test for recoverability is done by comparing the asset’s carrying value to the sum of the undiscounted future net cash inflows expected to be generated from the use of the asset over its remaining useful life. Impairment exists if the sum of the undiscounted expected future net cash inflows is less than the carrying amount of the asset. Impairment would result in a write-down of the asset to its estimated fair value. The estimated fair values of these assets are based on the discounted present value of the stream of future net cash inflows expected to be derived over the remaining useful lives of the assets. If an impairment write-down is recorded, the remaining useful life of the asset will be evaluated to determine whether revision of the remaining amortization or depreciation period is appropriate.
The Company’s non-amortizable intangible assets consist primarily of the brand-related intangibles and international transaction processing rights included in the acquisition of Diners Club. These assets are deemed to have indefinite useful lives and are therefore not subject to amortization. AllGoodwill
Goodwill is recorded as part of the Company’s non-amortizableacquisitions of businesses when the purchase price exceeds the fair value of the net tangible and separately identifiable intangible assets areacquired. The Company’s goodwill is not amortized, but rather is subject to aan impairment test for impairmentat the reporting unit level annually as of October 1, or between annual tests if an event occurs or circumstances change that would more frequently if events or changeslikely than not reduce the fair value of a
reporting unit below its carrying amount. The Company’s reported goodwill relates to PULSE, which it acquired in circumstances indicate that2005. The Company’s goodwill is tested for impairment by comparing the asset might befair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. As required by GAAP, ifIf the carrying value of a non-amortizable intangible asset is in excess ofexceeds its fair value, the assetan impairment loss must be written downrecognized in an amount equal to its fair value throughthat excess, limited to the recognitiontotal amount of angoodwill allocated to that reporting unit. No impairment charge to earnings. In contrast to amortizable intangibles, there is no test for recoverability associated with the impairment test for non-amortizable intangible assets. No significant impairment concerns werewas identified during the impairment test conducted as of October 1, 2019.2022. Stock-based Compensation The Company measures the cost of employee services received from employees and non-employee directors in exchange for an award of stock-based compensation based on the grant-date fair value of the award. The cost, net of estimated forfeitures, is recognized over the requisite service period. Awards to employees who are retirement-eligible at any point during the year are amortized over 12 months in accordance with the vesting terms that apply under those circumstances. No compensation cost is recognized for awards that are subsequently forfeited.
Advertising Costs The Company expenses television and radio advertising costs in the period in which the advertising is first aired and all other advertising costs as incurred. Advertising costs are recorded in marketing and business development and were $264$307 million,, $258 $262 million and $219$212 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively. Income Taxes Income tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based on the temporary differences between the financial statementreporting and income tax bases of assets and liabilities using currently enacted tax rates. Deferred tax assets are recognized when their realization is determined to be more likely than not. A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances and which causes a change in management’s judgment about the realizability of the related deferred tax asset is included in the current tax provision. Uncertain tax positions are measured at the highest amount of tax benefit for which realization is judged to be more likely than not. Tax benefits that do not meet these criteria are unrecognized tax benefits. The Company recognizes and reports interest and penalties, if necessary, related to uncertain tax positions within its provision for income tax expense. See Note 15: Income Taxes for more information about the Company’s income taxes. Financial Instruments Used for Asset and Liability Management
The Company utilizes derivative financial instruments to manage its various exposures to changes in fair value of certain assets and liabilities, variability in future cash flows arising from changes in interest rates or other types of forecasted transactions, and changes in foreign exchange rates. All derivatives are carried at their estimated fair values on the Company’s consolidated statements of financial condition. Derivatives having gross positive fair values, inclusive of net accrued interest receipts or payments, are recorded in other assets. Derivatives with gross negative fair values, inclusive of net accrued interest payments or receipts, are recorded in accrued expenses and other liabilities. The methodologies used to estimate the fair values of these derivative financial instruments are described in Note 20: Fair Value Measurements. Variation margin payments associated with derivative positions that are cleared through an exchange are legally characterized as settlements of the derivative positions. Such settlement payments are reflected as offsets to the associated derivatives balances recorded in other assets or in accrued expenses and other liabilities. The impact of settlement payments on the consolidated statements of financial condition is discussed in more detail in Note 21: Derivatives and Hedging Activities. Other cash collateral receivable or payable amounts associated with derivatives are not offset against the fair value of these derivatives, but are recorded separately in other assets or deposits, respectively.
Certain of these instruments are designated and qualify for hedge accounting. A hedge is deemed effective to the extent that the change in fair value, cash flow, or net investment of the hedged item is offset by changes in the hedginginstrument. Under cash flow hedge accounting, changes in the fair values of the derivative instruments are recognized in other comprehensive income (“OCI”) and subsequently reclassified to earnings in the period the hedged forecasted cash flows affect earnings. In a net investment hedge, amounts accumulated in OCI are reclassified into earnings when a hedged net investment is either sold or substantially liquidated. Under fair value hedge accounting, changes in both (i) the fair values of the derivative instruments and (ii) the fair values of the hedged items relating to the risks being hedged, including net differences, if any, are recorded in interest expense. Certain other derivatives are not designated as hedges or do not qualify for hedge accounting; changes in the fair value of these derivatives are recorded in other income. These transactions are discussed in more detail in Note 21: Derivatives and Hedging Activities.
Accumulated Other Comprehensive Income The Company records unrealized gains and losses on available-for-sale securities, changes in the fair value of cash flow hedges and certain pension and foreign currency translation adjustments in OCIother comprehensive income (“OCI”) on an after-tax basis where applicable. The Company’s policy is to adjust the tax effects of a component of AOCI in the same period in which the item is sold or otherwise derecognized, or when the carrying value of the item is remeasured. Details of OCI, net of tax, are presented in the statement of comprehensive income and a rollforwardroll forward of AOCI is presented in the statementconsolidated statements of changes in stockholders’ equity and Note 13: Accumulated Other Comprehensive Income. Significant Revenue Recognition Accounting Policies Loan Interest and Fee Income Interest on loans is comprisedcomposed largely of interest on credit card loans and is recognized based on the amount of loans outstanding and their contractual interest rate. Interest on credit card loans is included in loan receivables when billed to the customer. The Company accrues unbilled interest revenue each month from a customer’s billing cycle date to the end of the month. The Company applies an estimate of the percentage of loans that will revolve in the next cycle
in the estimation of the accrued unbilled portion of interest revenue that is included in accrued interest receivableother assets on the consolidated statements of financial condition. Interest on other loan receivables is accrued each month in accordance with their contractual terms and recorded in accrued interest receivable, which is included in other assets in the consolidated statements of financial condition. Interest related to PCI loans is discussed in Note 4: Loan Receivables. The Company recognizes fees (except balance transfer fees and certain product fees) on loan receivables in interest income or loan fee income as the fees are assessed. Balance transfer fees and certain product fees are
recognized in interest income or loan fee income ratably over the periods to which they relate. Balance transfer fees are accreted to interest income over the estimated life of the related balance. As of December 31, 20192022 and 2018,2021, deferred revenues related to balance transfer fees, recorded as a reduction of loan receivables, were $67$85 million and $52$62 million,, respectively. Loan fee income consists of fees on credit card loans and includes late, cash advance, returned check and other miscellaneous fees and is reflected net of waivers and charge-offs. Direct loan origination costs on credit card loans are deferred and amortized on a straight-line basis over a one year period and recorded in interest income from credit card loans. Direct loan origination costs on other loan receivables are deferred and amortized over the life of the loan using the interest method and are recorded in interest income from other loans. As of December 31, 20192022 and 2018,2021, the remaining unamortized deferred costs related to loan origination were $178$298 million and $138$222 million,, respectively, and were recorded in loan receivables. The Company accrues interest and fees on credit card and closed-end loan receivables until the loans are paid or charged off, except in instances of customer bankruptcy, death or suspected fraud, where no further interest and fee accruals occur following notification. Credit card and closed-end consumer loan receivables are placed on non-accrual status upon receipt of notification of the bankruptcy or death of a customer or suspected fraudulent activity on an account. Upon completion of the fraud investigation, non-fraudulent credit card and closed-end consumer loan receivables may resume accruing interest. Payments received on non-accrual loans are allocated according to the same payment hierarchy applied to loans that are accruing interest. When loan receivables are charged off, unpaid accrued interest and fees are reversed against the income line items in which they were originally recorded in the consolidated statements of income. Charge-offs and recoveries of amounts that relate to capitalized interest on private student loans are treated as principal charge-offs and recoveries, affecting the provision for loancredit losses rather than interest income. The Company considers uncollectible interest and fee revenues in assessing the adequacy of the allowance for loancredit losses. Interest income from loans individually evaluated for impairment, including loans accounted for as troubled debt restructurings is accounted for in the same manner as other accruing loans. Cash collections on these loans are allocated according to the same payment hierarchy methodology applied to loans that are not in such programs. Discount and Interchange Revenue The Company earns discount revenue from fees charged to merchants with whom it has entered into card acceptance agreements for processing credit card purchase transactions. The Company earns acquirer interchange revenue primarily from merchant acquirers on all Discover Network, Diners Club and PULSE transactions made by credit and debit card customers at merchants with whom merchant acquirers have entered into card acceptance agreements for processing payment card transactions. These card acceptance arrangements generally renew automatically and do not have fixed durations. Under these agreements, the Company stands ready to process payment transactions as and when each is presented. The Company earns discount, interchange and similar fees only when transactions are processed. Contractually defined per-transaction fee amounts typically apply to each type of transaction processed and are recognized as revenue at the time each transaction is captured for settlement. These fees are typically collected by the Company as part of the process of settling transactions daily with merchants and acquirers and are fully earned at the time settlement is made. The Company pays issuer interchange to card-issuing entities that have entered into contractual arrangements to issue cards on the Discover Network and on certain transactions on the Diners Club and PULSE networks. This cost is contractually established and is based on the card-issuing organization’s transaction volume. The Company classifies this cost as a reduction of discount and interchange revenue. Costs of cardholder reward arrangements, including the Cashback Bonus reward program, are classified as reductions of discount and interchange revenue pursuant to guidance under Accounting Standards Codification (“ASC”) Topic 606 governing consideration payable to a customer. For both issuer interchange and transaction-based cardholder rewards, the Company accrues the cost at the time each underlying card transaction is captured for settlement.
Customer Rewards The Company offers its customers various reward programs, including the CashbackCashback BonusBonus reward program, pursuant to which the Company pays certain customers a reward equal to a percentage of their credit card purchase amounts based on the type and volume of the customer’s purchases. The liability for customer rewards which is included in accrued expenses and other liabilities on the consolidated statements of financial condition, is recorded on an individual customer basis and is accumulated as qualified customers earn rewards through their ongoing credit card purchase activity or other defined actions. The Company recognizes customer rewards costs as a reduction of the related revenue, if any. In instances where a reward is not associated with a revenue-generating transaction, such as when a reward is given for opening an account, the reward cost is recorded as an operating expense. For the years
ended December 31, 2019, 20182022, 2021 and 2017,2020, rewards costs amounted to $1.9$3.0 billion,, $1.8 $2.5 billion and $1.6$1.9 billion,, respectively. The liability for customer rewards was $1.7$2.2 billion and $1.6$2.0 billion at December 31, 20192022 and 2018,2021, respectively, and is included in accrued expenses and other liabilities on the consolidated statements of financial condition. Protection Products Revenue The Company earns revenue related to fees received for providing ancillary products and services, including payment protection and identity theft protection services, to its credit card customers. A portion of this revenue comprises amounts earned for arranging for the delivery of products offered by third-party service providers. The amount of revenue recorded is generally based on either a percentage of a customer’s outstanding balance or a flat fee, in either case assessed monthly and is recognized as earned. These contracts are month-to-month arrangements that are cancellable at any time. The Company recognizes each monthly fee in the period to which the service or coverage relates. Transaction Processing Revenue Transaction processing revenue represents switch fees charged to financial institutions and merchants under network participation agreements for processing ATM debit and point-of-saledebit transactions over the PULSE network, as well as various participation and membership fees. Network participation agreements generally renew automatically and do not have fixed durations, although the Company does enter into fixed-term pricing or incentive arrangements with certain network participants. The impact of such incentives is not material to the Company’s consolidated statements of income. Similar to discount and interchange fees, switch fees are contractually defined per-transaction fee amounts and are assessed and recognized as revenue at the time each transaction is captured for settlement. These fees are typically collected by the Company as part of the process of settling transactions with network participants. Membership and other participation fees are recognized over the periods to which each fee relates. Other Income Other income includes gains and losses on equity investments, sales-based royalty revenues earned by Diners Club, merchant fees, certain payments from merchants related to reward programs, revenues from network partners and other miscellaneous revenue items. Unrealized gains and losses on equity investments carried at fair value are recognized quarterly based on changes in their respective fair values. Sales-based royalty revenues are recognized as the related sales are reported by Diners franchisees. All remaining items of other income are recognized as the related performance obligations are satisfied. Future Revenue Associated with Customer Contracts For contracts under which the Company processes payment card transactions, the Company has the right to assess fees for services performed and to collect those fees through the settlement process. The Company generates essentially all of its discount and interchange revenue and transaction processing revenue, as well as some revenue reported as other income, through such contracts. There is no specified quantity of service promised in these contracts as the number of payment transactions is dependent upon cardholder behavior, which is outside the control of the Company and its network customers (i.e., merchants, acquirers, issuers and other network participants). As noted above, these contracts are typically without fixed durations and renew automatically. For these reasons, the Company does not make or disclose an estimate of revenue associated with performance obligations attributable to the remaining terms of these contracts. Future revenue associated with the Company’s sales-based royalty revenues earned from Diners Club licensees is similarly variable and open-ended and therefore the Company does not make or disclose an estimate of royalties associated with performance obligations attributable to the remaining terms of the licensing and royalty arrangements. Because of the nature of the services and the manner of collection associated with the majority of the Company’s revenue from contracts with customers, material receivables or deferred revenues are not generated.
Incentive Payments The Company makes certain incentive payments under contractual arrangements with financial institutions, Diners Club licensees, merchants, acquirers and certain other customers. These payments are generally classified as contra-revenue unless a distinct good or service is received by the Company in considerationexchange for the payment and the fair value of the good or service can be reasonably estimated. If no such good or service is identified, then the entire payment is classified as contra-revenue and included in the consolidated statements of income in the line item where the related revenues are recorded. If the payment gives rise to an asset because it is expected to directly or indirectly contribute to future net cash inflows, it is deferred and recognized over the expected benefit period. The unamortized portion of the
deferred incentive payments included in other assets on the consolidated statements of financial condition was $24$32 million and $23$33 million at December 31, 20192022 and 2021, respectively. 3. Investments The Company’s other short-term investments and investment securities consist of the following (dollars in millions): | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | | | | | | | | | | | | | | | | | U.S. Treasury securities(1) and U.S. GSE(2) securities | $ | 11,423 | | | $ | 6,514 | | Residential mortgage-backed securities - Agency(3) | 785 | | | 390 | | Total investment securities | $ | 12,208 | | | $ | 6,904 | | | | | |
(1)$97 million and 2018,$27 million of U.S. Treasury securities pledged as swap collateral as of December 31, 2022 and 2021, respectively. The Company’s investment securities consist of the following (dollars in millions): | | | | | | | | | | December 31, | | 2019 | | 2018 | U.S. Treasury securities(1) | $ | 9,906 |
| | $ | 2,586 |
| Residential mortgage-backed securities - Agency(2) | 689 |
| | 784 |
| Total investment securities | $ | 10,595 |
| | $ | 3,370 |
| | | | |
(2) | | (1) | Includes $121 million and $42 million of U.S. Treasury securities pledged as swap collateral as of December 31, 2019 and 2018, respectively.
|
| | (2) | Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. |
The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in millions): | | | | | | | | | | | | | | | | | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | At December 31, 2019 | | | | | | | | Available-for-Sale Investment Securities(1) | | | | | | | | U.S. Treasury securities | $ | 9,759 |
| | $ | 155 |
| | $ | (8 | ) | | $ | 9,906 |
| Residential mortgage-backed securities - Agency | 414 |
| | 3 |
| | — |
| | 417 |
| Total available-for-sale investment securities | $ | 10,173 |
| | $ | 158 |
| | $ | (8 | ) | | $ | 10,323 |
| Held-to-Maturity Investment Securities(2) | | | | | | | | Residential mortgage-backed securities - Agency(3) | $ | 272 |
| | $ | 3 |
| | $ | (1 | ) | | $ | 274 |
| Total held-to-maturity investment securities | $ | 272 |
| | $ | 3 |
| | $ | (1 | ) | | $ | 274 |
| | | | | | | | | At December 31, 2018 | | | | | | | | Available-for-Sale Investment Securities(1) | | | | | | | | U.S. Treasury securities | $ | 2,559 |
| | $ | 27 |
| | $ | — |
| | $ | 2,586 |
| Residential mortgage-backed securities - Agency | 559 |
| | — |
| | (12 | ) | | 547 |
| Total available-for-sale investment securities | $ | 3,118 |
| | $ | 27 |
| | $ | (12 | ) | | $ | 3,133 |
| Held-to-Maturity Investment Securities(2) | | | | | | | | Residential mortgage-backed securities - Agency(3) | $ | 237 |
| | $ | — |
| | $ | (4 | ) | | $ | 233 |
| Total held-to-maturity investment securities | $ | 237 |
| | $ | — |
| | $ | (4 | ) | | $ | 233 |
| | | | | | | | |
| | (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 | | More than 12 months | | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | At December 31, 2019 | | | | | | | | | | Available-for-Sale Investment Securities | | | | | | | | | | U.S. Treasury securities | 11 |
| | $ | 1,402 |
| | $ | (8 | ) | | $ | — |
| | $ | — |
| Held-to-Maturity Investment Securities | | | | | | | | | | Residential mortgage-backed securities - Agency | 58 |
| | $ | 64 |
| | $ | — |
| | $ | 19 |
| | $ | (1 | ) | | | | | | | | | | | At December 31, 2018 | | | | | | | | | | Available-for-Sale Investment Securities | | | | | | | | | | Residential mortgage-backed securities - Agency | 31 |
| | $ | 110 |
| | $ | (1 | ) | | $ | 437 |
| | $ | (11 | ) | Held-to-Maturity Investment Securities | | | | | | | | | | Residential mortgage-backed securities - Agency | 90 |
| | $ | 101 |
| | $ | (1 | ) | | $ | 83 |
| | $ | (3 | ) | | | | | | | | | | |
Consists of a security issued by the Federal Home Loan Bank.There were 0 losses related to other-than-temporary impairments and 0 proceeds from sales(3)Consists of securities issued by Fannie Mae, Freddie Mac, or recognizedGinnie Mae.
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 | December 31, 2022 | | | | | | | | Available-for-Sale Investment Securities(1) | | | | | | | | U.S. Treasury and U.S. GSE securities | $ | 11,580 | | | $ | 21 | | | $ | (178) | | | $ | 11,423 | | Residential mortgage-backed securities - Agency | 587 | | | — | | | (23) | | | 564 | | Total available-for-sale investment securities | $ | 12,167 | | | $ | 21 | | | $ | (201) | | | $ | 11,987 | | Held-to-Maturity Investment Securities(2) | | | | | | | | Residential mortgage-backed securities - Agency(3) | $ | 221 | | | $ | — | | | $ | (22) | | | $ | 199 | | Total held-to-maturity investment securities | $ | 221 | | | $ | — | | | $ | (22) | | | $ | 199 | | | | | | | | | | December 31, 2021 | | | | | | | | Available-for-Sale Investment Securities(1) | | | | | | | | U.S. Treasury and U.S. GSE securities | $ | 6,368 | | | $ | 146 | | | $ | — | | | $ | 6,514 | | Residential mortgage-backed securities - Agency | 181 | | | 5 | | | — | | | 186 | | Total available-for-sale investment securities | $ | 6,549 | | | $ | 151 | | | $ | — | | | $ | 6,700 | | Held-to-Maturity Investment Securities(2) | | | | | | | | Residential mortgage-backed securities - Agency(3) | $ | 204 | | | $ | 3 | | | $ | (1) | | | $ | 206 | | Total held-to-maturity investment securities | $ | 204 | | | $ | 3 | | | $ | (1) | | | $ | 206 | | | | | | | | | |
(1)Available-for-sale investment securities are reported at fair value. (2)Held-to-maturity investment securities are reported at amortized cost. (3)Amounts represent residential mortgage-backed securities (“RMBS”) that were classified as held-to-maturity as they were entered into as a part of the Company’s community reinvestment initiatives. The Company invests in U.S. Treasury obligations and securities issued by U.S. GSEs, which have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. federal government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments. In addition, the Company did not have the intent to sell any available-for-sale securities with an unrealized loss position and did not believe it is more likely than not that it will be required to sell any such security before recovery of its amortized cost basis.
The following table provides information about investment securities with aggregate gross unrealized losses and the length of time that individual investment securities have been in a continuous unrealized loss position (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less than 12 months | | More than 12 months | | Number of Securities in a Loss Position | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | December 31, 2022 | | | | | | | | | | Available-for-Sale Investment Securities | | | | | | | | | | U.S. Treasury securities | 123 | | | $ | 9,060 | | | $ | (175) | | | $ | 106 | | | $ | (3) | | Residential mortgage-backed securities - Agency | 34 | | | $ | 559 | | | $ | (22) | | | $ | 5 | | | $ | (1) | | | | | | | | | | | | December 31, 2021 | | | | | | | | | | Available-for-Sale Investment Securities | | | | | | | | | | U.S. Treasury securities | 2 | | | $ | 110 | | | NM | | $ | — | | | $ | — | | Residential mortgage-backed securities - Agency | 1 | | | $ | 7 | | | NM | | $ | — | | | $ | — | |
During the year ended December 31, 2022, the Company had no sales of available-for-sale securities. During the year ended December 31, 2021, the Company received $5 million of proceeds from the sale of available-for-sale securities. As a result of the sale, the Company recognized an immaterial gain during the year ended December 31, 2021. There were no sales of available-for-sale securities during the yearsyear ended December 31, 2019, 2018 and 2017.2020. See Note 13: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the years ended December 31, 2019, 20182022, 2021 and 2017. 2020.
Maturities and weighted-average yields of available-for-sale debt securities and held-to-maturity debt securities are provided in the tables below (dollars in millions): | | | | | | | | | | | | | | | | | | | | | At December 31, 2019 | One Year or Less | | After One Year Through Five Years | | After Five Years Through Ten Years | | After Ten Years | | Total | Available-for-Sale Investment Securities—Amortized Cost | | | | | | | | | | U.S. Treasury securities | $ | 870 |
| | $ | 8,369 |
| | $ | 520 |
| | $ | — |
| | $ | 9,759 |
| Residential mortgage-backed securities - Agency(1) | — |
| | 85 |
| | 329 |
| | — |
| | 414 |
| Total available-for-sale investment securities | $ | 870 |
| | $ | 8,454 |
| | $ | 849 |
| | $ | — |
| | $ | 10,173 |
| Held-to-Maturity Investment Securities—Amortized Cost | | | | | | | | | | Residential mortgage-backed securities - Agency(1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 272 |
| | $ | 272 |
| Total held-to-maturity investment securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | 272 |
| | $ | 272 |
| | | | | | | | | | | Available-for-Sale Investment Securities—Fair Values | | | | | | | | | | U.S. Treasury securities | $ | 875 |
| | $ | 8,511 |
| | $ | 520 |
| | $ | — |
| | $ | 9,906 |
| Residential mortgage-backed securities - Agency(1) | — |
| | 86 |
| | 331 |
| | — |
| | 417 |
| Total available-for-sale investment securities | $ | 875 |
| | $ | 8,597 |
| | $ | 851 |
| | $ | — |
| | $ | 10,323 |
| Held-to-Maturity Investment Securities—Fair Values | | | | | | | | | | Residential mortgage-backed securities - Agency(1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 274 |
| | $ | 274 |
| Total held-to-maturity investment securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | 274 |
| | $ | 274 |
| | | | | | | | | | |
-94-
| | (1) | Maturities of residential mortgage-backedMaturities and weighted-average yields of available-for-sale debt securities and held-to-maturity debt securities are provided in the following tables (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At December 31, 2022 | One Year or Less | | After One Year Through Five Years | | After Five Years Through Ten Years | | After Ten Years | | Total | Available-for-Sale Investment Securities — Amortized Cost | | | | | | | | | | U.S. Treasury and U.S. GSE securities | $ | 1,726 | | | $ | 9,025 | | | $ | 829 | | | $ | — | | | $ | 11,580 | | Residential mortgage-backed securities - Agency(1) | 1 | | | 87 | | | 25 | | | 474 | | | 587 | | Total available-for-sale investment securities | $ | 1,727 | | | $ | 9,112 | | | $ | 854 | | | $ | 474 | | | $ | 12,167 | | Held-to-Maturity Investment Securities — Amortized Cost | | | | | | | | | | Residential mortgage-backed securities - Agency(1) | $ | — | | | $ | — | | | $ | — | | | $ | 221 | | | $ | 221 | | Total held-to-maturity investment securities | $ | — | | | $ | — | | | $ | — | | | $ | 221 | | | $ | 221 | | | | | | | | | | | | Available-for-Sale Investment Securities — Fair Values | | | | | | | | | | U.S. Treasury and U.S. GSE securities | $ | 1,706 | | | $ | 8,890 | | | $ | 827 | | | $ | — | | | $ | 11,423 | | Residential mortgage-backed securities - Agency(1) | 1 | | | 83 | | | 24 | | | 456 | | | 564 | | Total available-for-sale investment securities | $ | 1,707 | | | $ | 8,973 | | | $ | 851 | | | $ | 456 | | | $ | 11,987 | | Held-to-Maturity Investment Securities — Fair Values | | | | | | | | | | Residential mortgage-backed securities - Agency(1) | $ | — | | | $ | — | | | $ | — | | | $ | 199 | | | $ | 199 | | Total held-to-maturity investment securities | $ | — | | | $ | — | | | $ | — | | | $ | 199 | | | $ | 199 | | | | | | | | | | | | Available-for-Sale Investment Securities — Weighted-Average Yields(2) | | | | | | | | | | U.S. Treasury and U.S. GSE securities | 2.48 | % | | 3.39 | % | | 3.94 | % | | — | % | | 3.30 | % | Residential mortgage-backed securities - Agency(1) | 1.82 | % | | 1.94 | % | | 2.50 | % | | 3.51 | % | | 3.23 | % | Total available-for-sale investment securities | 2.48 | % | | 3.38 | % | | 3.90 | % | | 3.51 | % | | 3.29 | % | Held-to-Maturity Investment Securities — Weighted-Average Yields | | | | | | | | | | Residential mortgage-backed securities(1) | — | % | | — | % | | — | % | | 3.05 | % | | 3.05 | % | Total held-to-maturity investment securities | — | % | | — | % | | — | % | | 3.05 | % | | 3.05 | % | | | | | | | | | | |
(1)Maturities of RMBS are reflective of the contractual maturities of the investment. |
| | | | | | | | | | | | | | | | At December 31, 2019 | One Year or Less | | After One Year Through Five Years | | After Five Years Through Ten Years | | After Ten Years | | Total | Available-for-Sale Investment Securities—Weighted-Average Yields(1) | | | | | | | | | | U.S Treasury securities | 2.63 | % | | 2.20 | % | | 1.70 | % | | — | % | | 2.21 | % | Residential mortgage-backed securities - Agency | — | % | | 1.58 | % | | 2.07 | % | | — | % | | 1.97 | % | Total available-for-sale investment securities | 2.63 | % | | 2.19 | % | | 1.84 | % | | — | % | | 2.20 | % | Held-to-Maturity Investment Securities—Weighted-Average Yields | | | | | | | | | | Residential mortgage-backed securities | — | % | | — | % | | — | % | | 3.36 | % | | 3.36 | % | Total held-to-maturity investment securities | — | % | | — | % | | — | % | | 3.36 | % | | 3.36 | % | | | | | | | | | | |
| | (1) | The weighted-average yield for available-for-sale investment securities is calculated based on the amortized cost. |
(2)The weighted-average yield for available-for-sale investment securities is calculated based on the amortized cost. Taxable interest on investment securities was $179 million, $40$182 million and $27$252 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively.There was 0 tax exemptno U.S. federal income tax-exempt interest on investment securities for the years ended December 31, 2019, 20182022, 2021 and 2017.2020. 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 asand stimulate economic development in lowlow- to moderate incomemoderate-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 consolidated statements of financial condition. The portion of each investment’s operating results allocable to the Company reduces the carrying value of the investments and is recorded in other expense within the consolidated statements of income. The Company further reduces the carrying value of the investments by recognizing any amounts that are in excess of future net tax benefits in other expense. The Company earns a return primarily through the receipt of tax credits allocated to the affordable housing projects and the community revitalization projects. TheseThe Company does not consolidate these investments are not consolidated as the Company does not have a controlling financial interest in the investee entities. As of December 31, 20192022 and 2018,2021, the
Company had outstanding investments in these entities of $336$416 million and $295$388 million, respectively, and related contingent liabilities for unconditional and legally binding delayed equity contributions of $74$111 million and $49$92 million, respectively. Of the above outstanding equity investments, the Company had $298$375 million and $271$350 million of investments related to
affordable housing projects as of December 31, 20192022 and 2018,2021, respectively, which had $59$100 million and $30$80 million of related contingent liabilities for unconditional and legally binding delayed equity contributions, respectively. The Company holds non-controlling equity positions in several paymentspayment services entities. Most of these investments are not subject to equity method accounting because the Company does not have significant influence over the investee. The common or preferred equity securities that the Company holdholds typically do not have readily determinable fair values. As a result, the majority of these investments are carried at cost minus impairment, if any. As of December 31, 20192022 and 2018,2021, the carrying value of these investments, which isare recorded within other assets on the Company’s consolidated statements of financial condition, was $42$39 million and $40$36 million, respectively. The Company also holds non-controlling equity positions in payment service entities that have actively traded stock and therefore have readily determinable fair values. As a result, these investments are carried at fair value based on the quoted share prices. As of December 31, 2022 and 2021, the carrying value of these investments, which are recorded within other assets on the Company's consolidated statements of financial condition, were $41 million and $461 million, respectively. During the year ended December 31, 2022, the Company recognized a net loss of $214 million on the consolidated statements of income related to these investments. The Company recognized a net gain of $423 million during the year ended December 31, 2021. The Company recognized no gains or losses during the year ended December 31, 2020. 4. Loan Receivables The Company has 3two loan portfolio segments: credit card loans and other loans. The Company’s classes of receivables within the two portfolio segments are depicted in the following table (dollars in millions): | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | Credit card loans(1)(2) | $ | 90,113 | | | $ | 74,369 | | Other loans(3) | | | | Private student loans(4) | 10,308 | | | 10,113 | | Personal loans | 7,998 | | | 6,936 | | Other loans | 3,701 | | | 2,266 | | Total other loans | 22,007 | | | 19,315 | | Total loan receivables | 112,120 | | | 93,684 | | Allowance for credit losses | (7,374) | | | (6,822) | | Net loan receivables | $ | 104,746 | | | $ | 86,862 | | | | | |
(1)Amounts include carrying values of $13.5 billion and $13.3 billion underlying investors’ interest in trust debt at December 31, 2022 and 2021, respectively, and $12.2 billion and $11.9 billion in seller’s interest at December 31, 2022 and 2021, respectively. See Note 5: Credit Card and Private Student Loan Securitization Activities for additional information. (2)Unbilled accrued interest receivable on credit card loans, which is presented as part of other assets in the Company’s consolidated statements of financial condition, was $611 million and $423 million at December 31, 2022 and 2021, respectively. (3)Accrued interest receivable on private student, personal and other loans, which is presented as part of other assets in the Company’s consolidated statements of financial condition, was $468 million, $49 million and PCI loans.$11 million, respectively, at December 31, 2022 and $443 million, $42 million and $6 million, respectively, at December 31, 2021. (4)Amounts include carrying values of $176 million and $207 million in loans pledged as collateral against the note issued from a private student loan securitization trust at December 31, 2022 and 2021, respectively. See Note 5: Credit Card and Private Student Loan Securitization Activities for additional information. The Company’s classes of receivables within the three portfolio segments are depicted in the following table (dollars in millions): | | | | | | | | | | December 31, | | 2019 | | 2018 | Credit card loans(1) | $ | 77,181 |
| | $ | 72,876 |
| Other loans | | | | Personal loans | 7,687 |
| | 7,454 |
| Private student loans | 8,402 |
| | 7,728 |
| Other | 1,373 |
| | 817 |
| Total other loans | 17,462 |
| | 15,999 |
| PCI loans(2) | 1,251 |
| | 1,637 |
| Total loan receivables | 95,894 |
| | 90,512 |
| Allowance for loan losses | (3,383 | ) | | (3,041 | ) | Net loan receivables | $ | 92,511 |
| | $ | 87,471 |
| | | | |
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| | (1) | Amounts include carrying values of $18.9 billion and $22.0 billion underlying investors’ interest in trust debt at December 31, 2019 and 2018, respectively, and $12.7 billion and $11.1 billion in seller’s interest at December 31, 2019 and 2018, respectively. See Note 5: Credit Card and Student Loan Securitization Activities for additional information.
|
| | (2) | Amounts include carrying values of $292 million and $363 million in loans pledged as collateral against the note issued from a student loan securitization trust at December 31, 2019 and 2018, 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 December 31, 2019 | | | | | | | | | | Credit card loans(2) | $ | 999 |
| | $ | 1,020 |
| | $ | 2,019 |
| | $ | 940 |
| | $ | 237 |
| Other loans | | | | | | | | | | Personal loans(3) | 74 |
| | 31 |
| | 105 |
| | 29 |
| | 12 |
| Private student loans (excluding PCI)(4) | 109 |
| | 36 |
| | 145 |
| | 35 |
| | 11 |
| Other | 5 |
| | 2 |
| | 7 |
| | — |
| | 6 |
| Total other loans (excluding PCI) | 188 |
| | 69 |
| | 257 |
| | 64 |
| | 29 |
| Total loan receivables (excluding PCI) | $ | 1,187 |
| | $ | 1,089 |
| | $ | 2,276 |
| | $ | 1,004 |
| | $ | 266 |
| | | | | | | | | | | At December 31, 2018 | | | | | | | | | | Credit card loans(2) | $ | 885 |
| | $ | 887 |
| | $ | 1,772 |
| | $ | 781 |
| | $ | 266 |
| Other loans | | | | | | | | | | Personal loans(3) | 84 |
| | 35 |
| | 119 |
| | 33 |
| | 11 |
| Private student loans (excluding PCI)(4) | 117 |
| | 38 |
| | 155 |
| | 37 |
| | 8 |
| Other | 2 |
| | 1 |
| | 3 |
| | — |
| | 17 |
| Total other loans (excluding PCI) | 203 |
| | 74 |
| | 277 |
| | 70 |
| | 36 |
| Total loan receivables (excluding PCI) | $ | 1,088 |
| | $ | 961 |
| | $ | 2,049 |
| | $ | 851 |
| | $ | 302 |
| | | | | | | | | | |
| | (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 $45 million, $41 million and $35 million for the years ended December 31, 2019, 2018 and 2017, respectively. 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 $175 million and $116 million of loans accounted for as TDRs at December 31, 2019 and 2018, respectively.
|
| | (3) | Personal loans that are 90 or more days delinquent and accruing interest include $7 million and $5 million of loans accounted for as TDRs at December 31, 2019 and 2018, respectively.
|
| | (4) | Private student loans that are 90 or more days delinquent and accruing interest include $10 million and $7 million of loans accounted for as TDRs at December 31, 2019 and 2018, respectively.
|
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 Years Ended December 31, | | 2019 | | 2018 | | 2017 | | Net Charge-offs | | Net Charge-off Rate(1) | | Net Charge-offs | | Net Charge-off Rate(1) | | Net Charge-offs | | Net Charge-off Rate(1) | Credit card loans | $ | 2,494 |
| | 3.43 | % | | $ | 2,213 |
| | 3.26 | % | | $ | 1,802 |
| | 2.91 | % | Other loans | | | | | | | | | | | | Personal loans | 322 |
| | 4.28 | % | | 308 |
| | 4.15 | % | | 231 |
| | 3.30 | % | Private student loans (excluding PCI) | 69 |
| | 0.85 | % | | 85 |
| | 1.14 | % | | 83 |
| | 1.21 | % | Other | 1 |
| | 0.02 | % | | 6 |
| | 0.98 | % | | 3 |
| | 0.75 | % | Total other loans | 392 |
| | 2.34 | % | | 399 |
| | 2.58 | % | | 317 |
| | 2.24 | % | Net charge-offs (excluding PCI) | $ | 2,886 |
| | 3.23 | % | | $ | 2,612 |
| | 3.13 | % | | $ | 2,119 |
| | 2.78 | % | Net charge-offs (including PCI) | $ | 2,886 |
| | 3.17 | % | | $ | 2,612 |
| | 3.06 | % | | $ | 2,119 |
| | 2.70 | % | | | | | | | | | | | | |
| | (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’scustomer's account with the Company as well asand information from credit bureaus, such as FICO or other credit scores, relating to the customer’scustomer's broader credit performance. The Company actively monitors key credit quality indicators, including FICO scores and delinquency status, for credit card, private student and personal loans. These indicators are important to understand the overall credit performance of the Company's customers and their ability to repay. FICO scores are generally obtained at the origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that a significant portion of delinquent accounts havewith FICO scores below 660.660 have larger delinquencies and credit losses than those with higher credit scores. The following table provides the distribution of the amortized cost basis (excluding accrued interest receivable presented in other assets) by the most recent FICO scores available for the Company's customers for credit card, private student and personal loan receivables (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit Risk Profile by FICO Score | | December 31, | | 2022 | | 2021 | | 660 and Above | | Less than 660 or No Score | | 660 and Above | | Less than 660 or No Score | | $ | | % | | $ | | % | | $ | | % | | $ | | % | Credit card loans(1) | $ | 73,827 | | | 82 | % | | $ | 16,286 | | | 18 | % | | $ | 62,262 | | | 84 | % | | $ | 12,107 | | | 16 | % | Private student loans by origination year(2)(3) | | | | | | | | | | | | | | | | 2022 | $ | 1,172 | | | 94 | % | | $ | 77 | | | 6 | % | | | | | | | | | 2021 | 1,668 | | | 95 | % | | 81 | | | 5 | % | | $ | 1,251 | | | 94 | % | | $ | 73 | | | 6 | % | 2020 | 1,365 | | | 95 | % | | 65 | | | 5 | % | | 1,561 | | | 96 | % | | 59 | | | 4 | % | 2019 | 1,221 | | | 95 | % | | 67 | | | 5 | % | | 1,439 | | | 96 | % | | 61 | | | 4 | % | 2018 | 945 | | | 94 | % | | 62 | | | 6 | % | | 1,147 | | | 95 | % | | 59 | | | 5 | % | Prior | 3,361 | | | 94 | % | | 224 | | | 6 | % | | 4,215 | | | 94 | % | | 248 | | | 6 | % | Total private student loans | $ | 9,732 | | | 94 | % | | $ | 576 | | | 6 | % | | $ | 9,613 | | | 95 | % | | $ | 500 | | | 5 | % | Personal loans by origination year | | | | | | | | | | | | | | | | 2022 | $ | 4,270 | | | 98 | % | | $ | 77 | | | 2 | % | | | | | | | | | 2021 | 1,958 | | | 96 | % | | 91 | | | 4 | % | | $ | 3,326 | | | 99 | % | | $ | 37 | | | 1 | % | 2020 | 790 | | | 95 | % | | 40 | | | 5 | % | | 1,622 | | | 98 | % | | 39 | | | 2 | % | 2019 | 444 | | | 92 | % | | 38 | | | 8 | % | | 1,052 | | | 94 | % | | 62 | | | 6 | % | 2018 | 164 | | | 88 | % | | 23 | | | 12 | % | | 435 | | | 91 | % | | 44 | | | 9 | % | Prior | 85 | | | 83 | % | | 18 | | | 17 | % | | 276 | | | 87 | % | | 43 | | | 13 | % | Total personal loans | $ | 7,711 | | | 96 | % | | $ | 287 | | | 4 | % | | $ | 6,711 | | | 97 | % | | $ | 225 | | | 3 | % | | | | | | | | | | | | | | | | |
(1)Amounts include $645 million and $813 million of revolving line-of-credit arrangements that were converted to term loans as a result of a TDR program as of December 31, 2022 and 2021, respectively. 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 December 31, 2019 | | | | Credit card loans | 80 | % | | 20 | % | Personal loans | 94 | % | | 6 | % | Private student loans (excluding PCI)(1) | 94 | % | | 6 | % | | | | | At December 31, 2018 | | | | Credit card loans | 81 | % | | 19 | % | Personal loans | 94 | % | | 6 | % | Private student loans (excluding PCI)(1) | 94 | % | | 6 | % | | | | |
(2)A majority of private student loan originations occur in the third quarter and disbursements can span multiple calendar years.(3)FICO score represents the higher credit score of the cosigner or borrower.
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 amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent loans in the Company’s loan portfolio is shown below for credit card, private student and personal loan receivables (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | | 30-89 Days Delinquent | | 90 or More Days Delinquent | | Total Past Due | | 30-89 Days Delinquent | | 90 or More Days Delinquent | | Total Past Due | Credit card loans | $ | 1,250 | | | $ | 1,028 | | | $ | 2,278 | | | $ | 670 | | | $ | 562 | | | $ | 1,232 | | Private student loans by origination year(1) | | | | | | | | | | | | 2022 | $ | — | | | $ | — | | | $ | — | | | | | | | | 2021 | 6 | | | 1 | | | 7 | | | $ | — | | | $ | — | | | $ | — | | 2020 | 14 | | | 3 | | | 17 | | | 4 | | | 1 | | | 5 | | 2019 | 19 | | | 5 | | | 24 | | | 9 | | | 2 | | | 11 | | 2018 | 21 | | | 6 | | | 27 | | | 14 | | | 4 | | | 18 | | Prior | 107 | | | 30 | | | 137 | | | 94 | | | 29 | | | 123 | | Total private student loans | $ | 167 | | | $ | 45 | | | $ | 212 | | | $ | 121 | | | $ | 36 | | | $ | 157 | | Personal loans by origination year | | | | | | | | | | | | 2022 | $ | 12 | | | $ | 3 | | | $ | 15 | | | | | | | | 2021 | 15 | | | 6 | | | 21 | | | $ | 5 | | | $ | 1 | | | $ | 6 | | 2020 | 8 | | | 2 | | | 10 | | | 7 | | | 2 | | | 9 | | 2019 | 6 | | | 2 | | | 8 | | | 11 | | | 4 | | | 15 | | 2018 | 3 | | | 2 | | | 5 | | | 6 | | | 3 | | | 9 | | Prior | 3 | | | 1 | | | 4 | | | 6 | | | 3 | | | 9 | | Total personal loans | $ | 47 | | | $ | 16 | | | $ | 63 | | | $ | 35 | | | $ | 13 | | | $ | 48 | | | | | | | | | | | | | |
(1)Private student loans may include a deferment period, during which borrowers are not required to make payments while enrolled in school at least half time as determined by the school. During a deferment period, these loans do not advance into delinquency.
Allowance for Credit Losses The following tables provide changes in the Company’s allowance for credit losses (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2022 | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans | Balance at December 31, 2021 | $ | 5,273 | | | $ | 843 | | | $ | 662 | | | $ | 44 | | | $ | 6,822 | | Additions | | | | | | | | | | Provision for credit losses(1) | 2,233 | | | 99 | | | 24 | | | 13 | | | 2,369 | | Deductions | | | | | | | | | | Charge-offs | (2,417) | | | (126) | | | (159) | | | — | | | (2,702) | | Recoveries | 794 | | | 23 | | | 68 | | | — | | | 885 | | Net charge-offs | (1,623) | | | (103) | | | (91) | | | — | | | (1,817) | | | | | | | | | | | | Balance at December 31, 2022 | $ | 5,883 | | | $ | 839 | | | $ | 595 | | | $ | 57 | | | $ | 7,374 | | | | | | | | | | | | | For the Year Ended December 31, 2021 | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans | Balance at December 31, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | | Additions | | | | | | | | | | Provision for credit losses(1) | 229 | | | 67 | | | (75) | | | 6 | | | 227 | | Deductions | | | | | | | | | | Charge-offs | (2,255) | | | (89) | | | (190) | | | — | | | (2,534) | | Recoveries | 808 | | | 25 | | | 70 | | | — | | | 903 | | Net charge-offs | (1,447) | | | (64) | | | (120) | | | — | | | (1,631) | | | | | | | | | | | | Balance at December 31, 2021 | $ | 5,273 | | | $ | 843 | | | $ | 662 | | | $ | 44 | | | $ | 6,822 | | | | | | | | | | | | | For the Year Ended December 31, 2020 | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans | Balance at December 31, 2019(2) | $ | 2,883 | | | $ | 148 | | | $ | 348 | | | $ | 4 | | | $ | 3,383 | | Cumulative effect of ASU No. 2016-13 adoption(3) | 1,667 | | | 505 | | | 265 | | | 24 | | | 2,461 | | Balance at January 1, 2020 | 4,550 | | | 653 | | | 613 | | | 28 | | | 5,844 | | Additions | | | | | | | | | | Provision for credit losses(1) | 4,379 | | | 251 | | | 476 | | | 11 | | | 5,117 | | Deductions | | | | | | | | | | Charge-offs | (3,101) | | | (85) | | | (289) | | | (1) | | | (3,476) | | Recoveries | 663 | | | 21 | | | 57 | | | — | | | 741 | | Net charge-offs | (2,438) | | | (64) | | | (232) | | | (1) | | | (2,735) | | | | | | | | | | | | Balance at December 31, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | | | | | | | | | | | |
(1)Excludes a $10 million, $9 million and $17 million reclassification of the liability for expected credit losses on unfunded commitments for the years ended December 31, 2022, 2021 and 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in the Company’s consolidated statements of financial condition. (2)Prior to the adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach. (3)Represents the adjustment to the allowance for credit losses as a result of the adoption of ASU No. 2016-13 on January 1, 2020.
| | (1) | PCI loans are discussed under the heading “— Purchased Credit-Impaired Loans.” |
The allowance for credit losses was approximately $7.4 billion at December 31, 2022, which reflects a $552 million build from the amount of the allowance for credit losses at December 31, 2021. The build in the allowance for credit losses between December 31, 2022 and December 31, 2021, was primarily driven by loan growth.
The allowance estimation process begins with a loss forecast that uses certain macroeconomic variables and multiple macroeconomic scenarios among its inputs. In estimating the allowance at December 31, 2022, the Company used a macroeconomic forecast that resulted in the following weighted average amounts: (i) peak unemployment rate of 4.68%, decreasing to 4.63% by the end of 2023 and (ii) 1.05% annualized growth in the real gross domestic product in 2023. In estimating expected credit losses, the Company considered the uncertainties associated with borrower behavior and payment trends, as well as higher consumer price inflation experienced during 2022 and the fiscal and monetary policy responses to that inflation. In 2022, the Federal Reserve raised its federal funds rate target range and financial market participants expect additional increases during 2023 in an effort to reduce inflation. In recognition of the risks related to the macroeconomic environment, the estimation of the allowance for credit losses has required significant management judgment. The forecast period the Company deemed to be reasonable and supportable was 18 months for all periods presented. The 18-month reasonable and supportable forecast period was deemed appropriate given the current economic conditions. For all periods presented, the Company determined that a reversion period of 12 months was appropriate for the same reason. The Company applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented. The net charge-offs on the Company’s credit card loans for the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, due to continued credit normalization and the seasoning of vintages from the past two years. The net charge-offs on private student loans additionalfor the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, primarily driven by credit risk management activities include monitoringnormalization. The net charge-offs on personal loans for the year ended December 31, 2022, decreased when compared to the year ended December 31, 2021, primarily driven by continued benefit from tighter credit underwriting standards implemented in 2020. Net charge-offs of principal are recorded against the allowance for credit losses, as shown in the preceding table. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income) | $ | 303 | | | $ | 286 | | | $ | 484 | | Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income) | $ | 100 | | | $ | 75 | | | $ | 117 | | | | | | | |
Delinquent and Non-Accruing Loans The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent and non-accruing loans in the Company’s loan portfolio is shown below for each class of loan receivables (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 30-89 Days Delinquent | | 90 or More Days Delinquent | | Total Past Due | | 90 or More Days Delinquent and Accruing | | Total Non-accruing(1) | December 31, 2022 | | | | | | | | | | Credit card loans | $ | 1,250 | | | $ | 1,028 | | | $ | 2,278 | | | $ | 1,003 | | | $ | 176 | | Other loans | | | | | | | | | | Private student loans | 167 | | | 45 | | | 212 | | | 45 | | | 8 | | Personal loans | 47 | | | 16 | | | 63 | | | 16 | | | 7 | | Other loans | 13 | | | 12 | | | 25 | | | 1 | | | 23 | | Total other loans | 227 | | | 73 | | | 300 | | | 62 | | | 38 | | Total loan receivables | $ | 1,477 | | | $ | 1,101 | | | $ | 2,578 | | | $ | 1,065 | | | $ | 214 | | | | | | | | | | | | December 31, 2021 | | | | | | | | | | Credit card loans | $ | 670 | | | $ | 562 | | | $ | 1,232 | | | $ | 527 | | | $ | 194 | | Other loans | | | | | | | | | | Private student loans | 121 | | | 36 | | | 157 | | | 35 | | | 8 | | Personal loans | 35 | | | 13 | | | 48 | | | 12 | | | 7 | | Other loans | 7 | | | 7 | | | 14 | | | 1 | | | 16 | | Total other loans | 163 | | | 56 | | | 219 | | | 48 | | | 31 | | Total loan receivables | $ | 833 | | | $ | 618 | | | $ | 1,451 | | | $ | 575 | | | $ | 225 | | | | | | | | | | | |
(1)The Company estimates that the gross interest income that would have been recorded under the original terms of non-accruing credit card loans was $23 million, $28 million and $33 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company does not separately track the amount of loans in forbearance. Forbearance allows borrowers experiencing temporary financial difficultiesgross interest income that would have been recorded under the original terms of loans. Instead, the Company estimated this amount based on customers’ current balances and willing to make payments the ability to temporarily suspend payments. Eligible borrowers have a lifetime cap on forbearance of 12 months. At December 31, 2019 and 2018, there were $46 million and $37 million, respectively, of private student loans, including those classified as PCI, in forbearance, representing 0.8% and 0.7%, respectively, of total student loans in repayment and forbearance.most recent interest rates.
Allowance for Loan Losses
The following tables provide changes in the Company’s allowance for loan losses (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2019 | | Credit Card | | Personal Loans | | Student Loans(1) | | Other | | Total | Balance at beginning of period | $ | 2,528 |
| | $ | 338 |
| | $ | 169 |
| | $ | 6 |
| | $ | 3,041 |
| Additions | | | | | | | | | | Provision for loan losses | 2,849 |
| | 332 |
| | 51 |
| | (1 | ) | | 3,231 |
| Deductions | | | | | | | | | | Charge-offs | (3,165 | ) | | (369 | ) | | (82 | ) | | (1 | ) | | (3,617 | ) | Recoveries | 671 |
| | 47 |
| | 13 |
| | — |
| | 731 |
| Net charge-offs | (2,494 | ) | | (322 | ) | | (69 | ) | | (1 | ) | | (2,886 | ) | Other(2) | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | Balance at end of period | $ | 2,883 |
| | $ | 348 |
| | $ | 148 |
| | $ | 4 |
| | $ | 3,383 |
| | | | | | | | | | | | For the Year Ended December 31, 2018 | | Credit Card | | Personal Loans | | Student Loans(1) | | Other | | Total | Balance at beginning of period | $ | 2,147 |
| | $ | 301 |
| | $ | 162 |
| | $ | 11 |
| | $ | 2,621 |
| Additions | | | | | | | | | | Provision for loan losses | 2,594 |
| | 345 |
| | 95 |
| | 1 |
| | 3,035 |
| Deductions | | | | | | | | | | Charge-offs | (2,734 | ) | | (345 | ) | | (97 | ) | | (6 | ) | | (3,182 | ) | Recoveries | 521 |
| | 37 |
| | 12 |
| | — |
| | 570 |
| Net charge-offs | (2,213 | ) | | (308 | ) | | (85 | ) | | (6 | ) | | (2,612 | ) | Other(2) | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | Balance at end of period | $ | 2,528 |
| | $ | 338 |
| | $ | 169 |
| | $ | 6 |
| | $ | 3,041 |
| | | | | | | | | | | | For the Year Ended December 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 | 2,159 |
| | 332 |
| | 93 |
| | (5 | ) | | 2,579 |
| Deductions | | | | | | | | | | Charge-offs | (2,263 | ) | | (258 | ) | | (94 | ) | | (3 | ) | | (2,618 | ) | Recoveries | 461 |
| | 27 |
| | 11 |
| | — |
| | 499 |
| Net charge-offs | (1,802 | ) | | (231 | ) | | (83 | ) | | (3 | ) | | (2,119 | ) | Other(2) | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) | Balance at end of period | $ | 2,147 |
| | $ | 301 |
| | $ | 162 |
| | $ | 11 |
| | $ | 2,621 |
| | | | | | | | | | |
| | (1) | Includes both PCI and non-PCI private student loans. |
| | (2) | Net change in reserves on PCI pools having no remaining non-accretable difference. |
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 Years Ended December 31, | | 2019 | | 2018 | | 2017 | Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income) | $ | 515 |
| | $ | 442 |
| | $ | 353 |
| Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income) | $ | 123 |
| | $ | 109 |
| | $ | 89 |
| | | | | | |
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 December 31, 2019 | | | | | | | | | | Allowance for loans evaluated for impairment as | | | | | | | | | | Collectively evaluated for impairment in accordance with ASC 450-20 | $ | 2,283 |
| | $ | 281 |
| | $ | 95 |
| | $ | 4 |
| | $ | 2,663 |
| Evaluated for impairment in accordance with ASC 310-10-35(2)(3) | 600 |
| | 67 |
| | 31 |
| | — |
| | 698 |
| Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 | — |
| | — |
| | 22 |
| | — |
| | 22 |
| Total allowance for loan losses | $ | 2,883 |
| | $ | 348 |
| | $ | 148 |
| | $ | 4 |
| | $ | 3,383 |
| Recorded investment in loans evaluated for impairment as | | | | | | | | | | Collectively evaluated for impairment in accordance with ASC 450-20 | $ | 73,819 |
| | $ | 7,479 |
| | $ | 8,133 |
| | $ | 1,330 |
| | $ | 90,761 |
| Evaluated for impairment in accordance with ASC 310-10-35(2)(3) | 3,362 |
| | 208 |
| | 269 |
| | 43 |
| | 3,882 |
| Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 | — |
| | — |
| | 1,251 |
| | — |
| | 1,251 |
| Total recorded investment | $ | 77,181 |
| | $ | 7,687 |
| | $ | 9,653 |
| | $ | 1,373 |
| | $ | 95,894 |
| | | | | | | | | | | At December 31, 2018 | | | | | | | | | | Allowance for loans evaluated for impairment as | | | | | | | | | | Collectively evaluated for impairment in accordance with ASC 450-20 | $ | 2,229 |
| | $ | 292 |
| | $ | 121 |
| | $ | 4 |
| | $ | 2,646 |
| Evaluated for impairment in accordance with ASC 310-10-35(2)(3) | 299 |
| | 46 |
| | 23 |
| | 2 |
| | 370 |
| Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 | — |
| | — |
| | 25 |
| | — |
| | 25 |
| Total allowance for loan losses | $ | 2,528 |
| | $ | 338 |
| | $ | 169 |
| | $ | 6 |
| | $ | 3,041 |
| Recorded investment in loans evaluated for impairment as | | | | | | | | | | Collectively evaluated for impairment in accordance with ASC 450-20 | $ | 70,628 |
| | $ | 7,302 |
| | $ | 7,546 |
| | $ | 761 |
| | $ | 86,237 |
| Evaluated for impairment in accordance with ASC 310-10-35(2)(3) | 2,248 |
| | 152 |
| | 182 |
| | 56 |
| | 2,638 |
| Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 | — |
| | — |
| | 1,637 |
| | — |
| | 1,637 |
| Total recorded investment | $ | 72,876 |
| | $ | 7,454 |
| | $ | 9,365 |
| | $ | 817 |
| | $ | 90,512 |
| | | | | | | | | | |
| | (1) | Includes both PCI and non-PCI private student loans. |
| | (2) | Loan receivables evaluated for impairment in accordance with 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 TDRs. Other loans are individually evaluated for impairment and generally do not represent TDRs.
|
| | (3) | The unpaid principal balance of credit card loans was $3.0 billion and $2.0 billion at December 31, 2019 and 2018, respectively. All loans accounted for as TDRs have a related allowance for loan losses.
|
The payment status of modified loans, whether the TDR designation applies or not, is reflected in the Company’s delinquency reporting.
Troubled Debt Restructurings The Company has internal loan modification programs that provide relief to credit card, personal loanprivate student and studentpersonal loan borrowers who may be experiencing financial hardship. The Company continually evaluates new programsconsiders a modified loan in which a concession has been granted to determine whichthe borrower to be a TDR based on the cumulative length of them meet the definitionconcession period and credit quality of a TDR.the borrower. 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. The Company evaluates new programs to determine which of them meet the definition of a TDR. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on private student loans and certain grants of private student loan forbearance, generally result in the loans being classified as individually impaired.TDRs. In addition, loans that defaulted from, or graduated fromsuccessfully completed, a loan modification programsprogram or forbearance continue to be classified as individually impaired.TDRs, except as noted in the following paragraph. See the table below that presents the carrying value of loans that entered a TDR program and experienced a default during the period for more information. For credit card customers, the Company offers both temporary and permanent hardship programs. The temporary hardship programs consist of an interest rate reduction and in some cases a reduced minimum payment, both lasting for a period no longer than 12 months.months. Charging privileges on these loansaccounts are generally suspended while in the program andprogram. However, if the customer meets certain criteria, are met,charging privileges may be reinstated following completion of the program. Balances remainingCredit card accounts of borrowers who have previously participated in a temporary interest rate reduction program and that have both demonstrated financial stability and had their charging privileges reinstated at the end of the program as well as any new charges continue to be included ina market-based interest rate, are excluded from the balance of TDRs, contributing to the growth in total TDRs disclosed. In addition to helping customers with their credit needs, these programs are designed to maximize the collection cash flows and ultimately the Company’s profitability.TDRs.
The permanent modification program involves closing the account, changing the structure of the loan to a fixed payment loan with a maturity no longer than 6072 months and reducing the interest rate on the loan. The permanent modification program does not normallytypically provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. The Company also makes permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans typically receive a reduced interest rate, but continue to be subject to the original minimumgenerally reflect fixed payment terms and do not normally include waiver of unpaid principal, interest or fees. These loanspermanent loan modifications remain in the population of TDRs until they are paid off or charged off. At December 31, 2022 and 2021, there were $6.0 billion and $5.8 billion, respectively, of private student loans in repayment and $81 million and $64 million, respectively, in forbearance. To assist private student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance, payment deferral, a temporary payment reduction, a temporary interest rate reduction or extended terms. A modified loan typically meets the definition of a TDR based on the cumulative length of the concession period and a determination of financial distress based on an evaluation of the borrower’s credit quality using FICO scores. For personal loan customers, in certain situations the Company offers various payment programs, including temporary and permanent programs.programs, in certain situations. The temporary programs normally consist of a reduction ofreducing 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,and, in certain circumstances, the interest rate on the loan is reduced. The permanent programs involve changing the terms ofextending 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 toThe total term of the temporary programs, the total termloan, including modification, may not exceed nine years. The Company also allows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are accounted forclassified as TDRs. At December 31, 2019, there was $5.6 billion of private student loans in repayment, which includes both PCI and non-PCI loans. To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, theThe Company may offer hardship forbearance or programs that include payment deferral, temporary payment reduction, temporary interest rate reduction or extended terms. A non-PCI modified loan typically meets the definition of a TDR based on the cumulative length of the concession period and an evaluation of the credit quality of themonitors borrower based on FICO scores.
Borrower performance after using payment programs or forbearance is monitored and theforbearance. The Company believes the programs are useful in assisting customers experiencing financial difficulties and helpallowing them to prevent defaults.make timely payments. In addition to helping customers with their credit needs, these programs are designed to maximize collections and ultimately the Company’s profitability. The Company plans to continue to use payment programs and forbearance as a means to provide relief to customers experiencing temporary financial difficulties and as a result, expects to have additional loans classified as TDRs in the future.future as a result.
Additional information about modified loans classified as TDRs 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 Year Ended December 31, 2019 | | | | | | Credit card loans(3) | $ | 2,821 |
| | $ | 347 |
| | $ | 202 |
| Personal loans | $ | 180 |
| | $ | 18 |
| | $ | 10 |
| Private student loans | $ | 226 |
| | $ | 18 |
| | $ | 1 |
| | | | | | | For the Year Ended December 31, 2018 | | | | | | Credit card loans(3) | $ | 1,737 |
| | $ | 180 |
| | $ | 137 |
| Personal loans | $ | 130 |
| | $ | 14 |
| | $ | 6 |
| Private student loans | $ | 158 |
| | $ | 13 |
| | $ | — |
| | | | | | | For the Year Ended December 31, 2017 | | | | | | Credit card loans(3) | $ | 1,159 |
| | $ | 107 |
| | $ | 86 |
| Personal loans | $ | 94 |
| | $ | 10 |
| | $ | 4 |
| Private student loans | $ | 113 |
| | $ | 8 |
| | $ | — |
| | | | | | |
| | (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 TDRs, but are no longer enrolled in a TDR program due to noncompliance with the terms of the modification or due to successful completion of a program after which charging privileges may be reinstated based on customer-level evaluation. The average balance of credit card loans that were no longer enrolled in a TDR program was $916 million, $430 million and $339 million, respectively, for the years ended December 31, 2019, 2018 and 2017.
|
In order toTo evaluate the primary financial effects that resulted from credit card loans entering into a loan modificationTDR program during the years ended December 31, 2019, 20182022, 2021 and 2017,2020, the Company quantified the amount by which interest and fees were reduced during the periods. During the years ended December 31, 2019, 20182022, 2021 and 2017,2020, the Company forgave approximately $73$29 million, $48$33 million and $40$66 million, respectively, of interest and fees as a result ofresulting from accounts entering into a credit card loan TDR program. For all loan products, interest income on modified loans is recognized based on the modified contractual terms.
The following table provides information on loans that entered a TDR program during the period (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Number of Accounts | | Balances | | Number of Accounts | | Balances | | Number of Accounts | | Balances | Accounts that entered a TDR program during the period | | | | | | | | | | | | Credit card loans(1) | 237,339 | | | $ | 1,545 | | | 64,359 | | | $ | 399 | | | 152,055 | | | $ | 1,022 | | Private student loans | 6,841 | | | $ | 127 | | | 477 | | | $ | 8 | | | 1,916 | | | $ | 35 | | Personal loans | 6,303 | | | $ | 86 | | | 4,066 | | | $ | 51 | | | 8,805 | | | $ | 114 | | | | | | | | | | | | | |
(1)Accounts that entered a credit card TDR program include $322 million, $351 million and $670 million that were converted from revolving line-of-credit arrangements to term loans during the years ended December 31, 2022, 2021 and 2020, respectively. The number and balance of enrollments in credit card, private student loan and personal loan modification program.programs designated as TDRs increased during the year ended December 31, 2022, when compared to the same period in 2021. The increase is primarily driven by the impact of accounting and financial reporting exemptions The following table provides information on loans that entered a loan modification program during the period (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | | Number of Accounts | | Balances | | Number of Accounts | | Balances | | Number of Accounts | | Balances | Accounts that entered a loan modification program during the period | | | | | | | | | | | | Credit card loans | 368,009 |
| | $ | 2,364 |
| | 268,817 |
| | $ | 1,713 |
| | 133,139 |
| | $ | 776 |
| Personal loans | 10,945 |
| | $ | 147 |
| | 8,260 |
| | $ | 111 |
| | 6,567 |
| | $ | 82 |
| Private student loans | 6,742 |
| | $ | 124 |
| | 4,057 |
| | $ | 74 |
| | 3,942 |
| | $ | 69 |
| | | | | | | | | | | | |
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provided by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which expired on January 1, 2022, during the prior periods. The following table presents the carrying value of loans that experienced a default during the period that had been modified in a TDR during the 15 months preceding the end of each period (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Number of Accounts | | Aggregated Outstanding Balances Upon Default | | Number of Accounts | | Aggregated Outstanding Balances Upon Default | | Number of Accounts | | Aggregated Outstanding Balances Upon Default | TDRs that subsequently defaulted | | | | | | | | | | | | Credit card loans(1)(2) | 28,231 | | | $ | 141 | | | 17,953 | | | $ | 104 | | | 48,075 | | | $ | 276 | | Private student loans(3) | 1,145 | | | $ | 22 | | | 290 | | | $ | 6 | | | 1,119 | | | $ | 22 | | Personal loans(2) | 1,140 | | | $ | 20 | | | 1,589 | | | $ | 22 | | | 3,145 | | | $ | 46 | | | | | | | | | | | | | |
(1)For credit card loans that default from a temporary loan modification program, accounts revert back to the pre-modification terms and charging privileges remain suspended in most cases. (2)For credit card loans and personal loans, a customer defaults from a loan modification program after either two consecutive missed payments or at charge-off, depending on the program. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.
The following table presents the carrying value of loans that experienced a payment default during the period that had been modified in a TDR during the 15 months preceding the end of each period (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | | Number of Accounts | | Aggregated Outstanding Balances Upon Default | | 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) | 71,326 |
| | $ | 410 |
| | 42,659 |
| | $ | 239 |
| | 34,210 |
| | $ | 183 |
| Personal loans(2) | 4,152 |
| | $ | 59 |
| | 2,955 |
| | $ | 40 |
| | 1,915 |
| | $ | 25 |
| Private student loans(3) | 1,406 |
| | $ | 27 |
| | 1,041 |
| | $ | 19 |
| | 939 |
| | $ | 16 |
| | | | | | | | | | | | |
(3)For student loans, a customer defaults from a loan modification after they 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. | | (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 2 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 years ended December 31, 2019, 20182022, 2021 and 20172020, approximately 65%, approximately 38%, 36%66% and 37%53%, respectively, of the total balances were charged off at the end of the month in which they defaulted from a loan modificationTDR program. For accounts that have defaulted from a loan modificationTDR program and have not been subsequently charged off, the balances are included in the allowance for loancredit loss analysis discussed above under “— Allowance for LoanCredit 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 as part of the Company’s acquisition of The Student Loan Corporation (“SLC”) as well as the additional acquired private student loan portfolio comprise the Company’s only PCI loans at December 31, 2019 and 2018. Total PCI student loans had an outstanding balance of $1.3 billion and $1.7 billion, including accrued interest, and a related carrying amount of $1.3 billion and $1.6 billion, as of December 31, 2019 and 2018, respectively.
The following table provides changes in accretable yield for the acquired loans during each period (dollars in millions): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Balance at beginning of period | $ | 548 |
| | $ | 669 |
| | $ | 796 |
| Accretion into interest income | (119 | ) | | (139 | ) | | (159 | ) | Other changes in expected cash flows | 23 |
| | 18 |
| | 32 |
| Balance at end of period | $ | 452 |
| | $ | 548 |
| | $ | 669 |
| | | | | | |
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Periodically, the Company updates the estimate of cash flows expected to be collected based on management’s latest expectations of future net credit losses, borrower prepayments and certain other assumptions that affect cash flows. NaN provision expense was recorded during the years ended December 31, 2019, 2018 and 2017. The allowance for PCI loan losses at December 31, 2019 and 2018 was $22 million and $25 million, respectively. For the years ended December 31, 2019, 2018 and 2017, the increase in accretable yield was primarily due to changes in rates on variable-rate loans. Changes to accretable yield are recognized prospectively as an adjustment to yield over the remaining life of the pools.
At December 31, 2019, 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 2.92% and 0.80%, respectively. At December 31, 2018, 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 2.93% and 0.78%, 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 for the years ended December 31, 2019, 2018 and 2017 was 0.47%, 0.63% and 0.71%, respectively.
Geographical Distribution of Loans The Company originates credit card loans throughout the United States. The geographic distribution of the Company’s credit card loan receivables was as follows (dollars in millions): | | | | | | | | | | | | | | | | December 31, | | 2019 | | 2018 | | $ | | % | | $ | | % | California | $ | 7,110 |
| | 9.2 | % | | $ | 6,620 |
| | 9.1 | % | Texas | 6,543 |
| | 8.5 |
| | 6,155 |
| | 8.4 |
| New York | 5,335 |
| | 6.9 |
| | 5,040 |
| | 6.9 |
| Florida | 5,176 |
| | 6.7 |
| | 4,815 |
| | 6.6 |
| Illinois | 4,084 |
| | 5.3 |
| | 3,878 |
| | 5.3 |
| Pennsylvania | 3,873 |
| | 5.0 |
| | 3,712 |
| | 5.1 |
| Ohio | 3,207 |
| | 4.2 |
| | 3,039 |
| | 4.2 |
| New Jersey | 2,807 |
| | 3.6 |
| | 2,661 |
| | 3.7 |
| Georgia | 2,325 |
| | 3.0 |
| | 2,160 |
| | 3.0 |
| Michigan | 2,165 |
| | 2.8 |
| | 2,042 |
| | 2.8 |
| Other | 34,556 |
| | 44.8 |
| | 32,754 |
| | 44.9 |
| Total credit card loans | $ | 77,181 |
| | 100 | % | | $ | 72,876 |
| | 100 | % | | | | | | | | |
The Company originates credit card loans throughout the U.S. The geographic distribution of the Company’s credit card loan receivables was as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | | $ | | % | | $ | | % | Texas | $ | 7,996 | | | 8.9 | % | | $ | 6,543 | | | 8.8 | % | California | 7,888 | | | 8.7 | | | 6,334 | | | 8.5 | | Florida | 6,465 | | | 7.2 | | | 5,199 | | | 7.0 | | New York | 5,895 | | | 6.5 | | | 4,908 | | | 6.6 | | Illinois | 4,528 | | | 5.0 | | | 3,838 | | | 5.2 | | Pennsylvania | 4,484 | | | 5.0 | | | 3,757 | | | 5.1 | | Ohio | 3,759 | | | 4.2 | | | 3,149 | | | 4.2 | | New Jersey | 3,127 | | | 3.5 | | | 2,599 | | | 3.5 | | Georgia | 2,849 | | | 3.2 | | | 2,328 | | | 3.1 | | Michigan | 2,521 | | | 2.8 | | | 2,081 | | | 2.8 | | Other | 40,601 | | | 45.0 | | | 33,633 | | | 45.2 | | Total credit card loans | $ | 90,113 | | | 100.0 | % | | $ | 74,369 | | | 100.0 | % | | | | | | | | |
The Company originates personal loans, student loans and other loans, and has PCI loans throughout the United States. The geographic distribution of personal, student, other and PCI loan receivables was as follows (dollars in millions): | | | | | | | | | | | | | | | | December 31, | | 2019 | | 2018 | | $ | | % | | $ | | % | New York | $ | 1,859 |
| | 9.9 | % | | $ | 1,834 |
| | 10.4 | % | California | 1,764 |
| | 9.4 |
| | 1,656 |
| | 9.4 |
| Pennsylvania | 1,275 |
| | 6.8 |
| | 1,221 |
| | 6.9 |
| Illinois | 1,157 |
| | 6.2 |
| | 1,098 |
| | 6.2 |
| Texas | 1,151 |
| | 6.2 |
| | 1,071 |
| | 6.1 |
| New Jersey | 980 |
| | 5.2 |
| | 925 |
| | 5.2 |
| Florida | 930 |
| | 5.0 |
| | 838 |
| | 4.8 |
| Ohio | 739 |
| | 4.0 |
| | 698 |
| | 4.0 |
| Massachusetts | 594 |
| | 3.2 |
| | 584 |
| | 3.3 |
| Michigan | 585 |
| | 3.1 |
| | 560 |
| | 3.2 |
| Other | 7,679 |
| | 41.0 |
| | 7,151 |
| | 40.5 |
| Total other loans (including PCI loans) | $ | 18,713 |
| | 100 | % | | $ | 17,636 |
| | 100 | % | | | | | | | | |
The Company originates private student, personal and other loans throughout the U.S. The geographic distribution of private student, personal and other loan receivables was as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | | $ | | % | | $ | | % | California | $ | 2,015 | | | 9.2 | % | | $ | 1,686 | | | 8.7 | % | New York | 1,900 | | | 8.6 | | | 1,771 | | | 9.2 | | Texas | 1,595 | | | 7.2 | | | 1,305 | | | 6.8 | | Pennsylvania | 1,431 | | | 6.5 | | | 1,341 | | | 6.9 | | Florida | 1,248 | | | 5.7 | | | 1,017 | | | 5.3 | | Illinois | 1,247 | | | 5.7 | | | 1,162 | | | 6.0 | | New Jersey | 1,114 | | | 5.1 | | | 1,009 | | | 5.2 | | Ohio | 849 | | | 3.9 | | | 770 | | | 4.0 | | Michigan | 656 | | | 3.0 | | | 599 | | | 3.1 | | Massachusetts | 626 | | | 2.8 | | | 583 | | | 3.0 | | Other | 9,326 | | | 42.3 | | | 8,072 | | | 41.8 | | Total other loans | $ | 22,007 | | | 100.0 | % | | $ | 19,315 | | | 100.0 | % | | | | | | | | |
| | 5. | Credit Card and Student Loan Securitization Activities |
5. Credit Card and Private Student Loan Securitization Activities The Company’s securitizations are accounted for as secured borrowings and the related trusts are treated as consolidated subsidiaries of the Company. For a description of the Company’s principles of consolidation with respect to VIEs, see Note 1: Background and Basis of Presentation. Credit Card Securitization Activities The Company accesses the term asset securitization market through DCMT and DCENT. Credit card loan receivables are transferred into DCMT and beneficial interests in DCMT are transferred into DCENT. DCENT issues debt securities to investors that are reported primarily in long-term borrowings.
The DCENT debt structure consists of 4four classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. In order toTo issue senior, higher ratedhigher-rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower ratedlower-rated or more highly subordinated classes of notes. The subordinated classes are held by wholly-ownedWholly-owned subsidiaries of Discover Bank.Bank hold the subordinated classes of notes. The Company is exposed to credit-relatedcredit risk of loss associated with trust assetsreceivables as of the balance sheet date through the retention of these subordinated interests. The estimated probable incurred lossestimate of expected credit losses on trust receivables is included in the allowance for loancredit losses estimate. The Company’s retained interests in the trust’s assets, of the trusts, consisting of investments in DCENT notes held by subsidiaries of Discover Bank, constitute intercompany positions whichthat are eliminated in the preparation of the Company’s consolidated statements of financial condition. Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the trusts’trust’s creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to the Company’s third-party creditors of the Company.creditors. The trusts have ownership of cash balances, the amounts of which are reported in restricted cash. Withcash within the exceptionCompany’s consolidated statements of financial condition. Except for the seller’s interest in trust receivables, the Company’s interests in trust assets are generally subordinate to the interests of third-party investors in trust debt and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts’ debt.those investors. Apart from the restricted assets related to securitization activities, the investors and the securitization trusts have no recourse to the Company’s other assets or the Company’s general credit for a shortage in cash flows. The carrying values of these restricted assets, which are presented on the Company’s consolidated statements of financial condition as relating to securitization activities, are shown in the following table (dollars in millions): | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | Restricted cash | $ | 33 | | | $ | 2,574 | | | | | | Investors’ interests held by third-party investors | 10,200 | | | 9,425 | | Investors’ interests held by wholly-owned subsidiaries of Discover Bank | 3,341 | | | 3,899 | | Seller’s interest | 12,220 | | | 11,918 | | Loan receivables(1) | 25,761 | | | 25,242 | | Allowance for credit losses allocated to securitized loan receivables(1) | (1,152) | | | (1,371) | | Net loan receivables | 24,609 | | | 23,871 | | Other assets | 2 | | | 3 | | Carrying value of assets of consolidated variable interest entities | $ | 24,644 | | | $ | 26,448 | | | | | |
The carrying values of these restricted assets, which are presented on the Company’s consolidated statements of financial condition as relating to securitization activities, are shown in the following table (dollars in millions): | | | | | | | | | | December 31, | | 2019 | | 2018 | Restricted cash | $ | 28 |
| | $ | 1,834 |
| | | | | Investors’ interests held by third-party investors | 14,100 |
| | 16,800 |
| Investors’ interests held by wholly-owned subsidiaries of Discover Bank | 4,796 |
| | 5,211 |
| Seller’s interest | 12,652 |
| | 11,050 |
| Loan receivables(1) | 31,548 |
| | 33,061 |
| Allowance for loan losses allocated to securitized loan receivables(1) | (1,179 | ) | | (1,150 | ) | Net loan receivables | 30,369 |
| | 31,911 |
| Other | 5 |
| | 7 |
| Carrying value of assets of consolidated variable interest entities | $ | 30,402 |
| | $ | 33,752 |
| | | | |
(1)The Company maintains its allowance for credit losses at an amount equal to lifetime expected credit losses associated with all loan receivables, which includes all loan receivables in the trusts. Therefore, the credit risk associated with the transferred receivables is fully reflected on the Company’s statements of financial condition in accordance with GAAP. | | (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 in the securities, there are certain features or triggering events that couldwill cause an early amortization of the debt securities, including triggers related to the impact of the performance of the trust receivables on the availability and adequacy of cash flows to meet contractual requirements. As of December 31, 2019,2022, no economic or other early amortization events have occurred.
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.
Private Student Loan Securitization Activities StudentThe Company’s private student loan trust receivables are recordedreported in PCI loansloan receivables and the related debt issued by the trusts istrust reported in long-term borrowings.borrowings were immaterial as of December 31, 2022 and 2021. The assets of the trustsamounts 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. With the exception of the trusts’ restricted assets, the trusts and investors have no recourseincluded, together with amounts related to the Company’s other assets or the Company’s general credit for a shortage in cash flows.
Securities issued to investors are outstanding from only 1 of the 2 remaining student loan securitization trusts. 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 trust until cash is released in accordance with the trust indenture agreement. Similar to the credit card securitizations, in the Company continues to ownsupplemental information about assets and service the accounts that generate the student loan receivables held by the trust and receives servicing fees from the trust based on a percentageliabilities of the principal balance outstanding. Although the servicing fee income offsets the fee expense related to the trust and thusconsolidated variable interest entities, which 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 the trust arrangement, the Company has the option, but not the obligation, to provide financial support to the trust, but has never provided such support. A substantial portion of the credit risk associatedpresented with the securitized loans has been transferred to a third party under an indemnification arrangement.Company’s consolidated statements of financial condition.
The carrying values of these restricted assets, which are presented on the Company’s consolidated statements of financial condition as relating to securitization activities, are shown in the following table (dollars in millions): | | | | | | | | | | December 31, | | 2019 | | 2018 | Restricted cash | $ | 12 |
| | $ | 12 |
| Student loan receivables | 292 |
| | 363 |
| Carrying value of assets of consolidated variable interest entities | $ | 304 |
| | $ | 375 |
| | | | |
| | 6. | 6. Premises and Equipment |
A summary of premises and equipment, net is as follows (dollars in millions): | | | | | | | | | | December 31, | | 2019 | | 2018 | Land | $ | 42 |
| | $ | 42 |
| Buildings and improvements | 693 |
| | 671 |
| Furniture, fixtures and equipment | 1,082 |
| | 989 |
| Software | 851 |
| | 696 |
| Premises and equipment | 2,668 |
| | 2,398 |
| Less: accumulated depreciation | (1,276 | ) | | (1,193 | ) | Less: accumulated amortization of software | (335 | ) | | (269 | ) | Premises and equipment, net | $ | 1,057 |
| | $ | 936 |
| | | | |
A summary of premises and equipment, net is as follows (dollars in millions): | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | Land | $ | 37 | | | $ | 38 | | Buildings and improvements | 587 | | | 676 | | Furniture, fixtures and equipment | 1,111 | | | 1,126 | | Software | 1,125 | | | 992 | | Premises and equipment | 2,860 | | | 2,832 | | Less: accumulated depreciation | (1,339) | | | (1,415) | | Less: accumulated amortization of software | (518) | | | (434) | | Premises and equipment, net | $ | 1,003 | | | $ | 983 | | | | | |
Depreciation expense was $84$80 million,, $75 $86 million and $76$98 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively. Amortization expense on capitalized software was $80$114 million,, $67 $103 million and $52$100 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively. | | 7. | Goodwill and Intangible Assets |
7. Goodwill As of December 31, 20192022 and 2018,2021, the Company had goodwill of $255 million related to PULSE, which is part of the Payment Services segment. The Company conducted its annual goodwill impairment test as of October 1, 20192022 and 2018 and 0 impairment charges were identified. Intangible Assets
The Company’s amortizable intangible assets consisting of customer relationships and trade names resulted from various acquisitions and are primarily included in the Payment Services segment.
Non-amortizable intangible assets consist primarily of trade name intangibles and international transaction processing rights included in the Payment Services segment. The Company conducted its annual impairment test of intangible assets as of October 1, 2019 and 20182021 and no material impairment chargesimpairments were identified.
The following table summarizes the Company’s intangible assets (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | 2019 | | 2018 | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | Amortizable intangible assets | | | | | | | | | | | | Customer relationships | $ | 69 |
| | $ | 68 |
| | $ | 1 |
| | $ | 69 |
| | $ | 67 |
| | $ | 2 |
| Trade name and other | 8 |
| | 5 |
| | 3 |
| | 8 |
| | 4 |
| | 4 |
| Total amortizable intangible assets | 77 |
| | 73 |
| | 4 |
| | 77 |
| | 71 |
| | 6 |
| Non-amortizable intangible assets | | | | | | | | | | | | Trade names | 128 |
| | — |
| | 128 |
| | 132 |
| | — |
| | 132 |
| International transaction processing rights | 23 |
| | — |
| | 23 |
| | 23 |
| | — |
| | 23 |
| Total non-amortizable intangible assets | 151 |
| | — |
| | 151 |
| | 155 |
| | — |
| | 155 |
| Total intangible assets | $ | 228 |
| | $ | 73 |
| | $ | 155 |
| | $ | 232 |
| | $ | 71 |
| | $ | 161 |
| | | | | | | | | | | | |
Amortization expense related to the Company’s intangible assets was not material for the years ended December 31, 2019, 2018 and 2017 and the expected amortization expense for the next five years based on intangible assets at the end
8. Deposits
The Company offers its deposit products to customersobtains deposits from consumers directly or through 2 channels: (i) through direct marketing, internet origination and affinity relationships (“direct-to-consumer deposits”); and (ii) indirectly. Additionally, the Company obtains deposits through contractual arrangements withthird-party securities brokerage firms that offer the Company’s deposits to their customers (“brokered deposits”). Direct-to-consumer depositsdeposit products include online savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts, while brokered depositsaccounts. Brokered deposit products include certificates of deposit and sweep accounts. Customer deposits held with Discover Bank are currently insured for up to $250,000 per account holder through the Federal Deposit Insurance Corporation (“FDIC”). At December 31, 2022 and 2021, the Company had approximately $8.9 billion and $8.2 billion of uninsured deposits, respectively. Uninsured deposits are the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit or similar state deposit insurance regime, and amounts in any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regime. The amounts of uninsured deposits above were estimated based on the same methodologies and assumptions used for Discover Bank’s regulatory reporting requirements. The following table summarizes certificates of deposit in uninsured accounts and accounts that are in excess of the FDIC insurance limit by time remaining until maturity (dollars in millions):The following table provides a summary of interest-bearing deposit accounts (dollars in millions): | | | | | | | | | | December 31, | | 2019 | | 2018 | Certificates of deposit in amounts less than $100,000 | $ | 25,113 |
| | $ | 27,947 |
| Certificates of deposit in amounts $100,000 or greater(1) | 9,268 |
| | 6,841 |
| Savings deposits, including money market deposit accounts | 37,574 |
| | 32,296 |
| Total interest-bearing deposits | $ | 71,955 |
| | $ | 67,084 |
| | | | |
| | | | | | (1) | Includes $2.6 billion and $1.7 billion in certificates of deposit equal to or greater than $250,000, the Federal Deposit Insurance Corporation (“FDIC”) insurance limit, as of At December 31, 2019 and 20182022
| , respectively.Three months or less | $ | 64 | | Over three months through six months | 62 | | Over six months through twelve months | 255 | | Over twelve months | 188 | | Total | $ | 569 | | | |
The following table summarizes certificates of deposit maturing over each of the next five years and thereafter (dollars in millions): | | | | | | | At December 31, 2022 | 2023 | $ | 18,024 | | 2024 | 6,413 | | 2025 | 2,672 | | 2026 | 2,015 | | 2027 | 3,318 | | Thereafter | 628 | | Total | $ | 33,070 | | | |
The following table summarizes certificates of deposit in amounts of $100,000 or greater by contractual maturity (dollars in millions): | | | | | | December 31, 2019 | Three months or less | $ | 1,576 |
| Over three months through six months | 1,516 |
| Over six months through twelve months | 3,429 |
| Over twelve months | 2,747 |
| Total | $ | 9,268 |
| | |
The following table summarizes certificates of deposit maturing over each of the next five years and thereafter (dollars in millions): | | | | | | December 31, 2019 | 2020 | $ | 18,976 |
| 2021 | 6,980 |
| 2022 | 3,292 |
| 2023 | 1,913 |
| 2024 | 1,309 |
| Thereafter | 1,911 |
| Total | $ | 34,381 |
| | |
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9. Long-Term Borrowings Long-term borrowings consist of borrowings having original maturities of one year or more. The following table provides a summary of the Company’s long-term borrowings and weighted-average interest rates on outstanding balances (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | | Maturity | | Interest Rate | | Weighted-Average Interest Rate | | Outstanding Amount | | Outstanding Amount | Securitized Debt | | | | | | | | | | Fixed-rate asset-backed securities(1) | 2023-2026 | | 0.58% - 5.03% | | 2.78% | | $ | 8,401 | | | $ | 5,588 | | Floating-rate asset-backed securities(2) | 2023-2024 | | 4.65% - 4.92% | | 4.80% | | 1,774 | | | 3,347 | | Total Discover Card Master Trust I and Discover Card Execution Note Trust | | | | | | | 10,175 | | | 8,935 | | | | | | | | | | | | Floating-rate asset-backed security(3)(4) | 2031 | | 8.50% | | 8.50% | | 84 | | | 104 | | Total private student loan securitization trust | | | | | | | 84 | | | 104 | | Total long-term borrowings - owed to securitization investors | | | | | | | 10,259 | | | 9,039 | | | | | | | | | | | | Discover Financial Services (Parent Company) | | | | | | | | | | Fixed-rate senior notes | 2024-2032 | | 3.75% - 6.70% | | 4.68% | | 3,333 | | | 3,382 | | Fixed-rate retail notes | 2023-2031 | | 2.85% - 4.40% | | 3.77% | | 154 | | | 166 | | | | | | | | | | | | Discover Bank | | | | | | | | | | Fixed-rate senior bank notes(1) | 2023-2030 | | 2.45% - 4.65% | | 3.63% | | 5,348 | | | 5,385 | | Fixed-rate subordinated bank notes(1) | 2028 | | 4.68% | | 4.68% | | 489 | | | 505 | | Floating-rate Federal Home Loan Bank advance(5) | 2023 | | 4.53% | | 4.53% | | 525 | | | — | | Total long-term borrowings | | | | | | | $ | 20,108 | | | $ | 18,477 | | | | | | | | | | | |
(1)The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in the applicable benchmark interest rates. The use of these interest rate swaps impacts the carrying value of the debt. See Note 21: Derivatives and Hedging Activities.
(2)DCENT floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 33 to 60 basis points as of December 31, 2022. Long-term borrowings consist of borrowings having original maturities of one year or more. The following table provides a summary of the Company’s long-term borrowings and weighted-average interest rates on outstanding balances (dollars in millions): | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | Maturity | | Interest Rate | | Weighted-Average Interest Rate | | Outstanding Amount | | Outstanding Amount | Securitized Debt | | | | | | | | | | Fixed-rate asset-backed securities(1) | 2020-2024 | | 1.85%-3.32% | | 2.50% | | $ | 8,609 |
| | $ | 10,657 |
| Floating-rate asset-backed securities(2)(3) | 2020-2024 | | 1.97%-2.46% | | 2.15% | | 5,515 |
| | 6,063 |
| Total Discover Card Master Trust I and Discover Card Execution Note Trust | | | | | | | 14,124 |
| | 16,720 |
| | | | | | | | | | | Floating-rate asset-backed security(4)(5) | 2031 | | 5.75% | | 5.75% | | 160 |
| | 197 |
| Total student loan securitization trust | | | | | | | 160 |
| | 197 |
| Total long-term borrowings - owed to securitization investors | | | | | | | 14,284 |
| | 16,917 |
| | | | | | | | | | | Discover Financial Services (Parent Company) | | | | | | | | | | Fixed-rate senior notes | 2022-2027 | | 3.75%-5.20% | | 4.16% | | 3,296 |
| | 2,743 |
| Fixed-rate retail notes | 2021-2031 | | 2.85%-4.60% | | 3.73% | | 340 |
| | 346 |
| | | | | | | | | | | Discover Bank | | | | | | | | | | Fixed-rate senior bank notes(1) | 2020-2028 | | 2.45%-4.65% | | 3.55% | | 6,785 |
| | 6,027 |
| Fixed-rate subordinated bank notes(1) | 2020-2028 | | 4.68%-7.00% | | 5.84% | | 996 |
| | 1,195 |
| Total long-term borrowings | | | | | | | $ | 25,701 |
| | $ | 27,228 |
| | | | | | | | | | |
(3)The private student loan securitization trust floating-rate asset-backed security includes an issuance with the following interest rate term: Prime rate + 100 basis points as of December 31, 2022. | | (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”) or Overnight Index Swap (“OIS”) Rate. Use of these interest rate swaps impacts carrying value of the debt. See Note 21: Derivatives and Hedging Activities. |
| | (2) | Discover Card Execution Note Trust floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 23 to 60 basis points and Commercial paper rate + 55 basis points as of December 31, 2019.
|
| | (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 21: Derivatives and Hedging Activities. |
| | (4) | The student loan securitization trust floating-rate asset-backed security includes an issuance with the following interest rate term: Prime rate + 100 basis points as of December 31, 2019.
|
| | (5) | Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying student loans. The date shown represents final maturity date. |
(4)Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying private student loans. The date shown represents the final maturity date. The following table summarizes long-term borrowings maturing over each of the next five years and thereafter (dollars in millions): | | | | | | Amount | 2020 | $ | 5,247 |
| 2021 | 4,210 |
| 2022 | 5,119 |
| 2023 | 3,319 |
| 2024 | 2,565 |
| Thereafter | 5,241 |
| Total | $ | 25,701 |
| | |
(5)The floating-rate Federal Home Loan Bank (“FHLB”) advance includes an issuance with the following interest rate term: SOFR + 23 basis points as of December 31, 2022.The following table summarizes long-term borrowings maturing over each of the next five years and thereafter (dollars in millions): | | | | | | | At December 31, 2022 | 2023 | $ | 3,815 | | 2024 | 3,729 | | 2025 | 6,158 | | 2026 | 2,659 | | 2027 | 1,000 | | Thereafter | 2,747 | | Total | $ | 20,108 | | | |
As a member of the FHLB of Chicago, the Company has access to both short- and long-term advance structures with maturities ranging from overnight to 30 years. As of December 31, 2022, the Company had total committed borrowing capacity of $2.2 billion based on the amount and type of assets pledged, of which the outstanding balance was comprised solely of a $525 million long-term advance. As of December 31, 2021, the Company had total committed borrowing capacity of $1.4 billion, of which the outstanding balance was comprised solely of a $1.3 billion short-term advance. These advances are presented as short- or long-term borrowings on the consolidated statements of financial condition as appropriate. Additionally, the Company has access to committed borrowing capacity through private securitizations to support the funding of its credit card loan receivables. As of December 31, 2019,2022, the total commitment of secured credit facilities through
private providers was $6.0$3.5 billion,, none of which was drawn. As of December 31, 2021, the total commitment of secured credit facilities through private providers was $4.0 billion, $500 million of which was drawn at December 31, 2019.outstanding as a short-term draw. Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers, whichproviders. The secured credit facilities have various expirations in calendar years 2021 through 2022.2024. Borrowings outstanding under each facility bear interest at a margin above LIBOR, Term SOFR 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. | | 10. | Stock-Based Compensation Plans |
10. Stock-Based Compensation Plans The Company has 2two stock-based compensation plans: the Discover Financial Services Omnibus Incentive Plan (“Omnibus Plan”) and the Discover Financial Services Directors’ Compensation Plan (“Directors’ Compensation Plan”). Omnibus Plan The Omnibus Plan, which is stockholder approved,stockholder-approved, provides for the award of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance stock units (“PSUs”) and other stock-based and/or cash awards (collectively, “awards”). Currently, the Company does not have any stock options, stock appreciation rights or restricted stock outstanding. The total number of shares that may be granted is 45 million shares, subject to adjustments for certain transactions as described in the Omnibus Plan document. Shares granted under the Omnibus Plan may be the following: (i) authorized but unissued shares and (ii) treasury shares that the Company acquires in the open market, in private transactions or otherwise. Directors’ Compensation Plan The Directors’ Compensation Plan, which is stockholder approved,stockholder-approved, permits the grant of RSUs to non-employee directors. Under the Directors’ Compensation Plan, the Company may issue awards of up to a total of 1,000,0001 million shares of common stock to non-employee directors. Shares of stock that are issuable pursuant to the awards granted under the Directors’ Compensation Plan may be one of the following: authorized but unissued shares, treasury shares or shares that the Company acquires in the open market. Annual awards for eligible directors are calculated by dividing $150,000$170,000 by the fair market value of a share of stock on the date of grant and are subject to a restriction period whereby 100% of such units shall vest in full on the earlier of the one year anniversary of the date of grant or immediately prior to the first annual meeting of shareholders following the date of grant. RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Company common shareholders.
Stock-Based Compensation Stock-Based CompensationThe following table details the compensation cost, net of forfeitures (dollars in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | RSUs | $ | 58 | | | $ | 46 | | | $ | 49 | | PSUs(1) | 31 | | | 57 | | | (8) | | Total stock-based compensation expense | $ | 89 | | | $ | 103 | | | $ | 41 | | | | | | | | Income tax benefit | $ | 16 | | | $ | 15 | | | $ | 9 | | | | | | | |
(1)Total PSU expense for the year ended December 31, 2021, includes an incremental $1 million, representing a modification to the 2019 PSU award. Total PSU expense for the year ended December 31, 2020, includes an incremental $2 million, representing a modification to the 2018 PSU award. The nature of the modifications was to adjust the payout to compensate for the 2020 CECL adoption impact on earnings per share (“EPS”).The following table details the compensation cost, net of forfeitures (dollars in millions): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | RSUs | $ | 49 |
| | $ | 49 |
| | $ | 44 |
| PSUs | 20 |
| | 32 |
| | 31 |
| Total stock-based compensation expense | $ | 69 |
| | $ | 81 |
| | $ | 75 |
| | | | | | | Income tax benefit | $ | 12 |
| | $ | 15 |
| | $ | 28 |
| | | | | | |
RSUs The following table sets forth the activity related to vested and unvested RSUs: | | | | | | | | | | | | | | | | | | | Number of Units | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) | RSUs at December 31, 2021 | 1,816,244 | | | | | $ | 210 | | Granted | 739,388 | | | | | | Conversions to common stock | (509,254) | | | | | | Forfeited | (108,095) | | | | | | RSUs at December 31, 2022 | 1,938,283 | | | 0.91 | | $ | 190 | | Vested and convertible RSUs at December 31, 2022 | 752,223 | | | 0.00 | | $ | 74 | | | | | | | |
The following table sets forth the activity related to vested and unvested RSUs: | | | | | | | | | | | | Number of Units | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) | RSUs at December 31, 2018 | 2,606,494 |
| | | | $ | 154 |
| Granted | 878,380 |
| | | | | Conversions to common stock | (1,230,886 | ) | | | | | Forfeited | (105,012 | ) | | | | | RSUs at December 31, 2019 | 2,148,976 |
| | 0.91 |
| | $ | 182 |
| Vested and convertible RSUs at December 31, 2019 | 776,484 |
| | — |
| | $ | 66 |
| | | | | | |
The following table sets forth the activity related to unvested RSUs: | | | | | | | | | | | | | Number of Units | | Weighted-Average Grant-Date Fair Value | Unvested RSUs at December 31, 20211) | 890,484 | | | $ | 90.40 | | Granted | 739,388 | | | $ | 116.50 | | Vested | (462,094) | | | $ | 88.18 | | Forfeited | (108,095) | | | $ | 111.11 | | Unvested RSUs at December 31, 2022(1) | 1,059,683 | | | $ | 107.47 | | | | | |
(1)Unvested RSUs represent awards where recipients have yet to satisfy either explicit vesting terms or retirement-eligibility requirements. The following table sets forth the activity related to unvested RSUs: | | | | | | | | | Number of Units | | Weighted-Average Grant-Date Fair Value | Unvested RSUs at December 31, 2018(1) | 1,041,158 |
| | $ | 68.16 |
| Granted | 878,380 |
| | $ | 73.52 |
| Vested | (709,964 | ) | | $ | 67.49 |
| Forfeited | (105,012 | ) | | $ | 73.67 |
| Unvested RSUs at December 31, 2019(1) | 1,104,562 |
| | $ | 72.33 |
| | | | |
| | (1) | Unvested RSUs represent awards where recipients have yet to satisfy either explicit vesting terms or retirement-eligibility requirements. |
Compensation cost associated with RSUs is determined based on the number of units granted and the fair value on the date of grant. The fair value is amortized on a straight-line basis, net of estimated forfeitures, over the requisite service period for each separately vesting tranche of the award. The requisite service period is generally the vesting period. The following table summarizes the total intrinsic value of the RSUs converted to common stock and the total grant-date fair value of RSUs vested (dollars in millions, except weighted-average grant-date fair value amounts): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Intrinsic value of RSUs converted to common stock | $ | 93 |
| | $ | 67 |
| | $ | 41 |
| Grant-date fair value of RSUs vested | $ | 48 |
| | $ | 54 |
| | $ | 37 |
| Weighted-average grant-date fair value of RSUs granted | $ | 73.52 |
| | $ | 77.53 |
| | $ | 70.62 |
| | | | | | |
-110-
The following table summarizes the total intrinsic value of the RSUs converted to common stock and the total grant-date fair value of RSUs vested (dollars in millions, except weighted-average grant-date fair value amounts): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Intrinsic value of RSUs converted to common stock | $ | 59 | | | $ | 62 | | | $ | 55 | | Grant-date fair value of RSUs vested | $ | 41 | | | $ | 47 | | | $ | 51 | | Weighted-average grant-date fair value of RSUs granted | $ | 116.50 | | | $ | 101.47 | | | $ | 76.58 | | | | | | | |
As of December 31, 2019,2022, there was $29$47 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 0.910.92 years. RSUs provide for accelerated vesting if there is a change in control or upon certain terminations (as defined in the Omnibus Plan or the award certificate). RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Company common shareholders.
PSUs The following table sets forth the activity related to vested and unvested PSUs: | | | | | | | | | | | | | | | | | | | | | | | | | Number of Units | | Weighted-Average Grant-Date Fair Value | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) | PSUs at December 31, 2021(1) | 764,135 | | | $ | 84.58 | | | | | $ | 88 | | Granted | 247,458 | | | $ | 124.01 | | | | | | Conversions to common stock | (242,682) | | | $ | 71.62 | | | | | | Forfeited | (52,439) | | | $ | 99.33 | | | | | | PSUs at December 31, 2022(1)(2)(3)(4) | 716,472 | | | $ | 99.21 | | | 1.05 | | $ | 70 | | | | | | | | | |
The following table sets forth the activity related to vested and unvested PSUs: | | | | | | | | | | | | | | | Number of Units | | Weighted-Average Grant-Date Fair Value | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) | PSUs at December 31, 2018(1) | 933,642 |
| | $ | 62.25 |
| | | | $ | 55 |
| Granted | 248,185 |
| | $ | 71.62 |
| | | | | Conversions to common stock | (441,370 | ) | | $ | 48.59 |
| | | | | Forfeited | (16,924 | ) | | $ | 72.59 |
| | | | | PSUs at December 31, 2019(1)(2)(3)(4) | 723,533 |
| | $ | 73.56 |
| | 1.07 | | $ | 61 |
| | | | | | | | |
(1) All PSUs outstanding at December 31, 20192022 and December 31, 20182021, are unvested PSUs. | | (2) | Includes 243,100 PSUs granted in 2017 that are earned based on the Company’s achievement of earnings per share (“EPS”) during the three-year performance period which ends December 31, 2019 and are subject to the requisite service period which ended February 1, 2020. |
| | (3) | Includes 246,503 PSUs granted in 2018 that are earned based on the Company’s achievement of EPS during the three-year performance period which ends December 31, 2020 and are subject to the requisite service period which ends February 1, 2021. |
| | (4) | Includes 233,930 PSUs granted in 2019 that may be earned based on the Company’s achievement of EPS during the three-year performance period which ends December 31, 2021 and are subject to the requisite service period which ends February 1, 2022. |
(2) Includes 271,588 PSUs granted in 2020 that are earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ended December 31, 2022, and are subject to the requisite service period, which ended February 1, 2023. (3) Includes 244,498 PSUs granted in 2021 that are earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ends December 31, 2023, and are subject to the requisite service period, which ends February 1, 2024. (4) Includes 200,386 PSUs granted in 2022 that may be earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ends December 31, 2024, and are subject to the requisite service period, which ends February 1, 2025. Compensation cost associated with PSUs is determined based on the number of instruments granted, the fair value on the date of grant and the performance factor. The fair value is amortized on a straight-line basis, net of estimated forfeitures, over the requisite service period. Each PSU outstanding at December 31, 20192022, is a restricted stock instrument that is subject to additional conditions and constitutes a contingent and unsecured promise by the Company to pay up to 1.5 shares per unit of the Company’s common stock on the conversion date for the PSU, contingent on the number of PSUs to be issued. PSUs have a performance period of three years and a vesting period of three years. The requisite service period of an award having both performance and service conditions is the longest of the explicit, implicit and derived service periods. The following table summarizes the total intrinsic value of the PSUs converted to common stock and the total grant-date fair value of PSUs vested (dollars in millions, except weighted-average grant-date fair value amounts): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Intrinsic value of PSUs converted to common stock | $ | 33 |
| | $ | 30 |
| | $ | 27 |
| Grant-date fair value of PSUs vested | $ | 21 |
| | $ | 17 |
| | $ | 18 |
| Weighted-average grant-date fair value of PSUs granted | $ | 71.62 |
| | $ | 77.75 |
| | $ | 71.17 |
| | | | | | |
The following table summarizes the total intrinsic value of the PSUs converted to common stock and the total grant-date fair value of PSUs vested (dollars in millions, except weighted-average grant-date fair value amounts): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Intrinsic value of PSUs converted to common stock | $ | 29 | | | $ | 15 | | | $ | 21 | | Grant-date fair value of PSUs vested | $ | 17 | | | $ | 18 | | | $ | 17 | | Weighted-average grant-date fair value of PSUs granted | $ | 124.01 | | | $ | 94.21 | | | $ | 85.25 | | | | | | | |
As of December 31, 2019,2022, there was $5$20 million of total unrecognized compensation cost related to non-vested PSUs. The cost is expected to be recognized over a weighted-average period of 1.0 year.1.05 years.
PSUs provide for accelerated vesting if there is a change in control or upon certain terminations (as defined in the Omnibus Plan or the award certificate). PSUs include the right to receive dividend equivalents, which will accumulate and pay out in cash if and when the underlying shares are issued.
| | 11. | Employee Benefit Plans |
11. Employee Benefit Plans The Company sponsors the Discover Financial Services Pension Plan (the “Discover Pension Plan”), which is a non-contributory defined benefit plan that is qualified under Section 401(a) of the Internal Revenue Code, for eligible employees in the U.S. Effective December 31, 2008, the Discover Pension Plan was amended to discontinue the accrual of future benefits. The Company also sponsors the Discover Financial Services 401(k) Plan (the “Discover 401(k) Plan”), which is a defined contribution plan that is qualified under Section 401(a) of the Internal Revenue Code, for its eligible U.S. employees. Discover Pension Plan The Discover Pension Plan generally provides retirement benefits that are based on each participant’s years of credited service prior to 2009 and on compensation specified in the Discover Pension Plan. The Company’s policy is to fund at least the amounts sufficient to meet minimum funding requirements under the Employee Retirement Income Security Act of 1974, as amended. Net periodic benefit cost (income) is recorded in employee compensation and benefits within the consolidated statements of income. For this plan, the net periodic benefit cost was immaterial for all periods presented. Net Periodic Benefit Cost
Net periodic benefit cost expensed by the Company included the following components (dollars in millions): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Interest cost on projected benefit obligation | $ | 23 |
| | $ | 22 |
| | $ | 23 |
| Expected return on plan assets | (29 | ) | | (26 | ) | | (25 | ) | Net amortization | 4 |
| | 5 |
| | 4 |
| Net periodic benefit (income) cost | $ | (2 | ) | | $ | 1 |
| | $ | 2 |
| | | | | | |
Accumulated Other Comprehensive Income
Pretax amounts recognized in AOCI that have not yet been recognized as components of net periodic benefit cost consist of (dollars in millions): | | | | | | December 31, 2019 | Prior service credit | $ | 1 |
| Net loss | (294 | ) | Total | $ | (293 | ) | | |
Benefit ObligationsThe Company recognizes the funded status of the defined benefit pension plan, measured as the difference between the fair value of plan assets and Funded Status
The following table provides a reconciliation of the changes in the benefit obligation and fair value of plan assets as well as a summary of the Discover Pension Plan’s funded status (dollars in millions): | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | Reconciliation of benefit obligation | | | | Benefit obligation at beginning of year | $ | 550 |
| | $ | 603 |
| Interest cost | 23 |
| | 22 |
| Actuarial losses (gains) | 98 |
| | (57 | ) | Benefits paid | (21 | ) | | (18 | ) | Benefit obligation at end of year | 650 |
| | 550 |
| | | | | Reconciliation of fair value of plan assets | | | | Fair value of plan assets at beginning of year | 455 |
| | 424 |
| Actual return on plan assets | 91 |
| | (36 | ) | Employer contributions | — |
| | 85 |
| Benefits paid | (21 | ) | | (18 | ) | Fair value of plan assets at end of year | 525 |
| | 455 |
| | | | | Unfunded status (recorded in accrued expenses and other liabilities) | $ | (125 | ) | | $ | (95 | ) | | | | |
Actuarial lossesthe projected benefit obligation, in accrued expenses and gainsother liabilities on the benefit obligation were primarily driven by changes in the discount rate for the years endedconsolidated statements of financial condition. As of December 31, 20192022 and 2018.
Assumptions
The following table presents the assumptions used to determine the benefit obligation: | | | | | | | | December 31, | | 2019 | | 2018 | Discount rate | 3.30 | % | | 4.27 | % | | | | |
The following table presents the assumptions used to determine net periodic benefit cost: | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Discount rate | 4.27 | % | | 3.68 | % | | 4.29 | % | Expected long-term rate of return on plan assets | 6.15 | % | | 6.15 | % | | 6.50 | % | | | | | | |
The expected long-term rate of return on plan assets was estimated by computing a weighted-average return of2021, the underlying long-term expected returns on the different asset classes, based on the target asset allocations. Asset class return assumptions are created by integrating information on past capital market performance, current levels of key economic indicators and the market insights of investment professionals. Individual asset classes are analyzed as part of a larger system, acknowledging both the interaction between asset classes and the influence of larger macroeconomic variables such as inflation and economic growth on the entire structure of capital markets. Medium and long-term economic outlooks for the U.S. and other major industrial economies are forecast in order to understand the range of possible economic scenarios and evaluate their likelihood. Historical relationships between key economic variables and asset class performance patterns are analyzed using empirical models. Finally, comprehensive asset class performance projections are created by blending descriptive asset class characteristics with capital market insight and
the initial economic analyses. The expected long-term return on plan assets is a long-term assumption that generally is expected to remain the same from one yearunfunded status related to the next but is adjusted if there is a material change indefined benefit pension plan was $101 million and $106 million, respectively. Pending review by internal governance committees, the target asset allocation and/or significant changes in fees and expenses paid byCompany expects to contribute approximately $115 million to the Discover Pension Plan.
Discover Pension Plan Assets
The targeted asset allocation for 2020 by asset class is 72% and 28% for fixed income securities and equity securities, respectively. The Discover Financial Services Retirement Plan Investment Committee (the “Investment Committee”) determined the asset allocation targets forpension plan during 2023. Expected benefit payments from the Discover Pension Plan based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics and related risk factors. Other relevant factors, including industry practices and long-term historical and prospective capital market returns were considered as well.
The Discover Pension Plan return objectives provide long-term measures for monitoring the investment performance against growth in the pension obligations. The overall allocation is expected to help protect the Discover Pension Plan’s funded status while generating sufficiently stable real returns (net of inflation) to help cover current and future benefit payments and to improve the Discover Pension Plan’s funded status. Total Discover Pension Plan portfolio performance is assessed by comparing actual returns with relevant benchmarks, such as the S&P 500 Index, the S&P 500 Total Return Index, the Russell 2000 Index and the MSCI All Country World Index.
Both the fixed income and equity portionseach of the asset allocation use a combination of activenext five years range from $25 million and passive investment strategies and different investment styles. The fixed income asset allocation consists of longer duration fixed income securities in order to help reduce plan exposure to interest rate variation and to better correlate assets with obligations. The longer duration fixed income allocation is expected to help stabilize the funding status ratio over the long term.
The asset mix of the Discover Pension Plan is reviewed by the Investment Committee on a regular basis. The asset allocation strategy will change over time in response to changes in the Discover Pension Plan’s funded status.
Fair Value Measurements
The Discover Pension Plan’s assets are stated at fair value. Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available. If a quoted market price is not available, the estimate of the fair value is based on the best information available in the circumstances. The table below presents information about the Discover Pension Plan assets and indicates the level within the fair value hierarchy, as defined by ASC Topic 820, with which each item is associated as of the end of the current period. For a description of the fair value hierarchy, see Note 20: Fair Value Measurements. (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | Level 1 | | Level 2 | | Level 3 | | Net Asset Value | | Total | | Net Asset Allocation | Balance at December 31, 2019 | | | | | | | | | | | | Assets | | | | | | | | | | | | Cash | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7 |
| | 1 | % | Domestic small/mid cap equity fund | — |
| | 6 |
| | — |
| | — |
| | 6 |
| | 1 | % | Emerging markets equity fund | — |
| | — |
| | — |
| | 16 |
| | 16 |
| | 3 | % | Global equity fund | — |
| | 73 |
| | 3 |
| | 45 |
| | 121 |
| | 23 | % | Domestic large cap equity fund | — |
| | 8 |
| | — |
| | — |
| | 8 |
| | 2 | % | Long duration credit fund | — |
| | 205 |
| | — |
| | — |
| | 205 |
| | 39 | % | Non-core fixed income fund | — |
| | — |
| | 64 |
| | — |
| | 64 |
| | 12 | % | U.S. Treasury securities | 87 |
| | — |
| | — |
| | — |
| | 87 |
| | 17 | % | Temporary investment fund | — |
| | 15 |
| | — |
| | — |
| | 15 |
| | 3 | % | Total assets | 94 |
| | 307 |
| | 67 |
| | 61 |
| | 529 |
| |
|
| Liabilities | | | | | | | | | | | | Futures contracts | — |
| | 4 |
| | — |
| | — |
| | 4 |
| | 1 | % | Total liabilities | — |
| | 4 |
| | — |
| | — |
| | 4 |
| |
| Net assets | $ | 94 |
| | $ | 303 |
| | $ | 67 |
| | $ | 61 |
| | $ | 525 |
| | 100 | % | | | | | | | | | | | | | Balance at December 31, 2018 | | | | | | | | | | | | Assets | | | | | | | | | | | | Domestic small/mid cap equity fund | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
| | 1 | % | Emerging markets equity fund | — |
| | — |
| | — |
| | 17 |
| | 17 |
| | 4 | % | Global equity fund | — |
| | 82 |
| | — |
| | 42 |
| | 124 |
| | 27 | % | Domestic large cap equity fund | — |
| | 7 |
| | — |
| | — |
| | 7 |
| | 2 | % | Long duration credit fund | — |
| | 125 |
| | — |
| | — |
| | 125 |
| | 28 | % | Futures contracts | — |
| | 6 |
| | — |
| | — |
| | 6 |
| | 1 | % | Non-core fixed income fund | — |
| | — |
| | 65 |
| | — |
| | 65 |
| | 14 | % | U.S. Treasury securities | 59 |
| | — |
| | — |
| | — |
| | 59 |
| | 13 | % | Stable value fund | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — | % | Temporary investment fund | — |
| | 45 |
| | — |
| | — |
| | 45 |
| | 10 | % | Total assets | $ | 59 |
| | $ | 272 |
| | $ | 65 |
| | $ | 59 |
| | $ | 455 |
| | 100 | % | | | | | | | | | | | | |
Cash Flows
The Company does 0t expect to make any contributions to the Discover Pension Plan in 2020.
Expected benefit payments associated with the Discover Pension Plan for each of the next five years and in aggregate for the years thereafter are as follows (dollars in millions): | | | | | | December 31, 2019 | 2020 | $ | 16 |
| 2021 | $ | 18 |
| 2022 | $ | 19 |
| 2023 | $ | 20 |
| 2024 | $ | 22 |
| Following five years thereafter | $ | 132 |
| | |
$30 million annually.Discover 401(k) Plan Under the Discover 401(k) Plan, eligible U.S. employees receive 401(k) matching contributions. Eligible employees also receive fixed employer contributions. The pretax expense associated with the Company contributions for the years ended December 31, 2019, 20182022, 2021 and 20172020 was $104 million, $97 million and $99 million, respectively.
, $69 million12. Common and $64 million, respectively.Preferred Stock
Common Stock Repurchase Program | | 12. | Common and Preferred Stock |
In July 2021, the Board of Directors approved a share repurchase program authorizing up to $2.4 billion of share repurchases. The program expired on March 31, 2022. On April 27, 2022, the Company’s Board of Directors approved a new share repurchase program authorizing the repurchase of up to $4.2 billion of its outstanding shares of common stock. This program expires on June 30, 2023. During the three months ended December 31, 2022, the Company repurchased approximately 5.9 million shares for approximately $600 million. During the year ended December 31, 2022, the Company repurchased approximately 21.5 million shares for approximately $2.3 billion. Preferred Stock The Company has table below presents a summary of the Company's non-cumulative perpetual preferred stock that is outstanding at December 31, 2022 (dollars in millions, except per depositary share amounts): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series | | Description | | Initial Issuance Date | | Liquidation Preference and Redemption Price per Depositary Share(1) | | Per Annum Dividend Rate in effect at December 31, 2022 | | Total Depositary Shares Authorized, Issued and Outstanding | | Carrying Value | | | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2022 | | December 31, 2021 | C(2)(3)(4) | | Fixed-to-Floating Rate | | 10/31/2017 | | $ | 1,000 | | | 5.500 | % | | 570,000 | | | 570,000 | | | $ | 563 | | | $ | 563 | | D(2)(5)(6) | | Fixed-Rate Reset | | 6/22/2020 | | $ | 1,000 | | | 6.125 | % | | 500,000 | | | 500,000 | | | 493 | | | 493 | | Total Preferred Stock | | 1,070,000 | | | 1,070,000 | | | $ | 1,056 | | | $ | 1,056 | | | | | | | | | | | | | | | | | | |
(1)5,700Redeemable at the redemption price plus declared and unpaid dividends. (2)Issued as depositary shares, each representing 1/100th sharesinterest in a share of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (the “preferred stock”), outstanding withthe corresponding series of preferred stock. Each preferred share has a par value of $0.01. (3)$0.01 per share that were issued on October 31, 2017. Each share of preferred stock has a liquidation preference of $100,000 and is represented by 100 depositary shares. Proceeds, net of underwriting discount, received from the preferred stock issuance totaled approximately $563 million. The preferred stock is redeemableRedeemable at the Company’s option, subject to regulatory approval, either (1)(i) in whole or in part on any dividend payment date on or after October 30, 2027, or (2)(ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series C preferred stock), in each case at a redemption price equal to . (4)$100,000 per share of preferred stock plus declared and unpaid dividends. Any dividends declared on the preferred stock will beare payable semi-annually in arrears at a rate of 5.50% per annum throughuntil October 30, 2027. Thereafter, dividends declared on preferred stock will be payable quarterly in arrears at a floating rate equal to three-month3-month LIBOR plus a spread of 3.076% per annum. On December 1, 2017, the Company redeemed all outstanding shares of the Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B, for an aggregate price of $575 million and charged to retained earnings $15 million of original issuance costs. Stock Repurchase Program
On July 18, 2019,(5)Redeemable at the Company’s Boardoption, subject to regulatory approval, either (i) in whole or in part during the three-month period prior to, and including, each reset date (as defined in the certificate of Directors approved a share repurchase program authorizingdesignations for the repurchase of up to $2.2 billion of its outstanding shares of common stock. The program expires on September 30, 2020 and may be terminatedSeries D preferred stock) or (ii) in whole but not in part, at any time. Duringtime within 90 days following a regulatory capital treatment event (as defined in the year ended December 31, 2019,certificate of designations for the Company repurchased approximately 22 million sharesSeries D Preferred Stock).
(6)Any dividends declared are payable semi-annually in arrears at a rate of 6.125% per annum until September 23, 2025, after which the dividend rate will reset every 5 years to a fixed annual rate equal to the 5-year Treasury plus a spread of 5.783%.
13. Accumulated Other Comprehensive Income Changes in each component of AOCI were as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized Gains (Losses) on Available-for-Sale Investment Securities, Net of Tax | | Losses on Cash Flow Hedges, Net of Tax | | Losses on Pension Plan, Net of Tax | | AOCI | For the Year Ended December 31, 2022 | | | | | | | | Balance at December 31, 2021 | $ | 114 | | | $ | (9) | | | $ | (199) | | | $ | (94) | | Net change | (250) | | | (5) | | | 10 | | | (245) | | Balance at December 31, 2022 | $ | (136) | | | $ | (14) | | | $ | (189) | | | $ | (339) | | | | | | | | | | For the Year Ended December 31, 2021 | | | | | | | | Balance at December 31, 2020 | $ | 284 | | | $ | (12) | | | $ | (227) | | | $ | 45 | | | | | | | | | | Net change | (170) | | | 3 | | | 28 | | | (139) | | Balance at December 31, 2021 | $ | 114 | | | $ | (9) | | | $ | (199) | | | $ | (94) | | | | | | | | | | For the Year Ended December 31, 2020 | | | | | | | | Balance at December 31, 2019 | $ | 112 | | | $ | (17) | | | $ | (214) | | | $ | (119) | | | | | | | | | | Net change | 172 | | | 5 | | | (13) | | | 164 | | Balance at December 31, 2020 | $ | 284 | | | $ | (12) | | | $ | (227) | | | $ | 45 | | | | | | | | | |
The following table presents each component of OCI before reclassifications and amounts reclassified from AOCI for $1.7 billion.each component of OCI before- and after-tax (dollars in millions): | | | | | | | | | | | | | | | | | | | Before Tax | | Tax Benefit (Expense) | | Net of Tax | For the Year Ended December 31, 2022 | | | | | | Available-for-Sale Investment Securities | | | | | | Net unrealized holding losses arising during the period | $ | (331) | | | $ | 81 | | | $ | (250) | | | | | | | | Net change | $ | (331) | | | $ | 81 | | | $ | (250) | | Cash Flow Hedges | | | | | | Net unrealized losses arising during the period | $ | (13) | | | $ | 3 | | | $ | (10) | | Amounts reclassified from AOCI | 4 | | | 1 | | | 5 | | Net change | $ | (9) | | | $ | 4 | | | $ | (5) | | Pension Plan | | | | | | Unrealized gains arising during the period | $ | 13 | | | $ | (3) | | | $ | 10 | | Net change | $ | 13 | | | $ | (3) | | | $ | 10 | | | | | | | | For the Year Ended December 31, 2021 | | | | | | Available-for-Sale Investment Securities | | | | | | Net unrealized holding losses arising during the period | $ | (226) | | | $ | 56 | | | $ | (170) | | | | | | | | Net change | $ | (226) | | | $ | 56 | | | $ | (170) | | Cash Flow Hedges | | | | | | Net unrealized losses arising during the period | $ | (1) | | | $ | 1 | | | $ | — | | Amounts reclassified from AOCI | 3 | | | — | | | 3 | | Net change | $ | 2 | | | $ | 1 | | | $ | 3 | | Pension Plan | | | | | | Unrealized gains arising during the period | $ | 37 | | | $ | (9) | | | $ | 28 | | Net change | $ | 37 | | | $ | (9) | | | $ | 28 | | | | | | | | For the Year Ended December 31, 2020 | | | | | | Available-for-Sale Investment Securities | | | | | | Net unrealized holding gains arising during the period | $ | 227 | | | $ | (55) | | | $ | 172 | | | | | | | | Net change | $ | 227 | | | $ | (55) | | | $ | 172 | | Cash Flow Hedges | | | | | | Net unrealized losses arising during the period | $ | (7) | | | $ | 3 | | | $ | (4) | | Amounts reclassified from AOCI | 12 | | | (3) | | | 9 | | Net change | $ | 5 | | | $ | — | | | $ | 5 | | Pension Plan | | | | | | Unrealized losses arising during the period | $ | (17) | | | $ | 4 | | | $ | (13) | | Net change | $ | (17) | | | $ | 4 | | | $ | (13) | | | | | | | |
| | 13. | Accumulated Other Comprehensive Income |
Changes in each component of AOCI were as follows (dollars in millions): | | | | | | | | | | | | | | | | | | Unrealized Gains (Losses) on Available-for-Sale Investment Securities, Net of Tax | | Gains (Losses) on Cash Flow Hedges, Net of Tax | | Losses on Pension Plan, Net of Tax | | AOCI | For the Year Ended December 31, 2019 | | | | | | | | Balance at December 31, 2018 | $ | 10 |
| | $ | 22 |
| | $ | (188 | ) | | $ | (156 | ) | Net change | 102 |
| | (39 | ) | | (26 | ) | | 37 |
| Balance at December 31, 2019 | $ | 112 |
| | $ | (17 | ) | | $ | (214 | ) | | $ | (119 | ) | | | | | | | | | For the Year Ended December 31, 2018 | | | | | | | | Balance at December 31, 2017 | $ | (5 | ) | | $ | 10 |
| | $ | (157 | ) | | $ | (152 | ) | Cumulative effect of ASU No. 2018-02 adoption(1) | (1 | ) | | 3 |
| | (31 | ) | | (29 | ) | Net change | 16 |
| | 9 |
| | — |
| | 25 |
| Balance at December 31, 2018 | $ | 10 |
| | $ | 22 |
| | $ | (188 | ) | | $ | (156 | ) | | | | | | | | | For the Year Ended December 31, 2017 | | | | | | | | Balance at December 31, 2016 | $ | (3 | ) | | $ | (13 | ) | | $ | (145 | ) | | $ | (161 | ) | Net change | (2 | ) | | 23 |
| | (12 | ) | | 9 |
| Balance at December 31, 2017 | $ | (5 | ) | | $ | 10 |
| | $ | (157 | ) | | $ | (152 | ) | | | | | | | | |
| | (1) | Represents the adjustment to AOCI as a result of adoption of ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the second quarter of 2018. |
The following table presents each component of OCI before reclassifications and amounts reclassified from AOCI for each component of OCI before- and after-tax (dollars in millions): | | | | | | | | | | | | | | Before Tax | | Tax (Expense) Benefit | | Net of Tax | For the Year Ended December 31, 2019 | | | | | | Available-for-Sale Investment Securities | | | | | | Net unrealized holding gains arising during the period | $ | 135 |
| | $ | (33 | ) | | $ | 102 |
| Net change | $ | 135 |
| | $ | (33 | ) | | $ | 102 |
| Cash Flow Hedges | | | | | | Net unrealized losses arising during the period | $ | (42 | ) | | $ | 7 |
| | $ | (35 | ) | Amounts reclassified from AOCI | (5 | ) | | 1 |
| | (4 | ) | Net change | $ | (47 | ) | | $ | 8 |
| | $ | (39 | ) | Pension Plan | | | | | | Unrealized losses arising during the period | $ | (34 | ) | | $ | 8 |
| | $ | (26 | ) | Net change | $ | (34 | ) | | $ | 8 |
| | $ | (26 | ) | | | | | | | For the Year Ended December 31, 2018 | | | | | | Available-for-Sale Investment Securities | | | | | | Net unrealized holding gains arising during the period | $ | 23 |
| | $ | (7 | ) | | $ | 16 |
| Net change | $ | 23 |
| | $ | (7 | ) | | $ | 16 |
| Cash Flow Hedges | | | | | | Net unrealized gains arising during the period | $ | 17 |
| | $ | (4 | ) | | $ | 13 |
| Amounts reclassified from AOCI | (6 | ) | | 2 |
| | (4 | ) | Net change | $ | 11 |
| | $ | (2 | ) | | $ | 9 |
| | | | | | | For the Year Ended December 31, 2017 | | | | | | Available-for-Sale Investment Securities | | | | | | Net unrealized holding losses arising during the period | $ | (3 | ) | | $ | 1 |
| | $ | (2 | ) | Net change | $ | (3 | ) | | $ | 1 |
| | $ | (2 | ) | Cash Flow Hedges | | | | | | Net unrealized gains arising during the period | $ | 23 |
| | $ | (9 | ) | | $ | 14 |
| Amounts reclassified from AOCI | 15 |
| | (6 | ) | | 9 |
| Net change | $ | 38 |
| | $ | (15 | ) | | $ | 23 |
| Pension Plan | | | | | | Unrealized losses arising during the period | $ | (15 | ) | | $ | 3 |
| | $ | (12 | ) | Net change | $ | (15 | ) | | $ | 3 |
| | $ | (12 | ) | | | | | | |
Total other expense includes the following components (dollars in millions): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Postage | $ | 93 |
| | $ | 86 |
| | $ | 78 |
| Fraud losses and other charges | 96 |
| | 83 |
| | 89 |
| Supplies | 34 |
| | 29 |
| | 39 |
| Incentive expense | 84 |
| | 85 |
| | 37 |
| Other expense | 196 |
| | 186 |
| | 181 |
| Total other expense | $ | 503 |
| | $ | 469 |
| | $ | 424 |
| | | | | | |
Income tax expense consisted of the following (dollars in millions): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Current | | | | | | U.S. federal | $ | 836 |
| | $ | 839 |
| | $ | 1,056 |
| U.S. state and local | 175 |
| | 206 |
| | 96 |
| Total | 1,011 |
| | 1,045 |
| | 1,152 |
| Deferred | | | | | | U.S. federal | (116 | ) | | (163 | ) | | 288 |
| U.S. state and local | (17 | ) | | (27 | ) | | (2 | ) | Total | (133 | ) | | (190 | ) | | 286 |
| Income tax expense | $ | 878 |
| | $ | 855 |
| | $ | 1,438 |
| | | | | | |
The following table reconciles the Company’s effective tax rate to the U.S. federal statutory income tax rate: | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 35.0 | % | U.S. state, local and other income taxes, net of U.S. federal income tax benefits | 3.5 |
| | 3.6 |
| | 3.1 |
| Revaluation of net deferred tax assets and other investments due to tax reform(1) | — |
| | — |
| | 5.1 |
| Tax credits | (1.4 | ) | | (1.3 | ) | | (1.3 | ) | Other | (0.2 | ) | | 0.5 |
| | (1.2 | ) | Effective income tax rate | 22.9 | % | | 23.8 | % | | 40.7 | % | | | | | | |
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| | (1) | See Note 3: Investments — Other Investments for a description of these investments. |
For14.Other Expense
Total other expense includes the year ended December 31, 2019, incomefollowing components (dollars in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Postage | $ | 97 | | | $ | 91 | | | $ | 93 | | Fraud losses and other charges | 149 | | | 92 | | | 96 | | Supplies | 35 | | | 46 | | | 51 | | Incentive expense | 32 | | | 44 | | | 57 | | Impairment charges | — | | | 95 | | | 59 | | Other expense | 247 | | | 252 | | | 240 | | Total other expense | $ | 560 | | | $ | 620 | | | $ | 596 | | | | | | | |
15. Income Taxes Income tax expense increased $23 million, or 2.7%, andconsisted of the effective income tax rate decreased 0.9 percentage points as compared tofollowing (dollars in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Current | | | | | | U.S. federal | $ | 1,465 | | | $ | 1,084 | | | $ | 807 | | U.S. state and local | 312 | | | 204 | | | 159 | | Total | 1,777 | | | 1,288 | | | 966 | | Deferred | | | | | | U.S. federal | (376) | | | 288 | | | (585) | | U.S. state and local | (51) | | | 39 | | | (87) | | Total | (427) | | | 327 | | | (672) | | Income tax expense | $ | 1,350 | | | $ | 1,615 | | | $ | 294 | | | | | | | |
The following table reconciles the year ended December 31, 2018. The increase in income tax expense was primarily driven by increased pretax income. TheCompany’s effective tax rate decreased primarily due to the resolution of certain tax matters. Income tax expense decreased $583 million, or 40.5%, and the effective tax rate decreased 16.9 percentage points for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The decrease in both the effective tax rate and income tax expense was primarily due to a reduction in the U.S. federal statutory income tax rate from 35%rate: | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | U.S. state, local and other income taxes, net of U.S. federal income tax benefits | 3.4 | | | 3.4 | | | 3.4 | | | | | | | | Tax credits | (1.3) | | | (1.2) | | | (4.4) | | Other | 0.4 | | | (0.3) | | | 0.5 | | Effective income tax rate | 23.5 | % | | 22.9 | % | | 20.5 | % | | | | | | |
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to 21%reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. The Company evaluates the likelihood of realizing its deferred tax assets by estimating sources of future taxable income and other impactsthe impact of tax planning strategies.
Significant components of the Tax CutsCompany’s net deferred income taxes, which are included in other assets in the Company’s consolidated statements of financial condition, were as follows (dollars in millions): | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | Deferred tax assets | | | | Allowance for credit losses | $ | 1,791 | | | $ | 1,660 | | | | | | Customer fees and rewards | 166 | | | 45 | | Unrealized losses | 53 | | | — | | Other | 140 | | | 158 | | Total deferred tax assets before valuation allowance | 2,150 | | | 1,863 | | Valuation allowance | (1) | | | (1) | | Total deferred tax assets, net of valuation allowance | 2,149 | | | 1,862 | | Deferred tax liabilities | | | | Depreciation and software amortization | (71) | | | (167) | | Unrealized gains | — | | | (125) | | | | | | Deferred loan origination costs | (48) | | | (35) | | | | | | | | | | Other | (26) | | | (41) | | Total deferred tax liabilities | (145) | | | (368) | | Net deferred tax assets | $ | 2,004 | | | $ | 1,494 | | | | | |
A reconciliation of beginning and Jobs Act of 2017.ending unrecognized tax benefits is as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Balance at beginning of period | $ | 39 | | | $ | 56 | | | $ | 61 | | Additions | | | | | | Current year tax positions | 4 | | | 13 | | | 5 | | Prior year tax positions | 1 | | | 8 | | | 3 | | Reductions | | | | | | Prior year tax positions | (20) | | | (14) | | | — | | Settlements with taxing authorities | — | | | (14) | | | (2) | | Expired statute of limitations | (5) | | | (10) | | | (11) | | | | | | | | | | | | | | Balance at end of period(1) | $ | 19 | | | $ | 39 | | | $ | 56 | | | | | | | |
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. The Company evaluates the likelihood of realizing its deferred tax assets by estimating sources of future taxable income and the impact of tax planning strategies. Significant components of the Company’s net deferred income taxes, which are included in other assets in the consolidated statements of financial condition, were as follows (dollars in millions): | | | | | | | | | | December 31, | | 2019 | | 2018 | Deferred tax assets | | | | Allowance for loan losses | $ | 819 |
| | $ | 730 |
| Compensation and benefits | 65 |
| | 65 |
| Other | 50 |
| | 44 |
| Total deferred tax assets before valuation allowance | 934 |
| | 839 |
| Valuation allowance | (1 | ) | | (1 | ) | Total deferred tax assets, net of valuation allowance | 933 |
| | 838 |
| Deferred tax liabilities | | | | Depreciation and software amortization | (167 | ) | | (137 | ) | Customer fees and rewards | (81 | ) | | (159 | ) | Unrealized gains | (33 | ) | | (8 | ) | Intangibles | (28 | ) | | (26 | ) | Deferred loan origination costs | (28 | ) | | (23 | ) | Debt exchange premium | (26 | ) | | (34 | ) | Other | (19 | ) | | (17 | ) | Total deferred tax liabilities | (382 | ) | | (404 | ) | Net deferred tax assets | $ | 551 |
| | $ | 434 |
| | | | |
(1)A reconciliation of beginning and ending unrecognized tax benefits is as follows (dollars in millions): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Balance at beginning of period | $ | 83 |
| | $ | 123 |
| | $ | 158 |
| Additions | | | | | | Current year tax positions | 4 |
| | 5 |
| | 9 |
| Prior year tax positions | — |
| | 6 |
| | 23 |
| Reductions | | | | | | Prior year tax positions | (22 | ) | | (17 | ) | | (41 | ) | Settlements with taxing authorities | — |
| | (25 | ) | | (25 | ) | Expired statute of limitations | (4 | ) | | (9 | ) | | (1 | ) | Balance at end of period(1) | $ | 61 |
| | $ | 83 |
| | $ | 123 |
| | | | | | |
| | (1) | For the years ended December 31, 2019, 2018 and 2017, amounts included $54For the years ended December 31, 2022, 2021 and 2020, amounts included $18 million, $37 million and $51 million,, $74 million and $105 million, respectively, of unrecognized tax benefits, which, if recognized, would favorably affect the effective tax rate.
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties related to unrecognized tax benefits were $14$2 million and $15$3 million for the years ended December 31, 20192022 and 2018,2021, respectively.
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’s federal income tax filings are open to examinations for the tax year ended December 31, 2019 and forward. The Company regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions resulting from these and subsequent years’ examinations. The years 2011-2015 are currently under review by the IRS Office of Appeals.jurisdictions. 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. The Company has an immaterial amount of state net operating loss carryforwards that are subject to a partial valuation allowance as of December 31, 20192022 and 2018.2021. The following table presents the calculation of basic and diluted earnings per share (in millions, except per share amounts): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Numerator | | | | | | Net income | $ | 2,957 |
| | $ | 2,742 |
| | $ | 2,099 |
| Preferred stock dividends | (31 | ) | | (31 | ) | | (37 | ) | Issuance costs for Series B preferred stock redemption | — |
| | — |
| | (15 | ) | Net income available to common stockholders | 2,926 |
| | 2,711 |
| | 2,047 |
| Income allocated to participating securities | (18 | ) | | (22 | ) | | (16 | ) | Net income allocated to common stockholders | $ | 2,908 |
| | $ | 2,689 |
| | $ | 2,031 |
| | | | | | | Denominator | | | | | | Weighted-average shares of common stock outstanding | 320 |
| | 344 |
| | 374 |
| Effect of dilutive common stock equivalents | — |
| | 1 |
| | — |
| Weighted-average shares of common stock outstanding and common stock equivalents | 320 |
| | 345 |
| | 374 |
| | | | | | | Basic earnings per common share | $ | 9.09 |
| | $ | 7.81 |
| | $ | 5.43 |
| Diluted earnings per common share | $ | 9.08 |
| | $ | 7.79 |
| | $ | 5.42 |
| | | | | | |
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16. Earnings Per Share The following table presents the calculation of basic and diluted EPS (dollars and shares in millions, except per share amounts): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Numerator | | | | | | Net income | $ | 4,392 | | | $ | 5,449 | | | $ | 1,141 | | Preferred stock dividends | (62) | | | (69) | | | (31) | | | | | | | | Net income available to common stockholders | 4,330 | | | 5,380 | | | 1,110 | | Income allocated to participating securities | (26) | | | (29) | | | (6) | | Net income allocated to common stockholders | $ | 4,304 | | | $ | 5,351 | | | $ | 1,104 | | Denominator | | | | | | Weighted-average shares of common stock outstanding | 277 | | | 300 | | | 307 | | Effect of dilutive common stock equivalents | 1 | | | — | | | — | | Weighted-average shares of common stock outstanding and common stock equivalents | 278 | | | 300 | | | 307 | | | | | | | | Basic earnings per common share | $ | 15.52 | | | $ | 17.85 | | | $ | 3.60 | | Diluted earnings per common share | $ | 15.50 | | | $ | 17.83 | | | $ | 3.60 | | | | | | | |
Anti-dilutive securities were not material and had no impact on the computation of diluted EPS for the years ended December 31, 2019, 20182022, 2021 and 2017.2020.
The Company17. Capital Adequacy
DFS is subject to the capital adequacy guidelines of the Federal Reserve, andReserve. 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 limit the Company’s business activities and have a direct material effect on the financial positioncondition and operating results of the CompanyDFS and Discover Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the CompanyDFS and Discover Bank must meet specific risk-based capital guidelinesrequirements and leverage ratios that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidelines. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The CompanyDFS and Discover Bank are subject to regulatory and capital rules issued by the Federal Reserve and FDIC, respectively, under the Basel Committee’s December 2010 framework (“Basel III rules”). The Basel III rules, which became effective for the Company January 2015, were subject to phase-in periods through the end of 2018, based on the Company being classified as a “Standardized Approach” entity. As of January 1, 2019,Under the Basel III rules, subjectDFS and Discover Bank are classified as “standardized approach” entities. Standardized approach entities are defined as U.S. banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposure less than $10 billion.
In March 2020, federal bank regulatory agencies announced an interim and now final rule that allows banks that have implemented the CECL accounting model to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition have all been fullyperiod. For purposes of calculating regulatory capital, the Company has elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, which ended December 31, 2021, the estimated impact of CECL on regulatory capital will be phased in withover three years beginning in 2022. Accordingly, the exception of certain transition provisions that were frozen pursuantCompany’s Common Equity Tier 1 (“CET1”) capital ratios in 2021 and 2020 are higher than they otherwise would have been. The Company's CET1 capital ratios will continue to regulation issued in November 2017. Pursuant to a final rule issued in July 2019,be favorably impacted by this election over the transition provisions that were previously frozen will be replaced with new permanent rules effective in April 2020 with the option to early adopt beginning on January 1, 2020.phase-in period. As of December 31, 2019, the Company2022 and 2021, DFS and Discover Bank met all Basel III minimum capital ratio requirements to which they were subject. The CompanyDFS and Discover Bank also met the requirements to be considered “well-capitalized” under Regulation Y and prompt corrective action regulations, respectively, and thererules, respectively. There have been no conditions or events that management believes have changed the Company’sDFS’ or Discover Bank’s category. To be categorized as “well-capitalized,” the CompanyDFS and Discover Bank must maintain minimum capital ratios as set forthoutlined in the table below.
The following table shows the actual capital amounts and ratios of DFS and Discover Bank and comparisons of each to the regulatory minimum and “well-capitalized” requirements (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Actual | | Minimum Capital Requirements | | Capital Requirements To Be Classified as Well-Capitalized | | Amount | | Ratio(1) | | Amount | | Ratio | | Amount(2) | | Ratio(2) | December 31, 2022 | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 18,250 | | | 16.0 | % | | $ | 9,133 | | | ≥8.0% | | $ | 11,416 | | | ≥10.0% | Discover Bank | $ | 16,579 | | | 14.7 | % | | $ | 9,015 | | | ≥8.0% | | $ | 11,268 | | | ≥10.0% | Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 16,285 | | | 14.3 | % | | $ | 6,850 | | | ≥6.0% | | $ | 6,850 | | | ≥6.0% | Discover Bank | $ | 13,683 | | | 12.1 | % | | $ | 6,761 | | | ≥6.0% | | $ | 9,015 | | | ≥8.0% | Tier 1 capital (to average assets) | | | | | | | | | | | | Discover Financial Services | $ | 16,285 | | | 12.7 | % | | $ | 5,147 | | | ≥4.0% | | N/A | | N/A | Discover Bank | $ | 13,683 | | | 10.8 | % | | $ | 5,086 | | | ≥4.0% | | $ | 6,357 | | | ≥5.0% | Common Equity Tier 1 (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 15,229 | | | 13.3 | % | | $ | 5,137 | | | ≥4.5% | | N/A | | N/A | Discover Bank | $ | 13,683 | | | 12.1 | % | | $ | 5,071 | | | ≥4.5% | | $ | 7,324 | | | ≥6.5% | | | | | | | | | | | | | December 31, 2021 | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 17,150 | | | 17.6 | % | | $ | 7,775 | | | ≥8.0% | | $ | 9,719 | | | ≥10.0% | Discover Bank | $ | 15,957 | | | 16.9 | % | | $ | 7,573 | | | ≥8.0% | | $ | 9,466 | | | ≥10.0% | Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 15,395 | | | 15.8 | % | | $ | 5,831 | | | ≥6.0% | | $ | 5,831 | | | ≥6.0% | Discover Bank | $ | 13,932 | | | 14.7 | % | | $ | 5,680 | | | ≥6.0% | | $ | 7,573 | | | ≥8.0% | Tier 1 capital (to average assets) | | | | | | | | | | | | Discover Financial Services | $ | 15,395 | | | 13.9 | % | | $ | 4,432 | | | ≥4.0% | | N/A | | N/A | Discover Bank | $ | 13,932 | | | 12.8 | % | | $ | 4,365 | | | ≥4.0% | | $ | 5,456 | | | ≥5.0% | Common Equity Tier 1 (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 14,339 | | | 14.8 | % | | $ | 4,373 | | | ≥4.5% | | N/A | | N/A | Discover Bank | $ | 13,932 | | | 14.7 | % | | $ | 4,260 | | | ≥4.5% | | $ | 6,153 | | | ≥6.5% | | | | | | | | | | | | |
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(1) | | Amount | | Ratio | | Amount(2) | | Ratio(2) | December 31, 2019 | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 13,250 |
| | 13.5 | % | | $ | 7,860 |
| | ≥8.0% | | $ | 9,825 |
| | ≥10.0% | Discover Bank | $ | 13,441 |
| | 13.8 | % | | $ | 7,776 |
| | ≥8.0% | | $ | 9,720 |
| | ≥10.0% | Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 11,595 |
| | 11.8 | % | | $ | 5,895 |
| | ≥6.0% | | $ | 5,895 |
| | ≥6.0% | Discover Bank | $ | 11,203 |
| | 11.5 | % | | $ | 5,832 |
| | ≥6.0% | | $ | 7,776 |
| | ≥8.0% | Tier 1 capital (to average assets) | | | | | | | | | | | | Discover Financial Services | $ | 11,595 |
| | 10.3 | % | | $ | 4,482 |
| | ≥4.0% | | N/A |
| | N/A | Discover Bank | $ | 11,203 |
| | 10.1 | % | | $ | 4,435 |
| | ≥4.0% | | $ | 5,544 |
| | ≥5.0% | Common Equity Tier 1 (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 11,032 |
| | 11.2 | % | | $ | 4,421 |
| | ≥4.5% | | N/A |
| | N/A | Discover Bank | $ | 11,203 |
| | 11.5 | % | | $ | 4,374 |
| | ≥4.5% | | $ | 6,318 |
| | ≥6.5% | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 12,532 |
| | 13.5 | % | | $ | 7,450 |
| | ≥8.0% | | $ | 9,312 |
| | ≥10.0% | Discover Bank | $ | 13,106 |
| | 14.2 | % | | $ | 7,372 |
| | ≥8.0% | | $ | 9,215 |
| | ≥10.0% | Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 10,895 |
| | 11.7 | % | | $ | 5,587 |
| | ≥6.0% | | $ | 5,587 |
| | ≥6.0% | Discover Bank | $ | 10,834 |
| | 11.8 | % | | $ | 5,529 |
| | ≥6.0% | | $ | 7,372 |
| | ≥8.0% | Tier 1 capital (to average assets) | | | | | | | | | | | | Discover Financial Services | $ | 10,895 |
| | 10.1 | % | | $ | 4,308 |
| | ≥4.0% | | N/A |
| | N/A | Discover Bank | $ | 10,834 |
| | 10.2 | % | | $ | 4,265 |
| | ≥4.0% | | $ | 5,332 |
| | ≥5.0% | Common Equity Tier 1 (to risk-weighted assets) | | | | | | | | | | | | Discover Financial Services | $ | 10,332 |
| | 11.1 | % | | $ | 4,191 |
| | ≥4.5% | | N/A |
| | N/A | Discover Bank | $ | 10,834 |
| | 11.8 | % | | $ | 4,147 |
| | ≥4.5% | | $ | 5,990 |
| | ≥6.5% | | | | | | | | | | | | |
(1)Capital ratios are calculated based on the Basel III standardized approach rules, subject to applicable transition provisions, including CECL transition provisions. | | (1) | Capital ratios are calculated based on the Basel III Standardized Approach rules, subject to applicable transition provisions. |
| | (2) | The Basel III rules do not establish well-capitalized thresholds for these measures for bank holding companies. Existing well-capitalized thresholds established in the Federal Reserve’s Regulation Y have been included where available. |
(2)The Basel III rules do not establish well-capitalized thresholds for these measures for bank holding companies. Existing well-capitalized thresholds established in the Federal Reserve’s Regulation Y have been included where available. The amount of dividends that a bank may pay in any year is subject to certain regulatory restrictions. Under the current banking regulations, a bank may not pay dividends if such a payment would leave the bank inadequately capitalized. Discover Bank paid dividends of $2.5$4.0 billion, $2.4$3.3 billion and $1.9 billion$555 million in the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively, to the Company.DFS. -119- | | 18. | Commitments, Contingencies and Guarantees |
18. Commitments, Contingencies and Guarantees In the normal course of business, the Company enters into a number of off-balance sheet commitments, transactions and obligations under guarantee arrangements that expose the Company to varying degrees of risk. The Company’s commitments, contingencies and guarantee relationships are described below. Commitments Unused Credit Arrangements At December 31, 2019,2022, the Company had unused credit arrangements for loans of approximately $206.7 billion.$224.7 billion. Such arrangements arise primarily from agreements with customers for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions in the related agreements. These arrangements, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification. As the Company’s credit card loans are unconditionally cancellable, no liability for expected credit losses is required for unused lines of credit. For all other loans, the Company records a liability for expected credit losses for unfunded commitments, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition. Contingencies See Note 19: Litigation and Regulatory Matters for a description of potential liability arising from pending litigation or regulatory proceedings involving the Company. Guarantees The Company has obligations under certain guarantee arrangements, including contracts, indemnification agreements and representations and warranties, which contingently require the Company to make payments to the guaranteed party based on changes in an underlying asset, liability or equity security of a guaranteed party, rate or index. Also included as guarantees are contracts that contingently require the Company to make payments to a guaranteed party based on another entity’s failure to perform under an agreement. The Company’s use of guarantees is disclosed below by type of guarantee. Securitizations Representations and Warranties As part of the Company’s financing activities, the Company provides representations and warranties that certain assets pledged as collateral in secured borrowing arrangements conform to specified guidelines. Due diligence is performed by the Company, which is intended to ensure that asset guideline qualifications are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company may be required to replace, repurchase or sell such assets. In its credit card securitization activities, the Company would replace nonconforming receivables through the allocation of excess seller’s interest or from additional transfers from the unrestricted pool of receivables. If the Company could not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors’ interests would be triggered. 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 private 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 consolidated statements of financial condition. The Company has not recorded any incremental contingent liability associated with its secured borrowing representations and warranties. Management believes that the probability of having to replace, repurchase or sell assets pledged as collateral under secured borrowing arrangements, including an early amortization event, is low.
Counterparty Settlement Guarantees Diners Club and DFS Services LLC (on behalf of PULSE) have various counterparty exposures, which are listed below.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.
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| | • | 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.
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| | • | •Merchant Guarantee. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants. •ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation. •Global Network Alliance Guarantee. Discover Network, Diners Club and PULSE have entered into contractual relationships with certain international payment networks in which DFS Services LLC retains the counterparty exposure if a network fails to fulfill its settlement obligation. |
The maximum potential amount of future payments related to such contingent obligations is dependent upon the transaction volume processed between the time a potential counterparty defaults on its settlement and the time at which the Company disables the settlement of any further transactions for the defaulting party. The Company has some contractual remedies to offset these counterparty settlement exposures (such as letters of credit or pledged deposits), however, there is no limitation on the maximum amount the Company may be liable to pay. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether particular counterparties will fail to meet their settlement obligations. In the event 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 would be approximately $160$90 million as of December 31, 2019.2022. The Company believes that the estimated amounts of maximum potential future payments are not representative of the Company’s actual potential loss exposure given Diners Club’s and PULSE’s insignificant historical losses from these counterparty exposures. As of December 31, 2019,2022, 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 customer’s favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn credits its customer’s account. The Discover Network will then charge back the disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by the applicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect the amount subject to dispute from the merchant or merchant acquirer (e.g., in the event of merchant default or dissolution or after expiration of the time period for chargebacks in the applicable agreement), the Discover Network will bear the loss for the amount credited or refunded to the customer. In most instances, a loss by the Discover Network is unlikely to arise in connection with payments on card transactions because most products or services are delivered when purchased and credits are issued by merchants on returned items in a timely fashion, thus minimizing the likelihood of cardholder disputes with respect to amounts paid by the Discover Network. However, where the product or service is not scheduled to be provided to the customer until a later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases. Losses related to merchant chargebacks were not material for the years ended December 31, 2019, 20182022, 2021 and 2017.2020. The maximum potential amount of obligations of the Discover Network arising as a result offrom such contingent obligations is estimated to be the portion of the total Discover Network transaction volume processed to date for which timely and valid disputes may be raised under applicable law and relevant issuer and customer agreements. There is no limitation on the maximum amount the Company may be liable to pay to issuers. However, the Company believes that such amount is not representative of the Company’s actual potential loss exposure based on the Company’s historical
experience. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes may include or result in disputed transactions. The following table summarizes certain information regarding merchant chargeback guarantees (dollars in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Aggregate sales transaction volume(1) | $ | 256,237 | | | $ | 223,360 | | | $ | 175,026 | | | | | | | |
The following table summarizes certain information regarding merchant chargeback guarantees (in millions): | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | Aggregate sales transaction volume(1) | $ | 172,463 |
| | $ | 158,910 |
| | $ | 143,551 |
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(1) | | (1) | Represents transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume. |
Represents transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume.
The Company did not record any contingent liability in the consolidated financial statements for merchant chargeback guarantees as of December 31, 2019 or 2018.2022 and 2021. The Company mitigates the risk of potential loss exposure by withholding settlement from merchants, obtaining third-party guarantees, or obtaining escrow deposits or letters of credit from certain merchant acquirers or merchants that are considered a higher risk due to various factors such as time delays in the delivery of products or services. As of December 31, 20192022 and 2018,2021, the Company had escrow deposits and settlement withholdings of $8$11 million and $10$15 million, respectively, which are recorded in interest-bearing deposit accounts and accrued expenses and other liabilities on the Company’s consolidated statements of financial condition. | | 19. | Litigation and Regulatory Matters |
19. Litigation and Regulatory Matters In the normal course of business, from time to time, the Company has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The litigation process is not predictable and can lead to unexpected results. The Company contests liability and/or the amount of damages as appropriate in each pending matter. The Company has historically offered its customers an arbitration clause in its customer agreements. The arbitration clause allows the Company and its customers to quickly and economically resolve disputes. Additionally, the arbitration clause has in some instances limited the costs of, and the Company’s exposure to, litigation. Future legal and regulatory challenges and prohibitions may cause the Company to discontinue its offering and use of such clauses. From time to time, the Company is involved in legal actions challenging its arbitration clause. Bills may be periodically introduced in Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses. The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company’s business including, among other matters, consumer regulatory, accounting, tax and other operational matters, some of whichmatters. The investigations and proceedings may result in significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief, whichrelief. These outcomes could materially impact the Company’s consolidated financial statements, increase its cost of operations, or limit itsthe Company’s ability to execute its business strategies and engage in certain business activities. Certain subsidiaries of the Company are subject to a consent order with the Consumer Financial Protection Bureau (the “CFPB”(“CFPB”) regarding certain private student loan servicing practices, as described below. Pursuant to powers granted under federal banking laws, regulatory agencies have broad and sweeping discretion and may assess civil money penalties, require changes to certain business practices or require customer restitution at any time. In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matters present loss contingencies that are both probable and estimable. Litigation and regulatory settlement relatedsettlement-related expense was not material$15 million, $59 million and $31 million for the years ended December 31, 2019, 20182022, 2021 and 2017.2020, respectively. 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 whichlosses 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.$190 million as of December 31, 2022. This estimated range of reasonably possible losses is based uponon currently available information for those proceedings in which the Company is involved takes into accountand considers the Company’s best estimate of such losses for those matters for which an estimate can be made, andmade. It 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 noted above involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years and, in some cases, a wide range of business activities), unspecified damages and/or the novelty of the legal issues presented. The outcome of pending matters could adversely affect the Company’s reputation and be material to the Company’s consolidated financial condition, operating results and cash flows for a particular future period, depending on, among other things, the level of the Company’s income for such period, and could adversely affect the Company’s reputation.period. On February 13, 2020, the Federal Reserve Board announced that the May 26, 2015 written agreement between the Company and the Federal Reserve Bank of Chicago related to the Company’s enterprise-wide anti-money laundering and related compliance programs has been terminated effective February 5, 2020.
OnIn July 22, 2015, the Company announced that its subsidiaries, Discover Bank, SLCThe Student Loan Corporation and Discover Products Inc. (the “Discover Subsidiaries”), agreed to a consent order with the CFPB with respect to certain private student loan servicing practices (the “2015 Order”). The 2015 Order expired in July 2020. In December 2020, the Discover Subsidiaries agreed to a consent order (the “2020 Order”) with the CFPB resolving the agency’s investigation into Discover Bank’s compliance with respect
the 2015 Order. In connection with the 2020 Order, Discover is required to certain student loan servicing practices. The order required the Discover Subsidiaries to provideimplement a redress of approximately $16and compliance plan and must pay at least $10 million in consumer redress 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,harmed and provision of interesthas paid information to consumers, and provide regulatory disclosures with respect to loans acquired in default. In addition, the Discover Subsidiaries were required to pay a $2.5$25 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. The CFPB is currently investigating Discover Bank’s compliance with the order and certain student loan servicing practices. Discover Bank is cooperating with the CFPB in connection with the investigation. Discover Bank is enhancing the compliance plan submitted to the CFPB in 2015. The investigation could lead to a supervisory action, which may result in legal fees, penalties, fines and remediation expenses, and could require Discover Bank to change certain business practices. On March 8, 2016, a class actionclass-action lawsuit was filed against the Company, other credit card networks, other issuing banks and EMVCo in the U.S. District Court for the Northern District of California (B&R Supermarket, Inc., d/b/a Milam’s Market, et al. v. Visa, Inc. et al.) alleging a conspiracy by defendants to shift fraud liability to merchants with the migration to the EMV security standard and chip technology. PlaintiffsThe plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys’ fees, costs and injunctive relief. In May 2017, the Court entered an order transferring the entire action to a federal court in New York that is presiding over certain related claims that are pending in the actions consolidated as MDL 1720. On March 11, 2018,In August 2020, the Court entered an order denyinggranted the plaintiffs’ Motion to Certify a Class. The defendants appealed the ruling, which was denied in January 2021. Expert discovery closed on February 28, 2022. On June 3, 2022, the Court granted Plaintiffs’ Motion to Approve Class Notices. The Company filed its renewed motion to compel arbitration, motion for class certification without prejudicesummary judgment, and Daubert challenges on November 30, 2022, with briefing scheduled to filing a renewed motion. Plaintiffs filed a renewed motion for class certificationclose on July 16, 2018. Defendants filed their Opposition to Class Certification on March 15, 2019; a hearing date is yet to be scheduled.27, 2023. 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, butmatter. However, the Company will seek to defend itself vigorously defend against all claims asserted by the plaintiffs. On September 20, 2019, a putative class action was filed against the Company in the Northern District of Illinois (Bonoan v. Discover Financial Services) alleging violations of the Telephone Consumer Protection Act. The plaintiff alleges the Company placed telephone calls to wrong or reassigned cellular telephone numbers without consent. The plaintiff seeks an injunction, statutory damages, treble damages, reasonable attorney fees, costs and expenses. The case was dismissed on November 8, 2019.
20. Fair Value Measurements
| | 20. | Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820, Fair Value Measurement, provides a three-level hierarchy for classifying the inputs to valuation techniques used to measure fair value of financial instruments 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. •: 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 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 discloseslevel in the fair value hierarchy in which the measurements are classified is based on the lowest level input that is significant to the fair value measurement based onin its entirety. Accordingly, the Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.
The Company evaluates the classification of each fair value immediately precedingmeasurement within the transfer.hierarchy at least quarterly. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and involves consideration of factors specific to the asset or liability. Furthermore, certain techniques used to measure fair value involve some degree of judgment and, as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis are as follows (dollars in millions): | | | | | | | | | | | | | | | | | | Quoted Price in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | Balance at December 31, 2019 | | | | | | | | Assets | | | | | | | | Fair value - OCI | | | | | | | | U.S. Treasury securities | $ | 9,906 |
| | $ | — |
| | $ | — |
| | $ | 9,906 |
| Residential mortgage-backed securities - Agency | — |
| | 417 |
| | — |
| | 417 |
| Available-for-sale investment securities | $ | 9,906 |
| | $ | 417 |
| | $ | — |
| | $ | 10,323 |
| | | | | | | | | Liabilities | | | | | | | | Fair value - OCI | | | | | | | | Derivative financial instruments - cash flow hedges(1) | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
| | | | | | | | | Fair value - Net income | | | | | | | | Derivative financial instruments - fair value hedges(1) | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 4 |
| Derivative financial instruments - foreign exchange forward contracts(1) | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
| | | | | | | | | Balance at December 31, 2018 | | | | | | | | Assets | | | | | | | | Fair value - OCI | | | | | | | | U.S. Treasury securities | $ | 2,586 |
| | $ | — |
| | $ | — |
| | $ | 2,586 |
| Residential mortgage-backed securities - Agency | — |
| | 547 |
| | — |
| | 547 |
| Available-for-sale investment securities | $ | 2,586 |
| | $ | 547 |
| | $ | — |
| | $ | 3,133 |
| | | | | | | | | Derivative financial instruments - cash flow hedges(1) | $ | — |
| | $ | 8 |
| | $ | — |
| | $ | 8 |
| | | | | | | | | Fair value - Net income | | | | | | | | Derivative financial instruments - fair value hedges(1) | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
| | | | | | | | | Liabilities | | | | | | | | Fair value - OCI | | | | | | | | Derivative financial instruments - cash flow hedges(1) | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
| | | | | | | | |
| | (1) | Derivative instrument carrying values in an asset or liability position are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company’s consolidated statements of financial condition. |
There were 0 transfers between Levels 1Assets and 2 within theliabilities measured at fair value hierarchy foron a recurring basis are as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | Quoted Price in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | Balance at December 31, 2022 | | | | | | | | Assets | | | | | | | | Fair value - OCI | | | | | | | | U.S. Treasury and U.S. GSE securities | $ | 11,416 | | | $ | 7 | | | $ | — | | | $ | 11,423 | | Residential mortgage-backed securities - Agency | — | | | 564 | | | — | | | 564 | | Available-for-sale investment securities | $ | 11,416 | | | $ | 571 | | | $ | — | | | $ | 11,987 | | | | | | | | | | Derivative financial instruments - cash flow hedges(1) | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | | | | | | | | | | Fair value - Net income | | | | | | | | Marketable equity securities | $ | 41 | | | $ | — | | | $ | — | | | $ | 41 | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | Fair value - OCI | | | | | | | | Derivative financial instruments - cash flow hedges(1) | $ | — | | | $ | 3 | | | $ | — | | | $ | 3 | | | | | | | | | | Fair value - Net income | | | | | | | | Derivative financial instruments - fair value hedges(1) | $ | — | | | $ | 2 | | | $ | — | | | $ | 2 | | | | | | | | | | | | | | | | | | Balance at December 31, 2021 | | | | | | | | Assets | | | | | | | | Fair value - OCI | | | | | | | | U.S. Treasury and U.S. GSE securities | $ | 6,505 | | | $ | 9 | | | $ | — | | | $ | 6,514 | | Residential mortgage-backed securities - Agency | — | | | 186 | | | — | | | 186 | | Available-for-sale investment securities | $ | 6,505 | | | $ | 195 | | | $ | — | | | $ | 6,700 | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value - Net income | | | | | | | | Marketable equity securities | $ | 461 | | | $ | — | | | $ | — | | | $ | 461 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1)Derivative instrument carrying values in an asset or liability position are presented as part of other assets or accrued expenses and other liabilities, respectively, in the years ended December 31, 2019 and 2018. Company’s consolidated statements of financial condition.
Available-for-Sale Investment Securities Investment securities classified as available-for-sale consist of U.S. Treasury and U.S. GSE securities and residential mortgage-backed securities.RMBS. The fair value estimates of investment securities classified as Level 1, consisting of U.S. Treasury securities, are determined based on quoted market prices for the same securities. The Company classifies residential mortgage-backed securities as Level 2, the fair value estimates of whichU.S. GSE securities and RMBS are based onclassified as Level 2 and are valued by maximizing the best information available. This data may consistuse of observed marketrelevant observable inputs, including quoted prices broker quotes or discounted cash flow models that incorporate assumptions such asfor similar securities, benchmark yields, issuer spreads, prepayment speeds, credit ratingsyield curves and losses, the priority of which may vary based on availability of information.market-corroborated inputs. The Company validates the fair value estimates provided by pricing services primarily by comparisoncomparing to valuations obtained through other pricing sources. The Company evaluates pricing variances amongstamong 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 December 31, 2019,2022, amounts reported in residential mortgage-backed securitiesRMBS reflect government-ratedU.S. government agency and U.S. GSE obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac and Ginnie Mae with aan aggregate par value of $408$586 million,, a weighted-average coupon of 2.81%4.05% and a weighted-average remaining maturity of three years.four years. Marketable Equity Securities The Company holds non-controlling equity positions in payment service entities that have actively traded stock and therefore have readily determinable fair values. The Company classifies these equity securities as Level 1, the fair value estimates of which are determined based on quoted share prices for the same securities. 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 by comparing the contracted forward exchange rate pertaining to the specific contract maturities to the current market exchange rate. The Company validates the fair value estimates of interest rate swaps primarily through comparison to the fair value estimates computed by the counterparties to each of the derivative transactions. The Company evaluates pricing variances amongstamong 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 toof any changes to the valuation techniques performed by proprietary pricing models prior tobefore implementation, working closely with the third-party valuation service and reviewsreviewing the service’s 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. In October 2020, the Company revised its valuation methodology to reflect changes made by central clearinghouses that changed the discounting methodology and interest calculation of cash variation margin from Federal Funds Overnight Index Swap (“OIS”) to SOFR OIS for U.S. Dollar cleared interest rate swaps. The Company’s revised valuation methodology results in valuations for cleared interest rate swaps that better reflect cleared swap prices obtainable in the markets in which the Company transacts. Pursuant to ASC Topic 848, the Company has elected and applied certain optional expedients and exceptions that provide contract modification and hedge accounting relief to eligible interest rate swaps affected by the change in the discounting methodology. The changes in valuation methodology are applied prospectively as a change in accounting estimate and are immaterial to the Company’s financial statements. 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.goodwill. For these assets, measurement at fair value in periods subsequent to the initial recognition of the assets may be applicable whenever one is applicable if one or more oftested for impairment. No impairments were recognized related to these assets for the assets is determined to be impaired.year ended December 31, 2022. The Company had no materialrecognized $95 million of impairments related to these assets duringfor the yearsyear ended December 31, 2019 and 2018.2021.
Financial Instruments Measured at Other Than Fair ValueThe following tables disclose the estimated fair value of the Company’s financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions): | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Carrying Value | Assets | | | | | | | | | | Amortized cost | | | | | | | | | | Residential mortgage-backed securities - Agency | $ | — |
| | $ | 274 |
| | $ | — |
| | $ | 274 |
| | $ | 272 |
| Held-to-maturity investment securities | $ | — |
| | $ | 274 |
| | $ | — |
| | $ | 274 |
| | $ | 272 |
| | | | | | | | | | | Net loan receivables | $ | — |
| | $ | — |
| | $ | 96,094 |
| | $ | 96,094 |
| | $ | 92,511 |
| | | | | | | | | | | Carrying value approximates fair value(1) | | | | | | | | | | Cash and cash equivalents | $ | 6,924 |
| | $ | — |
| | $ | — |
| | $ | 6,924 |
| | $ | 6,924 |
| Restricted cash | $ | 40 |
| | $ | — |
| | $ | — |
| | $ | 40 |
| | $ | 40 |
| Accrued interest receivables(2) | $ | — |
| | $ | 1,044 |
| | $ | — |
| | $ | 1,044 |
| | $ | 1,044 |
| | | | | | | | | | | Liabilities | | | | | | | | | | Amortized cost | | | | | | | | | | Time deposits(3) | $ | — |
| | $ | 34,910 |
| | $ | — |
| | $ | 34,910 |
| | $ | 34,381 |
| | | | | | | | | | | Long-term borrowings - owed to securitization investors | $ | — |
| | $ | 14,211 |
| | $ | 172 |
| | $ | 14,383 |
| | $ | 14,284 |
| Other long-term borrowings | — |
| | 12,189 |
| | — |
| | 12,189 |
| | 11,417 |
| Long-term borrowings | $ | — |
| | $ | 26,400 |
| | $ | 172 |
| | $ | 26,572 |
| | $ | 25,701 |
| | | | | | | | | | | Carrying value approximates fair value(1) | | | | | | | | | | Accrued interest payables(2) | $ | — |
| | $ | 283 |
| | $ | — |
| | $ | 283 |
| | $ | 283 |
| | | | | | | | | | | (1) The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year). | (2) Accrued interest receivable and payable carrying values are presented as part of other assets or accrued expenses and other liabilities, respectively, in the | Company’s consolidated statements of financial condition. | (3) Excludes deposits without contractually defined maturities for all periods presented. | | | | | | | | | | |
The following tables disclose the estimated fair value of the Company’s financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Carrying Value | Assets | | | | | | | | | | Amortized cost | | | | | | | | | | Residential mortgage-backed securities - Agency | $ | — | | | $ | 199 | | | $ | — | | | $ | 199 | | | $ | 221 | | Held-to-maturity investment securities | $ | — | | | $ | 199 | | | $ | — | | | $ | 199 | | | $ | 221 | | | | | | | | | | | | Net loan receivables | $ | — | | | $ | — | | | $ | 110,796 | | | $ | 110,796 | | | $ | 104,746 | | | | | | | | | | | | Carrying value approximates fair value(1) | | | | | | | | | | Cash and cash equivalents | $ | 8,856 | | | $ | — | | | $ | — | | | $ | 8,856 | | | $ | 8,856 | | Restricted cash | $ | 41 | | | $ | — | | | $ | — | | | $ | 41 | | | $ | 41 | | | | | | | | | | | | Accrued interest receivables(2) | $ | — | | | $ | 1,211 | | | $ | — | | | $ | 1,211 | | | $ | 1,211 | | | | | | | | | | | | Liabilities | | | | | | | | | | Amortized cost | | | | | | | | | | Time deposits(3) | $ | — | | | $ | 32,710 | | | $ | — | | | $ | 32,710 | | | $ | 33,070 | | | | | | | | | | | | | | | | | | | | | | Long-term borrowings - owed to securitization investors | $ | — | | | $ | 9,862 | | | $ | 84 | | | $ | 9,946 | | | $ | 10,259 | | Other long-term borrowings | — | | | 9,468 | | | — | | | 9,468 | | | 9,849 | | Long-term borrowings | $ | — | | | $ | 19,330 | | | $ | 84 | | | $ | 19,414 | | | $ | 20,108 | | | | | | | | | | | | Carrying value approximates fair value(1) | | | | | | | | | | Accrued interest payables(2) | $ | — | | | $ | 308 | | | $ | — | | | $ | 308 | | | $ | 308 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following tables disclose the estimated fair value of the Company’s financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions): | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2018 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Carrying Value | Assets | | | | | | | | | | Amortized cost | | | | | | | | | | Residential mortgage-backed securities - Agency | $ | — |
| | $ | 233 |
| | $ | — |
| | $ | 233 |
| | $ | 237 |
| Held-to-maturity investment securities | $ | — |
| | $ | 233 |
| | $ | — |
| | $ | 233 |
| | $ | 237 |
| | | | | | | | | | | Net loan receivables | $ | — |
| | $ | — |
| | $ | 90,787 |
| | $ | 90,787 |
| | $ | 87,471 |
| | | | | | | | | | | Carrying value approximates fair value(1) | | | | | | | | | | Cash and cash equivalents | $ | 13,299 |
| | $ | — |
| | $ | — |
| | $ | 13,299 |
| | $ | 13,299 |
| Restricted cash | $ | 1,846 |
| | $ | — |
| | $ | — |
| | $ | 1,846 |
| | $ | 1,846 |
| Accrued interest receivables(2) | $ | — |
| | $ | 951 |
| | $ | — |
| | $ | 951 |
| | $ | 951 |
| | | | | | | | | | | Liabilities | | | | | | | | | | Amortized cost | | | | | | | | | | Time deposits(3) | $ | — |
| | $ | 34,635 |
| | $ | — |
| | $ | 34,635 |
| | $ | 34,788 |
| | | | | | | | | | | Long-term borrowings - owed to securitization investors | $ | — |
| | $ | 16,701 |
| | $ | 217 |
| | $ | 16,918 |
| | $ | 16,917 |
| Other long-term borrowings | — |
| | 10,325 |
| | — |
| | 10,325 |
| | 10,311 |
| Long-term borrowings | $ | — |
| | $ | 27,026 |
| | $ | 217 |
| | $ | 27,243 |
| | $ | 27,228 |
| | | | | | | | | | | Carrying value approximates fair value(1) | | | | | | | | | | Accrued interest payables(2) | $ | — |
| | $ | 292 |
| | $ | — |
| | $ | 292 |
| | $ | 292 |
| | | | | | | | | | |
-126-
| | (1) | The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year). |
| | (2) | Accrued interest receivable and payable carrying values are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company’s consolidated statements of financial condition. |
| | (3) | Excludes deposits without contractually defined maturities for all periods presented. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Carrying Value | Assets | | | | | | | | | | Amortized cost | | | | | | | | | | Residential mortgage-backed securities - Agency | $ | — | | | $ | 206 | | | $ | — | | | $ | 206 | | | $ | 204 | | Held-to-maturity investment securities | $ | — | | | $ | 206 | | | $ | — | | | $ | 206 | | | $ | 204 | | | | | | | | | | | | Net loan receivables | $ | — | | | $ | — | | | $ | 94,176 | | | $ | 94,176 | | | $ | 86,862 | | | | | | | | | | | | Carrying value approximates fair value(1) | | | | | | | | | | Cash and cash equivalents | $ | 8,750 | | | $ | — | | | $ | — | | | $ | 8,750 | | | $ | 8,750 | | Restricted cash | $ | 2,582 | | | $ | — | | | $ | — | | | $ | 2,582 | | | $ | 2,582 | | | | | | | | | | | | Accrued interest receivables(2) | $ | — | | | $ | 948 | | | $ | — | | | $ | 948 | | | $ | 948 | | | | | | | | | | | | Liabilities | | | | | | | | | | Amortized cost | | | | | | | | | | Time deposits(3) | $ | — | | | $ | 21,490 | | | $ | — | | | $ | 21,490 | | | $ | 21,125 | | Short-term borrowings | $ | — | | | $ | 1,750 | | | $ | — | | | $ | 1,750 | | | $ | 1,750 | | | | | | | | | | | | Long-term borrowings - owed to securitization investors | $ | — | | | $ | 8,953 | | | $ | 104 | | | $ | 9,057 | | | $ | 9,039 | | Other long-term borrowings | — | | | 10,013 | | | — | | | 10,013 | | | 9,438 | | Long-term borrowings | $ | — | | | $ | 18,966 | | | $ | 104 | | | $ | 19,070 | | | $ | 18,477 | | | | | | | | | | | | Carrying value approximates fair value(1) | | | | | | | | | | Accrued interest payables(2) | $ | — | | | $ | 184 | | | $ | — | | | $ | 184 | | | $ | 184 | | | | | | | | | | | |
| | 21. | Derivatives and Hedging Activities |
(1) The carrying values of these assets and liabilities approximate fair value due to their short-term nature. (2) Accrued interest receivable and payable carrying values are presented as part of other assets and accrued expenses and other liabilities, respectively, in the Company’s consolidated statements of financial condition. (3) Excludes deposits without contractually defined maturities for all periods presented. 21. Derivatives and Hedging Activities The Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or speculative purposes. Certain derivatives used to manage the Company’s exposure to foreign currency are not designated as hedges and do not qualify for hedge accounting. Derivatives may give rise to counterparty credit risk, which generally is addressedmitigated 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 tobefore engaging in any transaction with the Company. Counterparties are monitored on a regular basis by theThe Company regularly monitors counterparties to ensure compliance with the Company’s risk policies and limits. In determining the counterparty credit risk valuation adjustment for the fair values of derivatives, if any, the Company considers collateral and legally enforceable master netting agreements that mitigate credit exposure to related counterparties. All derivatives are recorded in other assets at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values. See Note 20: Fair Value Measurements for a description of the valuation methodologies ofused for derivatives. Cash collateral amounts associated with derivative positions that are cleared through an exchange are legally characterized as settlement of the derivative positions. Such collateral amounts are reflected as
offsets to the associated derivatives balances recorded in other assets or in accrued expenses and other liabilities. Other cash collateral posted and held balances are recorded in other assets and deposits, respectively, in the
consolidated statements of financial condition. Collateral amounts recorded in the consolidated statements of financial condition are based on the net collateral posted or held position for each applicable legal entity’s master netting arrangement with each counterparty. Derivatives Designated as Hedges Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows arising from changes in interest rates, or other types of forecasted transactions, are considered cash flow hedges. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Cash Flow Hedges The Company uses interest rate swaps to manage its exposure to variability in cash flows related to changes in interest rates related to future cash flows resulting fromon interest-earning assets and funding instruments. These interest payments on credit card securitized debt and deposits. The Company’s outstanding cash flow hedges are for an initial maximum period of seven years for deposits. The derivatives are designated as hedges of the risk of changes in cash flows on the Company’s Federal Funds rate-based interest payments, andrate swaps qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). At December 31, 2022 and 2021, the Company’s outstanding cash flow hedges primarily relate to interest receipts from credit card receivables and had an initial maximum period of three years and two years, respectively. The change in the fair value of derivatives designated as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows affect earnings. Amounts reported in AOCI related to derivatives at December 31, 20192022, will be reclassified to interest income and interest expense as interest receipts and payments are accrued on certain of the Company’s then outstanding credit card receivables and certain floating-rate securitized debt, and deposits.respectively. During the next 12 months, the Company estimates it will reclassify $5$32 million ofinto pretax expense to interest expenseearnings related to its derivatives designated as cash flow hedges. Fair Value Hedges The Company is exposed to changes in the fair value of its fixed-rate debt obligations due to changes in interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value of certain fixed-rate long-term borrowings, including securitized debt and bank notes, attributable to changes in LIBOR or OIS rate,the respective benchmark interest rates as defined by ASC 815.rates. These interest rate swaps qualify as fair value hedges in accordance with ASC 815. Changes in both (i) the fair values of both (i) the derivatives and (ii) the hedged long-term borrowings and deposits relatingattributable to the interest rate risk being hedged are recorded in interest expense. The changes generally provide substantial offset to one another, with any difference recognized in interest expense. Derivatives Not Designated as Hedges Foreign Exchange Forward Contracts The Company has foreign exchange forward contracts that are economic hedges and are not designated as accounting hedges. The Company enters into foreign exchange forward contracts to manage foreign currency risk. Changes in the fair value of these contracts are recorded in other income on the consolidated statements of income. Derivatives Cleared Through an Exchange The legal characterization of cashCash variation margin payments on derivatives cleared through an exchange are legally considered settlement payments and are accounted for with corresponding derivative positions as one unit of account and not presented separately as collateral. With settlement payments on derivative positions cleared through this exchange reflected as offsets to the associated derivative asset and liability balances, the fair values of derivative instruments and collateral balances shown are generally reduced.
Derivatives Activity The following table summarizes the fair value (including accrued interest) and outstanding notional amounts of derivative instruments and related collateral balances (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | | Notional Amount | | Number of Outstanding Derivative Contracts | | Derivative Assets | | Derivative Liabilities | | Notional Amount | | Derivative Assets(1) | | Derivative Liabilities(1) | Derivatives designated as hedges | | | | | | | | | | | | | | Interest rate swaps — cash flow hedge | $ | 5,000 | | | 9 | | | $ | 1 | | | $ | 3 | | | $ | 250 | | | $ | — | | | $ | — | | Interest rate swaps — fair value hedge | $ | 4,425 | | | 5 | | | — | | | 2 | | | $ | 6,125 | | | — | | | — | | Derivatives not designated as hedges | | | | | | | | | | | | | | Foreign exchange forward contracts(2) | $ | 25 | | | 7 | | | — | | | — | | | $ | 36 | | | — | | | — | | Total gross derivative assets/liabilities(3) | | | | | 1 | | | 5 | | | | | — | | | — | | | | | | | | | | | | | | | | Less: collateral held/posted(4) | | | | | — | | | (5) | | | | | — | | | — | | Total net derivative assets/liabilities | | | | | $ | 1 | | | $ | — | | | | | $ | — | | | $ | — | | | | | | | | | | | | | | | |
The following table summarizes the fair value (including accrued interest) and outstanding notional amounts of derivative instruments and related collateral balances (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | 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 | $ | 900 |
| | 3 |
| | $ | — |
| | $ | 2 |
| | $ | 2,450 |
| | $ | 8 |
| | $ | 2 |
| Interest rate swaps—fair value hedge | $ | 14,275 |
| | 18 |
| | — |
| | 4 |
| | $ | 8,000 |
| | 5 |
| | — |
| Derivatives not designated as hedges | | | | | | | | | | | | | | Foreign exchange forward contracts(1) | $ | 38 |
| | 7 |
| | — |
| | 1 |
| | $ | 33 |
| | — |
| | — |
| Total gross derivative assets/liabilities(2) | | | | | — |
| | 7 |
| | | | 13 |
| | 2 |
| | | | | | | | | | | | | | | Less: collateral held/posted(3) | | | | | — |
| | (7 | ) | | | | (8 | ) | | (2 | ) | Total net derivative assets/liabilities | | | | | $ | — |
| | $ | — |
| | | | $ | 5 |
| | $ | — |
| | | | | | | | | | | | | | |
(1) | | (1) | The foreign exchange forward contracts have notional amounts of EUR 9 million, GBP 14 million, SGD 1 million and INR 596 million as of December 31, 2019 and notional amounts of EUR 9 million, GBP 12 million, SGD 1 million and INR 464 million as of December 31, 2018.
|
| | (2) | 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 December 31, 2019, the Company had 2 outstanding contracts with a total notional amount of $42 million and immaterial fair value. At December 31, 2018, the Company had 1 outstanding contract with a notional amount of $79 million and immaterial fair value.
|
| | (3) | 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. |
The following amounts were recorded on the statements of financial condition related to cumulative basis adjustment for fair value hedges (dollars in millions): | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | Carrying Amount of Hedged Assets/Liabilities | | Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities | | Carrying Amount of Hedged Assets/Liabilities | | Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities | Long-term borrowings | $ | 14,244 |
| | $ | 13 |
| | $ | 7,893 |
| | $ | (91 | ) | | | | | | | | |
The gross and net derivative assets and liabilities were immaterial as of December 31, 2021. (2)The foreign exchange forward contracts have notional amounts of EUR 6 million, GBP 6 million, SGD 1 million, INR 788 million and AUD 2 million as of December 31, 2022, and notional amounts of EUR 6 million, GBP 6 million, SGD 1 million, INR 788 million and AUD 14 million as of December 31, 2021.
(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 December 31, 2022, the Company had one outstanding contract with a total notional amount of $48 million and an immaterial fair value. At December 31, 2021, the Company had one outstanding contract with a total notional amount of $50 million and an immaterial fair value. (4)Collateral amounts, which consist of cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged. The following amounts were recorded on the statements of financial condition related to cumulative basis adjustments for fair value hedges (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | | Carrying Amount of Hedged Liabilities | | Cumulative Amount of Fair Value Hedging Adjustment (Decreasing) the Carrying Amount of Hedged Liabilities(1) | | Carrying Amount of Hedged Liabilities | | Cumulative Amount of Fair Value Hedging Adjustment Increasing the Carrying Amount of Hedged Liabilities(1) | Long-term borrowings | $ | 4,386 | | | $ | (3) | | | $ | 6,158 | | | $ | 83 | | | | | | | | | |
(1)The balance includes $28 million and $48 million of cumulative hedging adjustments related to discontinued hedging relationships as of December 31, 2022 and 2021, respectively. The following table summarizes the impact of the derivative instruments on income and indicates where within the consolidated financial statements such impact is reported (dollars in millions): | | | | | | | | | | | | | | Location and Amount of (Losses) Gains Recognized in Income | | Interest (Expense) | | | | Deposits | | Long-Term Borrowings | | Other Income | For the Year Ended December 31, 2019 | | | | | | Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (1,587 | ) | | $ | (943 | ) | | $ | 90 |
| | | | | | | The effects of cash flow and fair value hedging | | | | | | Gains on cash flow hedging relationship | | | | | | Amounts reclassified from OCI into earnings | $ | 3 |
| | $ | 2 |
| | $ | — |
| | | | | | | Gains (losses) on fair value hedging relationship | | | | | | Gains (losses) on hedged items | $ | — |
| | $ | (104 | ) | | $ | — |
| Gains on interest rate swaps | — |
| | 72 |
| | — |
| Total gains (losses) on fair value hedges | $ | — |
| | $ | (32 | ) | | $ | — |
| | | | | | | The effects of derivatives not designated in hedging relationships | | | | | | Gains (losses) on derivatives not designated as hedges | $ | — |
| | $ | — |
| | $ | (1 | ) | | | | | | | For the Year Ended December 31, 2018 | | | | | | Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (1,238 | ) | | $ | (901 | ) | | $ | 97 |
| | | | | | | The effects of cash flow and fair value hedging | | | | | | Gains on cash flow hedging relationship | | | | | | Amounts reclassified from OCI into earnings | $ | — |
| | $ | 6 |
| | $ | — |
| | | | | | | Gains (losses) on fair value hedging relationship | | | | | | Gains (losses) on hedged items | $ | — |
| | $ | (18 | ) | | $ | — |
| Gains (losses) on interest rate swaps | — |
| | (23 | ) | | — |
| Total gains (losses) on fair value hedges | $ | — |
| | $ | (41 | ) | | $ | — |
| | | | | | | The effects of derivatives not designated in hedging relationships | | | | | | Gains on derivatives not designated as hedges | $ | — |
| | $ | — |
| | $ | 1 |
| | | | | | | | | | | | |
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The following table summarizes the impact of the derivative instruments on income and indicates where within the consolidated financial statements such impact is reported (dollars in millions): | | | | | | | | | | | | | | Location and Amount of (Losses) Gains Recognized in Income | | Interest (Expense) | | | | Deposits | | Long-Term Borrowings | | Other Income | For the Year Ended December 31, 2017 | | | | | | Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (846 | ) | | $ | (802 | ) | | $ | 92 |
| | | | | | | The effects of cash flow and fair value hedging | | | | | | (Losses) gains on cash flow hedging relationship | | | | | | Amounts reclassified from OCI into earnings | $ | (8 | ) | | $ | (7 | ) | | $ | — |
| | | | | | | Gains (losses) on fair value hedging relationship | | | | | | Gains on hedged items | $ | — |
| | $ | 37 |
| | $ | — |
| (Losses) gains on interest rate swaps | (1 | ) | | (28 | ) | | — |
| Total (losses) gains on fair value hedges | $ | (1 | ) | | $ | 9 |
| | $ | — |
| | | | | | | The effects of derivatives not designated in hedging relationships | | | | | | Gains (losses) on derivatives not designated as hedges | $ | — |
| | $ | — |
| | $ | (2 | ) | | | | | | |
The following table summarizes the impact of the derivative instruments on income and indicates where within the consolidated financial statements such impact is reported (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | Location and Amount of (Losses) Gains Recognized on the Consolidated Statements of Income | | Interest Expense | | | | Other Income | | Deposits | | Long-Term Borrowings | | Interest Income (Credit Card) | | For the Year Ended December 31, 2022 | | | | | | | | Total amounts of income and expense line items presented in the consolidated statements of income, where the effects of fair value or cash flow hedges are recorded | $ | (1,257) | | | $ | (606) | | | $ | 10,632 | | | $ | 75 | | | | | | | | | | The effects of cash flow and fair value hedging | | | | | | | | Gains (Losses) on cash flow hedging relationships | | | | | | | | Amounts reclassified from OCI into earnings | $ | — | | | $ | (2) | | | $ | (2) | | | $ | — | | | | | | | | | | Gains (losses) on fair value hedging relationships | | | | | | | | Gains on hedged items | $ | — | | | $ | 66 | | | $ | — | | | $ | — | | Gains (losses) on interest rate swaps | — | | | (70) | | | — | | | — | | Total gains (losses) on fair value hedging relationships | $ | — | | | $ | (4) | | | $ | — | | | $ | — | | | | | | | | | | The effects of derivatives not designated in hedging relationships | | | | | | | | Gains on derivatives not designated as hedges | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | | | | | | | | For the Year Ended December 31, 2021 | | | | | | | | Total amounts of income and expense line items presented in the consolidated statements of income, where the effects of fair value or cash flow hedges are recorded | $ | (661) | | | $ | (473) | | | $ | 8,717 | | | $ | 66 | | | | | | | | | | The effects of cash flow and fair value hedging | | | | | | | | Gains (losses) on cash flow hedging relationships | | | | | | | | Amounts reclassified from OCI into earnings | $ | — | | | $ | (3) | | | $ | — | | | $ | — | | | | | | | | | | Gains (losses) on fair value hedging relationships | | | | | | | | Gains on hedged items | $ | — | | | $ | 246 | | | $ | — | | | $ | — | | Gains (losses) on interest rate swaps | — | | | (93) | | | — | | | — | | Total gains on fair value hedging relationships | $ | — | | | $ | 153 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2020 | | | | | | | | Total amounts of income and expense line items presented in the consolidated statements of income, where the effects of fair value or cash flow hedges are recorded | $ | (1,231) | | | $ | (602) | | | $ | 8,985 | | | $ | 56 | | | | | | | | | | The effects of cash flow and fair value hedging | | | | | | | | (Losses) gains on cash flow hedging relationships | | | | | | | | Amounts reclassified from OCI into earnings | $ | (9) | | | $ | (3) | | | $ | — | | | $ | — | | | | | | | | | | Gains (losses) on fair value hedging relationships | | | | | | | | Gains (losses) on hedged items | $ | — | | | $ | (268) | | | $ | — | | | $ | — | | Gains on interest rate swaps | — | | | 423 | | | — | | | — | | Total gains on fair value hedging relationships | $ | — | | | $ | 155 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the impact of the derivative instruments on OCI, see Note 13: Accumulated Other Comprehensive Income.
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 thesethe 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. These collateral receivable or payable amounts are generally not offset against the fair value of these derivatives but are recorded separately in other assets or deposits. Most of the Company’s cash collateral amounts relate to positions cleared through an exchange and are reflected as offsets to the associated derivatives balances recorded in other assets and accrued expenses and other liabilities. At December 31, 2019, Discover Bank’s credit rating met specified thresholds set by its counterparties. However, if its credit rating is reduced below investment grade, Discover Bank would be required to post additional collateral. The amount of additional collateral as of December 31, 2019 would have been $20 million. DFS (Parent Company) had no outstanding derivatives as of December 31, 2019, and therefore, no collateral was required.
The Company also has agreements with certain of its derivative counterparties that contain a provision whereunder which the Company could be declared in default on any of its derivative obligations if the Company defaults on any of its indebtedness, including default where the lender has not accelerated repayment of the indebtedness has not been accelerated by the lender, then theindebtedness. 22. Segment Disclosures The Company could also be declared in default onmanages its derivative obligations.
The Company’s business activities are managed in 2two segments: DirectDigital Banking and Payment Services.
•Digital Banking: The Digital Banking segment includes Discover-branded credit cards issued to individuals on the Discover Network and other consumer products and services, including private student loans, personal loans, home loans and other consumer lending and deposit products. The majority of Digital Banking revenues relate to interest income earned on the segment’s loan products. Additionally, the Company’s credit card products generate substantially all revenues related to discount and interchange, protection products and loan fee income. | | • | 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 makerdecision-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 DirectDigital Banking segment. •Through its operation of the Discover Network, the DirectDigital Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments, with the exception ofexcept for an allocation of direct and incremental costs driven by the Company’s Payment Services segment. •The Company’s assets of the Company are not allocated among the operating segments in the information reviewed by the Company’s chief operating decision maker.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.
The following table presents segment data (dollars in millions): | | | | | | | | | | | | | | Direct Banking | | Payment Services | | Total | For the Year Ended December 31, 2019 | | | | | | Interest income | | | | | | Credit card loans | $ | 9,690 |
| | $ | — |
| | $ | 9,690 |
| Private student loans | 698 |
| | — |
| | 698 |
| PCI student loans | 119 |
| | — |
| | 119 |
| Personal loans | 983 |
| | — |
| | 983 |
| Other | 502 |
| | 1 |
| | 503 |
| Total interest income | 11,992 |
| | 1 |
| | 11,993 |
| Interest expense | 2,530 |
| | — |
| | 2,530 |
| Net interest income | 9,462 |
| | 1 |
| | 9,463 |
| Provision for loan losses | 3,233 |
| | (2 | ) | | 3,231 |
| Other income | 1,648 |
| | 348 |
| | 1,996 |
| Other expense | 4,231 |
| | 162 |
| | 4,393 |
| Income before income tax expense | $ | 3,646 |
| | $ | 189 |
| | $ | 3,835 |
| | | | | | | For the Year Ended December 31, 2018 | | | | | | Interest income | | | | | | Credit card loans | $ | 8,835 |
| | $ | — |
| | $ | 8,835 |
| Private student loans | 614 |
| | — |
| | 614 |
| PCI student loans | 139 |
| | — |
| | 139 |
| Personal loans | 935 |
| | — |
| | 935 |
| Other | 369 |
| | 1 |
| | 370 |
| Total interest income | 10,892 |
| | 1 |
| | 10,893 |
| Interest expense | 2,139 |
| | — |
| | 2,139 |
| Net interest income | 8,753 |
| | 1 |
| | 8,754 |
| Provision for loan losses | 3,035 |
| | — |
| | 3,035 |
| Other income | 1,645 |
| | 310 |
| | 1,955 |
| Other expense | 3,918 |
| | 159 |
| | 4,077 |
| Income before income tax expense | $ | 3,445 |
| | $ | 152 |
| | $ | 3,597 |
| | | | | | | | | | | | |
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The following table presents segment data (dollars in millions): | | | | | | | | | | | | | | | | | | | Digital Banking | | Payment Services | | Total | For the Year Ended December 31, 2022 | | | | | | Interest income | | | | | | Credit card loans | $ | 10,632 | | | $ | — | | | $ | 10,632 | | Private student loans | 831 | | | — | | | 831 | | Personal loans | 872 | | | — | | | 872 | | Other loans | 167 | | | — | | | 167 | | Other interest income | 362 | | | — | | | 362 | | Total interest income | 12,864 | | | — | | | 12,864 | | Interest expense | 1,865 | | | — | | | 1,865 | | Net interest income | 10,999 | | | — | | | 10,999 | | Provision for credit losses | 2,359 | | | — | | | 2,359 | | Other income | 2,162 | | | 176 | | | 2,338 | | Other expense | 5,069 | | | 167 | | | 5,236 | | Income before income taxes | $ | 5,733 | | | $ | 9 | | | $ | 5,742 | | | | | | | | For the Year Ended December 31, 2021 | | | | | | Interest income | | | | | | Credit card loans | $ | 8,717 | | | $ | — | | | $ | 8,717 | | Private student loans | 742 | | | — | | | 742 | | Personal loans | 878 | | | — | | | 878 | | Other loans | 114 | | | — | | | 114 | | Other interest income | 200 | | | — | | | 200 | | Total interest income | 10,651 | | | — | | | 10,651 | | Interest expense | 1,134 | | | — | | | 1,134 | | Net interest income | 9,517 | | | — | | | 9,517 | | Provision for credit losses | 218 | | | — | | | 218 | | Other income | 1,781 | | | 789 | | | 2,570 | | Other expense | 4,549 | | | 256 | | | 4,805 | | Income before income taxes | $ | 6,531 | | | $ | 533 | | | $ | 7,064 | | | | | | | | For the Year Ended December 31, 2020 | | | | | | Interest income | | | | | | Credit card loans | $ | 8,985 | | | $ | — | | | $ | 8,985 | | Private student loans | 754 | | | — | | | 754 | | Personal loans | 958 | | | — | | | 958 | | Other loans | 106 | | | — | | | 106 | | Other interest income | 292 | | | — | | | 292 | | Total interest income | 11,095 | | | — | | | 11,095 | | Interest expense | 1,865 | | | — | | | 1,865 | | Net interest income | 9,230 | | | — | | | 9,230 | | Provision for credit losses | 5,134 | | | — | | | 5,134 | | Other income | 1,459 | | | 399 | | | 1,858 | | Other expense | 4,292 | | | 227 | | | 4,519 | | Income before income taxes | $ | 1,263 | | | $ | 172 | | | $ | 1,435 | | | | | | | |
The following table presents segment data (dollars in millions): | | | | | | | | | | | | | | Direct Banking | | Payment Services | | Total | For the Year Ended December 31, 2017 | | | | | | Interest income | | | | | | Credit card loans | $ | 7,907 |
| | $ | — |
| | $ | 7,907 |
| Private student loans | 523 |
| | — |
| | 523 |
| PCI student loans | 159 |
| | — |
| | 159 |
| Personal loans | 860 |
| | — |
| | 860 |
| Other | 199 |
| | — |
| | 199 |
| Total interest income | 9,648 |
| | — |
| | 9,648 |
| Interest expense | 1,648 |
| | — |
| | 1,648 |
| Net interest income | 8,000 |
| | — |
| | 8,000 |
| Provision for loan losses | 2,586 |
| | (7 | ) | | 2,579 |
| Other income | 1,607 |
| | 290 |
| | 1,897 |
| Other expense | 3,629 |
| | 152 |
| | 3,781 |
| Income before income tax expense | $ | 3,392 |
| | $ | 145 |
| | $ | 3,537 |
| | | | | | |
23.Revenue from Contracts with Customers | | 23. | Revenue from Contracts with Customers |
ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), generally applies to the sales of any good or service for which no other specific accounting guidance is provided. ASC 606 defines a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. The Company’s revenue that is subject to this model includes discount and interchange, protection products fees, transaction processing revenue and certain amounts classified as other income. The following table presents revenue from contracts with customers disaggregated by business segment and reconciles revenue from contracts with customers to total other income (dollars in millions): | | | | | | | | | | | | | | | | | | | Digital Banking | | Payment Services | | Total | For the Year Ended December 31, 2022 | | | | | | Other income subject to ASC 606 | | | | | | Discount and interchange revenue, net(1) | $ | 1,345 | | | $ | 79 | | | $ | 1,424 | | Protection products revenue | 172 | | | — | | | 172 | | Transaction processing revenue | — | | | 249 | | | 249 | | Other income | 11 | | | 64 | | | 75 | | Total other income subject to ASC 606(2) | 1,528 | | | 392 | | | 1,920 | | Other income not subject to ASC 606 | | | | | | Loan fee income | 632 | | | — | | | 632 | | Gains (losses) on equity investments | 2 | | | (216) | | | (214) | | Total other income (loss) not subject to ASC 606 | 634 | | | (216) | | | 418 | | Total other income by operating segment | $ | 2,162 | | | $ | 176 | | | $ | 2,338 | | | | | | | | For the Year Ended December 31, 2021 | | | | | | Other income subject to ASC 606 | | | | | | Discount and interchange revenue, net(1) | $ | 1,151 | | | $ | 73 | | | $ | 1,224 | | Protection products revenue | 165 | | | — | | | 165 | | Transaction processing revenue | — | | | 227 | | | 227 | | Other income | — | | | 66 | | | 66 | | Total other income subject to ASC 606(2) | 1,316 | | | 366 | | | 1,682 | | Other income not subject to ASC 606 | | | | | | Loan fee income | 464 | | | — | | | 464 | | Gains on equity investments | 1 | | | 423 | | | 424 | | Total other income not subject to ASC 606 | 465 | | | 423 | | | 888 | | Total other income by operating segment | $ | 1,781 | | | $ | 789 | | | $ | 2,570 | | | | | | | | For the Year Ended December 31, 2020 | | | | | | Other income subject to ASC 606 | | | | | | Discount and interchange revenue, net(1) | $ | 871 | | | $ | 62 | | | $ | 933 | | Protection products revenue | 180 | | | — | | | 180 | | Transaction processing revenue | — | | | 195 | | | 195 | | Other (loss) income | (7) | | | 63 | | | 56 | | Total other income subject to ASC 606(2) | 1,044 | | | 320 | | | 1,364 | | Other income not subject to ASC 606 | | | | | | Loan fee income | 414 | | | — | | | 414 | | Gains on equity investments | 1 | | | 79 | | | 80 | | Total other income not subject to ASC 606 | 415 | | | 79 | | | 494 | | Total other income by operating segment | $ | 1,459 | | | $ | 399 | | | $ | 1,858 | | | | | | | |
(1) Net of rewards, including Cashback Bonus rewards, of $3.0 billion, $2.5 billion and $1.9 billion for the years ended December 31, 2022, 2021 and 2020, respectively. The following table presents revenue from contracts with customers disaggregated by business segment and reconciles revenue from contracts with customers to total other income (dollars in millions): | | | | | | | | | | | | | | Direct Banking | | Payment Services | | Total | For the Year Ended December 31, 2019 | | | | | | Other income subject to ASC 606 | | | | | | Discount and interchange revenue, net(1) | $ | 1,000 |
| | $ | 66 |
| | $ | 1,066 |
| Protection products revenue | 194 |
| | — |
| | 194 |
| Transaction processing revenue | — |
| | 197 |
| | 197 |
| Other income | 8 |
| | 85 |
| | 93 |
| Total other income subject to ASC 606(2) | 1,202 |
| | 348 |
| | 1,550 |
| Other income not subject to ASC 606 | | | | | | Loan fee income | 449 |
| | — |
| | 449 |
| Other income | (3 | ) | | — |
| | (3 | ) | Total other income not subject to ASC 606 | 446 |
| | — |
| | 446 |
| Total other income by operating segment | $ | 1,648 |
| | $ | 348 |
| | $ | 1,996 |
| | | | | | | For the Year Ended December 31, 2018 | | | | | | Other income subject to ASC 606 | | | | | | Discount and interchange revenue, net(1) | $ | 1,022 |
| | $ | 52 |
| | $ | 1,074 |
| Protection products revenue | 204 |
| | — |
| | 204 |
| Transaction processing revenue | — |
| | 178 |
| | 178 |
| Other income | 17 |
| | 80 |
| | 97 |
| Total other income subject to ASC 606(2) | 1,243 |
| | 310 |
| | 1,553 |
| Other income not subject to ASC 606 | | | | | | Loan fee income | 402 |
| | — |
| | 402 |
| Total other income not subject to ASC 606 | 402 |
| | — |
| | 402 |
| Total other income by operating segment | $ | 1,645 |
| | $ | 310 |
| | $ | 1,955 |
| | | | | | | For the Year Ended December 31, 2017 | | | | | | Other income subject to ASC 606 | | | | | | Discount and interchange revenue, net(1) | $ | 1,009 |
| | $ | 43 |
| | $ | 1,052 |
| Protection products revenue | 223 |
| | — |
| | 223 |
| Transaction processing revenue | — |
| | 167 |
| | 167 |
| Other income | 9 |
| | 80 |
| | 89 |
| Total other income subject to ASC 606(2) | 1,241 |
| | 290 |
| | 1,531 |
| Other income not subject to ASC 606 | | | | | | Loan fee income | 363 |
| | — |
| | 363 |
| Other income | 3 |
| | — |
| | 3 |
| Total other income not subject to ASC 606 | 366 |
| | — |
| | 366 |
| Total other income by operating segment | $ | 1,607 |
| | $ | 290 |
| | $ | 1,897 |
| | | | | | |
(2) Excludes $10 million, $2 million and $2 million deposit product fees that are reported within net interest income for the years ended December 31, 2022, 2021 and 2020, respectively. | | (1) | Net of rewards, including Cashback Bonus rewards, of $1.9 billion, $1.8 billion and $1.6 billion for the years ended December 31, 2019, 2018 and 2017, respectively. |
| | (2) | Excludes $3 million, $3 million and $2 million deposit product fees that are reported within net interest income for the years ended December 31, 2019, 2018 and 2017, respectively. |
For a detailed description of the Company’s significant revenue recognition accounting policies, see Note 2: Summary of Significant Accounting Policies. -133- | | 24. | Related Party Transactions |
24.Related Party Transactions In the ordinary course of business, the Company offers consumer financial products to its directors, executive officers and certain members of their families. These products are offered on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and these receivables are included in the loan receivables in the Company’s consolidated statements of financial condition. They were not material to the Company’s financial position or results of operations. | | 25. | Parent Company Condensed Financial Information |
25.Parent Company Condensed Financial Information The following Parent Company financial statements are provided in accordance with SEC rules, which require such disclosure when the restricted net assets of consolidated subsidiaries exceed 25% of consolidated net assets. Discover Financial Services (Parent Company Only) Condensed Statements of Financial Condition | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | | (dollars in millions) | Assets | | | | Cash and cash equivalents(1) | $ | 3,155 | | | $ | 3,182 | | Restricted cash | 20 | | | 20 | | Notes receivable from subsidiaries(2) | 1,759 | | | 777 | | Investment in bank subsidiary | 11,922 | | | 11,889 | | Investments in non-bank subsidiaries | 886 | | | 1,209 | | Other assets | 811 | | | 663 | | Total assets | $ | 18,553 | | | $ | 17,740 | | | | | | Liabilities and Stockholders’ Equity | | | | Non-interest-bearing deposit accounts | $ | 2 | | | $ | 2 | | | | | | | | | | Short-term borrowings from subsidiaries | 115 | | | 439 | | Long-term borrowings | 3,487 | | | 3,548 | | Accrued expenses and other liabilities | 359 | | | 343 | | Total liabilities | 3,963 | | | 4,332 | | Stockholders’ equity | 14,590 | | | 13,408 | | Total liabilities and stockholders’ equity | $ | 18,553 | | | $ | 17,740 | | | | | |
(1)The Parent Company had $3.1 billion and $3.0 billion in a money market deposit account at Discover Bank as of December 31, 2022 and 2021, respectively, which is included in cash and cash equivalents. These funds are available to the Parent for liquidity purposes. | | | | | | | | | | December 31, | | 2019 | | 2018 | | (dollars in millions) | Assets | | | | Cash and cash equivalents(1) | $ | 2,511 |
| | $ | 1,586 |
| Restricted cash | 20 |
| | 20 |
| Notes receivable from subsidiaries(2) | 877 |
| | 821 |
| Investments in bank subsidiaries | 11,319 |
| | 10,891 |
| Investments in non-bank subsidiaries | 820 |
| | 752 |
| Other assets | 600 |
| | 676 |
| Total assets | $ | 16,147 |
| | $ | 14,746 |
| | | | | Liabilities and Stockholders’ Equity | | | | Non-interest bearing deposit accounts | $ | 2 |
| | $ | 4 |
| Short-term borrowings from subsidiaries | 283 |
| | 240 |
| Long-term borrowings | 3,636 |
| | 3,089 |
| Accrued expenses and other liabilities | 367 |
| | 283 |
| Total liabilities | 4,288 |
| | 3,616 |
| Stockholders’ equity | 11,859 |
| | 11,130 |
| Total liabilities and stockholders’ equity | $ | 16,147 |
| | $ | 14,746 |
| | | | |
(2)The Parent Company advanced $1.3 billion to Discover Bank as of December 31, 2022 and 2021, which is included in notes receivable from subsidiaries.
| | (1) | The Parent Company had $2.4 billion and $1.4 billion in a money market deposit account at Discover Bank as of December 31, 2019 and 2018, respectively, which is included in cash and cash equivalents. These funds are available to the Parent for liquidity purposes.
|
| | (2) | The Parent Company advanced $500 million to Discover Bank as of December 31, 2019 and 2018, which is included in notes receivable from subsidiaries. These funds are available to the Parent for liquidity purposes.
|
Discover Financial Services (Parent Company Only) Condensed Statements of Comprehensive Income | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | (dollars in millions) | Interest income | $ | 98 | | | $ | 33 | | | $ | 44 | | Interest expense | 189 | | | 199 | | | 205 | | Net interest expense | (91) | | | (166) | | | (161) | | Dividends from bank subsidiary | 4,000 | | | 3,250 | | | 555 | | Dividends from non-bank subsidiaries | 688 | | | — | | | 200 | | Total income | 4,597 | | | 3,084 | | | 594 | | Other expense | 6 | | | 10 | | | (16) | | Income before income tax benefit and equity in undistributed net income of subsidiaries | 4,591 | | | 3,074 | | | 610 | | Income tax benefit | 25 | | | 25 | | | 30 | | Equity in undistributed net income of subsidiaries | (224) | | | 2,350 | | | 501 | | Net income | 4,392 | | | 5,449 | | | 1,141 | | Other comprehensive (loss) income, net | (245) | | | (139) | | | 164 | | Comprehensive income | $ | 4,147 | | | $ | 5,310 | | | $ | 1,305 | | | | | | | |
| | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | | (dollars in millions) | Interest income | $ | 82 |
| | $ | 67 |
| | $ | 55 |
| Interest expense | 212 |
| | 189 |
| | 178 |
| Net interest expense | (130 | ) | | (122 | ) | | (123 | ) | Dividends from bank subsidiaries | 2,530 |
| | 2,375 |
| | 1,895 |
| Dividends from non-bank subsidiaries | 100 |
| | 450 |
| | 15 |
| Total income | 2,500 |
| | 2,703 |
| | 1,787 |
| Other expense | 1 |
| | — |
| | — |
| Income before income tax benefit and equity in undistributed net income of subsidiaries | 2,499 |
| | 2,703 |
| | 1,787 |
| Income tax benefit | 25 |
| | 33 |
| | 40 |
| Equity in undistributed net income of subsidiaries | 433 |
| | 6 |
| | 272 |
| Net income | 2,957 |
| | 2,742 |
| | 2,099 |
| OCI, net | 37 |
| | 25 |
| | 9 |
| Comprehensive income | $ | 2,994 |
| | $ | 2,767 |
| | $ | 2,108 |
| | | | | | |
-135-
Discover Financial Services (Parent Company Only) Condensed Statements of Cash Flows | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | (dollars in millions) | Cash flows provided by operating activities | | | | | | Net income | $ | 4,392 | | | $ | 5,449 | | | $ | 1,141 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | Equity in undistributed net income of subsidiaries | 224 | | | (2,350) | | | (501) | | Non-cash dividend from subsidiary | (188) | | | — | | | — | | Stock-based compensation expense | 89 | | | 103 | | | 42 | | Deferred income taxes | (8) | | | (13) | | | (5) | | Depreciation and amortization | 32 | | | 47 | | | 41 | | Changes in assets and liabilities: | | | | | | (Increase) decrease in other assets | (143) | | | (91) | | | 42 | | Increase (decrease) in accrued expenses and other liabilities | 27 | | | 24 | | | (30) | | Net cash provided by operating activities | 4,425 | | | 3,169 | | | 730 | | | | | | | | Cash flows (used for) provided by investing activities(1) | | | | | | | | | | | | (Increase) decrease in loans to subsidiaries | (982) | | | 114 | | | (15) | | Net cash (used for) provided by investing activities | (982) | | | 114 | | | (15) | | | | | | | | Cash flows used for financing activities | | | | | | Net (decrease) increase in short-term borrowings from subsidiaries | (324) | | | 156 | | | — | | Proceeds from issuance of common stock | 10 | | | 9 | | | 10 | | Proceeds from issuance of long-term borrowings | 740 | | | — | | | — | | Maturities and repayment of long-term borrowings | (834) | | | (172) | | | (3) | | Purchases of treasury stock | (2,359) | | | (2,260) | | | (348) | | | | | | | | Proceeds from issuance of preferred stock | — | | | — | | | 493 | | | | | | | | Dividends paid on common and preferred stock | (703) | | | (636) | | | (576) | | Net cash used for financing activities | (3,470) | | | (2,903) | | | (424) | | (Decrease) increase in cash, cash equivalents and restricted cash | (27) | | | 380 | | | 291 | | Cash, cash equivalents and restricted cash, at beginning of period | 3,202 | | | 2,822 | | | 2,531 | | Cash, cash equivalents and restricted cash, at end of period | $ | 3,175 | | | $ | 3,202 | | | $ | 2,822 | | | | | | | | Reconciliation of cash, cash equivalents and restricted cash | | | | | | Cash and cash equivalents | $ | 3,155 | | | $ | 3,182 | | | $ | 2,802 | | Restricted cash | 20 | | | 20 | | | 20 | | Cash, cash equivalents and restricted cash, at end of period | $ | 3,175 | | | $ | 3,202 | | | $ | 2,822 | | | | | | | | Supplemental disclosure of cash flow information | | | | | | Cash paid during the period for: | | | | | | Interest expense | $ | 159 | | | $ | 156 | | | $ | 168 | | Income taxes, net of income tax refunds | $ | (39) | | | $ | (70) | | | $ | (31) | | | | | | | |
(1)Subsequent to the issuance of the audited financial statements for the year ended December 31, 2021, the Company identified an immaterial classification error within cash flows (used for)/provided by investing activities. The correction of this error had no impact on the net cash (used for)/provided by investing activities. Management has evaluated the materiality of this misstatement and concluded it was not material to the prior period. | | | | | | | | | | | | | | For the Years Ended December 31, | | 2019 | | 2018 | | 2017 | | (dollars in millions) | Cash flows from operating activities | | | | | | Net income | $ | 2,957 |
| | $ | 2,742 |
| | $ | 2,099 |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | Equity in undistributed net income of subsidiaries | (433 | ) | | (6 | ) | | (272 | ) | Stock-based compensation expense | 69 |
| | 81 |
| | 75 |
| Deferred income taxes | (8 | ) | | (5 | ) | | 1 |
| Depreciation and amortization | 38 |
| | 34 |
| | 31 |
| Changes in assets and liabilities | | | | | | Decrease (increase) in other assets | 92 |
| | (416 | ) | | (54 | ) | Increase (decrease) in other liabilities and accrued expenses | 50 |
| | (129 | ) | | 43 |
| Net cash provided by operating activities | 2,765 |
| | 2,301 |
| | 1,923 |
| | | | | | | Cash flows from investing activities | | | | | | Decrease (increase) in investment in subsidiaries | — |
| | (3 | ) | | — |
| Increase in loans to subsidiaries | (55 | ) | | (62 | ) | | (8 | ) | Net cash used for investing activities | (55 | ) | | (65 | ) | | (8 | ) | | | | | | | Cash flows from financing activities | | | | | | Net increase (decrease) in short-term borrowings from subsidiaries | 42 |
| | (110 | ) | | 130 |
| Proceeds from issuance of common stock | 7 |
| | 6 |
| | 5 |
| Proceeds from issuance of long-term borrowings | 595 |
| | 49 |
| | 1,127 |
| Maturities and repayment of long-term borrowings | (86 | ) | | (6 | ) | | (404 | ) | Purchases of treasury stock | (1,768 | ) | | (2,065 | ) | | (2,081 | ) | Net (decrease) increase in deposits | (2 | ) | | 1 |
| | (11 | ) | Proceeds from issuance of preferred stock | — |
| | — |
| | 563 |
| Payments on redemption of preferred stock | — |
| | — |
| | (575 | ) | Dividends paid on common and preferred stock | (573 | ) | | (552 | ) | | (527 | ) | Net cash used for financing activities | (1,785 | ) | | (2,677 | ) | | (1,773 | ) | Increase (decrease) in cash, cash equivalents and restricted cash | 925 |
| | (441 | ) | | 142 |
| Cash, cash equivalents and restricted cash, at beginning of period | 1,606 |
| | 2,047 |
| | 1,905 |
| Cash, cash equivalents and restricted cash, at end of period | $ | 2,531 |
| | $ | 1,606 |
| | $ | 2,047 |
| | | | | | | Reconciliation of cash, cash equivalents and restricted cash | | | | | | Cash and cash equivalents | $ | 2,511 |
| | $ | 1,586 |
| | $ | 2,043 |
| Restricted cash | 20 |
| | 20 |
| | 4 |
| Cash, cash equivalents and restricted cash, at end of period | $ | 2,531 |
| | $ | 1,606 |
| | $ | 2,047 |
| | | | | | | Supplemental disclosure of cash flow information | | | | | | Cash paid during the period for | | | | | | Interest expense | $ | 170 |
| | $ | 156 |
| | $ | 132 |
| Income taxes, net of income tax refunds | $ | 20 |
| | $ | (22 | ) | | $ | (27 | ) | | | | | | |
-136-
26. Subsequent Events
The Company has evaluated events and transactions that have occurred subsequent to December 31, 20192022, and determined that there were no subsequent events that would require recognition or disclosure in the consolidated financial statements. The following table provides unaudited quarterly results (dollars in millions, except per share data): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 | Interest income | $ | 3,039 |
| | $ | 3,040 |
| | $ | 2,977 |
| | $ | 2,937 |
| | $ | 2,907 |
| | $ | 2,781 |
| | $ | 2,636 |
| | $ | 2,569 |
| Interest expense | 615 |
| | 638 |
| | 645 |
| | 632 |
| | 605 |
| | 558 |
| | 507 |
| | 469 |
| Net interest income | 2,424 |
| | 2,402 |
| | 2,332 |
| | 2,305 |
| | 2,302 |
| | 2,223 |
| | 2,129 |
| | 2,100 |
| Provision for loan losses | 836 |
| | 799 |
| | 787 |
| | 809 |
| | 800 |
| | 742 |
| | 742 |
| | 751 |
| Other income | 520 |
| | 498 |
| | 520 |
| | 458 |
| | 505 |
| | 501 |
| | 474 |
| | 475 |
| Other expense | 1,184 |
| | 1,107 |
| | 1,078 |
| | 1,024 |
| | 1,110 |
| | 1,015 |
| | 984 |
| | 968 |
| Income before income tax expense | 924 |
| | 994 |
| | 987 |
| | 930 |
| | 897 |
| | 967 |
| | 877 |
| | 856 |
| Income tax expense | 216 |
| | 224 |
| | 234 |
| | 204 |
| | 210 |
| | 247 |
| | 208 |
| | 190 |
| Net income | $ | 708 |
| | $ | 770 |
| | $ | 753 |
| | $ | 726 |
| | $ | 687 |
| | $ | 720 |
| | $ | 669 |
| | $ | 666 |
| Net income allocated to common stockholders(1) | $ | 704 |
| | $ | 749 |
| | $ | 747 |
| | $ | 705 |
| | $ | 681 |
| | $ | 699 |
| | $ | 663 |
| | $ | 646 |
| Basic earnings per common share(1) | $ | 2.25 |
| | $ | 2.36 |
| | $ | 2.32 |
| | $ | 2.15 |
| | $ | 2.04 |
| | $ | 2.05 |
| | $ | 1.91 |
| | $ | 1.82 |
| Diluted earnings per common share(1) | $ | 2.25 |
| | $ | 2.36 |
| | $ | 2.32 |
| | $ | 2.15 |
| | $ | 2.03 |
| | $ | 2.05 |
| | $ | 1.91 |
| | $ | 1.82 |
| | | | | | | | | | | | | | | | |
| | (1) | Because the inputs to net income allocated to common stockholders and earnings per share are calculated using weighted averages for the quarter, the sum of all four quarters may differ from the year to date amounts in the consolidated statements of income. |
Glossary of Acronyms | | • | •ALCO: Asset and Liability Management Committee •AOCI: Accumulated Other Comprehensive Income (Loss) •ARRC:Alternative Reference Rates Committee •ASC: Accounting Standards Codification •ASU: Accounting Standards Update •BCBS: Basel Committee on Banking Supervision •CARES Act:Coronavirus Aid, Relief, and Economic Security Act •CCAR: Comprehensive Capital Analysis and Review •CCPA: California Consumer Privacy Act •CECL: Current Expected Credit Loss •CEO: Chief Executive Officer •CET1: Common Equity Tier 1 •CFPB: Consumer Financial Protection Bureau •CLDC: Compensation and Leadership Development Committee •COSO: Committee of Sponsoring Organizations of the Treadway Commission •COVID-19: Coronavirus Disease 2019 •CPPA:California Privacy Protection Agency •CPRA:California Privacy Rights Act •CRM: Corporate Risk Management •CRO: Chief Risk Officer •DCENT: Discover Card Execution Note Trust •DCMT: Discover Card Master Trust •DE&I:Diversity, Equity and Inclusion •DFS: Discover Financial Services •DRR: Designated Reserve Ratio •EGRRCPA: Economic Growth, Regulatory Relief, and Consumer Protection Act •EPS: Earnings Per Share •ESG: Environmental, Social and Governance •EWI: Early Warning Indicator •FASB: Financial Accounting Standards Board •FCA:UK Financial Conduct Authority: Asset and Liability Management Committee |
| | • | AOCI: Accumulated Other Comprehensive Income
|
| | • | ASC: Accounting Standards Codification
|
| | • | ASU: Accounting Standards Update
|
| | • | BCBS: Basel Committee on Banking Supervision
|
| | • | CCAR: Comprehensive Capital Analysis and Review
|
| | • | CCB: Capital Conservation Buffer
|
| | • | CCPA: California Consumer Privacy Act
|
| | • | CECL: Current Expected Credit Loss
|
| | • | CEO: Chief Executive Officer
|
| | • | CET1: Common Equity Tier 1
|
| | • | CFPB: Consumer Financial Protection Bureau
|
| | • | COSO: Committee of Sponsoring Organizations of the Treadway Commission
|
| | • | CRM: Corporate Risk Management
|
| | • | DCENT: Discover Card Execution Note Trust
|
| | • | DCMT: Discover Card Master Trust
|
| | • | DFS: Discover Financial Services
|
| | • | EGRRCPA: Economic Growth, Regulatory Relief, and Consumer Protection Act
|
| | • | EWI: Early Warning Indicator
|
| | • | FASB: Financial Accounting Standards Board
|
| | • | FDIA: Federal Deposit Insurance Act
|
| | • | FDIC: Federal Deposit Insurance Corporation
|
| | • | FFIEC: Federal Financial Institutions Examination Council
|
| | • | GAAP: Generally Accepted Accounting Principles
|
| | • | IRS: Internal Revenue Service
|
| | • | LFI: Large Financial Institution
|
| | • | LIBOR: London Interbank Offered Rate
|
| | • | OCI: Other Comprehensive Income
|
| | • | OIS: Overnight Index Swap
|
•FDIA: Federal Deposit Insurance Act
| | • | •FDIC: Federal Deposit Insurance Corporation •FFIEC: Federal Financial Institutions Examination Council •FHLB: Federal Home Loan Bank •GAAP: Accounting Principles Generally Accepted in the United States •IRS: Internal Revenue Service •KRI: Key Risk Indicator •LFI: Large Financial Institution •LIBOR: London Interbank Offered Rate •OCI: Other Comprehensive Income (Loss) •OIS: Overnight Index Swap •PCAOB: Public Company Accounting Oversight Board •POS: Point-of-sale •PSU: Performance Stock Unit •Repo: Repurchase Agreement •RMBS: Residential Mortgage-Backed Securities •RSU: Restricted Stock Unit •SCB: Stress Capital Buffer •SEC: Securities and Exchange Commission •SOFR:Secured Overnight Financing Rate •TDR: Troubled Debt Restructuring •UDAAP: Unfair, Deceptive or Abusive Acts or Practices •U.S.:United States of America •USD: United States Dollar •U.S. GSE: Government-sponsored Enterprise of the U.S. •: Public Company Accounting Oversight Board |
| | • | PCD: Purchased Credit-Deteriorated
|
| | • | PCI: Purchased Credit-Impaired
|
| | • | PSU: Performance Stock Unit
|
| | • | RSU: Restricted Stock Unit
|
| | • | SEC: Securities and Exchange Commission
|
| | • | SLC: The Student Loan Corporation
|
| | • | TDR: Troubled Debt Restructuring
|
| | • | VIE: Variable Interest Entity |
-138- | | Item 9. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None. | | Item 9A. | Controls and Procedures |
Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer 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. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of human error, the circumvention or overriding of the system and reasonable resource constraints. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2022. In making this assessment, management used the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s assessments and those criteria, management has concluded that our internal control over financial reporting was effective as of December 31, 2019.2022. The effectiveness of our internal control over financial reporting as of December 31, 20192022, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and the firm’s report on this matter is included in Item 8 of this annual report on Form 10-K. Changes in Internal Control over Financial Reporting ThereDuring the first quarter of 2022, we implemented a new general ledger and related infrastructure and systems. The implementation was completed in the ordinary course of business to modernize technology used in our financial reporting processes and was not implemented in response to identified material weaknesses in our internal control over financial reporting. In connection with the implementation, where applicable, modifications were made to the design of the control environment associated with the new general ledger and related technology.
Except for the implementation discussed above, there have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. | | Item 9B. | Other Information |
Item 9B. Other Information None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable.
Part III. | | Part III | Item 10. | Directors, Executive Officers and Corporate Governance |
Part III | Item 10. Directors, Executive Officers and Corporate Governance Information regarding our executive officers is included under the heading “Information About Our Executive Officers” in Item 1 of this annual report on Form 10-K. Information regarding our directors and corporate governance under the following captions in our proxy statement for our annual meeting of stockholders to be held on May 14, 202011, 2023 (“Proxy Statement”) is incorporated by reference herein. “Corporate Governance — Information Concerning Nominees for Election as Directors” “Corporate Governance — Process for Nominating Directors — Shareholder Recommendations for Director Candidates” “Corporate Governance — Board Roles and Responsibilities — Board and Committee Meetings” Our Code of Ethics and Business Conduct applies to all directors, officers and employees, including our Chief Executive Officer and our Chief Financial Officer. You can find our Code of Ethics and Business Conduct on our internet site, www.discover.com. We will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on our internet site. | | Item 11. | Executive Compensation |
Item 11. Executive Compensation Information regarding executive compensation under the following captions in our Proxy Statement is incorporated by reference herein. “Corporate Governance — Director Compensation” “Executive Compensation” “Compensation Discussion and Analysis” “20192022 Executive Compensation Tables” | | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information relatingrelated to the compensation plans under which our equity securities are authorized for issuance as of December 31, 2019,2022, is set forthpresented under the caption “Approval of the Discover Financial Services 2023 Omnibus Incentive Plan — Equity Compensation Plan Information” in the table below.our Proxy Statement and is incorporated by reference herein. | | | | | | | | | Plan Category | Number of securities to be issued upon exercise of outstanding warrants and rights(1) | | Weighted-average exercise price of outstanding warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | (a) | | (b) | | (c) | Equity compensation plans approved by security holders | 2,872,509 |
| | N/A | | 24,124,453 |
| Equity compensation plans not approved by security holders | N/A |
| | N/A | | N/A |
| Total | 2,872,509 |
| | N/A | | 24,124,453 |
| | | | | | |
| | (1) | Includes 2,148,976 vested and unvested restricted stock units and 723,533 vested and unvested performance stock units that can be converted to up to 1.5 shares per each unit dependent on the performance factor.
|
Information related to the beneficial ownership of our common stock is presented under the caption “Stock Ownership Information — Beneficial Ownership of Company Common Stock” in our Proxy Statement and is incorporated by reference herein.
| | Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence under the following captions in our Proxy Statement is incorporated by reference herein. “Other Matters — Certain Transactions” “Corporate Governance — Information Concerning Nominees for Election as Directors — Director Independence” | | Item 14. | Principal Accounting Fees and Services |
Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is presented under the caption “Audit Matters” in our Proxy Statement and is incorporated by reference herein.
Part IV. | | Part IV | Item 15. | Exhibits, Financial Statement Schedules |
Part IV | Item 15. Exhibits, Financial Statement Schedules (a) Documents filed as part of this Form 10-K: 1. Consolidated Financial Statements The consolidated financial statements required to be filed in this annual report on Form 10-K are listed below and appear on pages 7182 through 141142 herein. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 2. Financial Statement Schedules Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements. 3. Exhibits See the Exhibit Index below for a list of the exhibits being filed or furnished with or incorporated by reference into this annual report on Form 10-K. Exhibit Index | | | | | | | | | Exhibit Number
| | Description | 2.1*
| | Separation and Distribution Agreement, dated as of June 29, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 2.1 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto), as amended by the First Amendment to the Separation and Distribution Agreement dated as of June 29, 2007 between Discover Financial Services and Morgan Stanley, dated February 11, 2010 (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on February 12, 2010 and incorporated herein by reference thereto). | | | | 2.2*
| | Agreement for the Sale and Purchase of the Goldfish Credit Card Business, dated February 7, 2008, among Discover Financial Services, Goldfish Bank Limited, Discover Bank, SCFC Receivables Corporation, and Barclays Bank Plc (filed as Exhibit 2.1 to Discover Financial Services’ Current Report on Form 8-K filed on February 7, 2008 and incorporated herein by reference thereto), as amended and restated by Amended and Restated Agreement for the Sale and Purchase of the Goldfish Credit Card Business, dated March 31, 2008, among Discover Financial Services, Goldfish Bank Limited, Discover Bank, SCFC Receivables Corporation, Barclays Bank PLC, and Barclays Group US Inc. (filed as Exhibit 2.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 14, 2008 and incorporated herein by reference thereto). | | | |
| | | | Exhibit
| | Description |
| | Agreement and Plan of Merger by and among Discover Bank, Academy Acquisition Corp. and The Student Loan Corporation dated as of September 17, 2010 (filed as Exhibit 2.3 to Discover Financial Services’ Annual Report on Form 10-K for the fiscal year ended November 30, 2010 filed on January 26, 2011 and incorporated herein by reference thereto). | | | |
| | | | | | | | | Exhibit Number | | Description | | | Restated Certificate of Incorporation of Discover Financial Services (filed as Exhibit 3.2 to Discover Financial Services’ Current Report on Form 8-K filed on May 21, 2019 and incorporated herein by reference thereto). | | | | | | Amended and Restated By-Laws of Discover Financial Services (filed as Exhibit 3.33.1 to Discover Financial Services’ CurrentQuarterly Report on Form 8-K10-Q filed on May 21, 2019October 28, 2021 and incorporated herein by reference thereto). | | | | | | Certificate of Elimination of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Discover Financial Services (filed as Exhibit 3.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on June 26, 2012 and incorporated herein by reference thereto). | | | | | | Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 16, 2012 and incorporated herein by reference thereto). | | | | | | Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto). | | | | | | Certificate of Elimination of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 4, 2017 and incorporated herein by reference thereto). | | | | | | DescriptionCertificate of CommonDesignations of Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, | | | Series D (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto). |
| | Description of Discover Financial Services’ Securities. | | | |
| | Senior Indenture, dated as of June 12, 2007, by and between Discover Financial Services and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 12, 2007 and incorporated herein by reference thereto). | | | | | | Subordinated Indenture, dated as of September 8, 2015, by and between Discover Financial Services and U.S. Bank National Association (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on September 8, 2015 and incorporated herein by reference thereto). | | | | | | Fiscal and Paying Agency Agreement, dated November 16, 2009, between Discover Bank, as issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on November 16, 2009 and incorporated herein by reference thereto). | | | | | | Fiscal and Paying Agency Agreement, dated April 15, 2010, between Discover Bank, as issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on April 16, 2010 and incorporated herein by reference thereto). | | | | | | Deposit Agreement (Series C), dated October 31, 2017 (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto). | | | | | | Form of Certificate Representing the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (filed as Exhibit 4.2 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto). | | | | | | Deposit Agreement (Series D), dated June 22, 2020 (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto). | | | | | | Form of Certificate Representing the Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (filed as Exhibit 4.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto). | | | | 4.8 | | Other instruments defining the rights of holders of long-term debt securities of Discover Financial Services and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Discover Financial Services agrees to furnish copies of these instruments to the SEC upon requestrequest.. | | | |
| | Tax Sharing Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto). | | | |
| | | | Number
| | Description |
| | U.S. Employee Matters Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto). | | | |
| | | | | | | | | Exhibit Number | | Description |
| | Transition Services Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto). | | | |
| | Transitional Trade Mark License Agreement, dated as of June 30, 2007, between Morgan Stanley & Co. PLC and Goldfish Bank Limited (filed as Exhibit 10.4 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto). | | | |
| | Amended and Restated Trust Agreement, dated as of December 22, 2015, between Discover Funding LLC, as Beneficiary, and Wilmington Trust Company, as Owner Trustee (filed as Exhibit 4.6 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto). | | | |
| | Third Amended and Restated Pooling and Servicing Agreement, dated as of December 22, 2015, between Discover Bank, as Master Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.2 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto). | | | |
| | Amended and Restated Series Supplement for Series 2007-CC, dated as of December 22, 2015, among Discover Bank, as Master Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.3 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto). | | | |
| | Discover Financial Services Omnibus Incentive Plan (filed as an attachment to Discover Financial Services’ Proxy Statement on Schedule 14A filed on February 27, 2009 and incorporated herein by reference thereto). | | | |
| | Amended Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.6 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 12, 2007 and incorporated herein by reference thereto). | | | | 10.10†
| | Directors’ Compensation Plan of Discover Financial Services (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto), as amended and restated as of January 20, 2011 (filed as Exhibit A to the Discover Financial Services’ definitive proxy statement filed on February 18, 2011 and incorporated herein by reference thereto), as further amended by Amendment No. 2, effective as of December 1, 2011 (filed as Exhibit 10.10 to the Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2012 and incorporated herein by reference thereto). | | | |
| | Amended Form of Restricted Stock Unit Award Under Discover Financial Services Directors’ Compensation Plan (filed as Exhibit 10.7 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 12, 2007 and incorporated herein by reference thereto). | | | | 10.12†
| | Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto) as amended by Amendment No. 1 to Discover Financial Services Employee Stock Purchase Plan effective as of May 1, 2008 (filed as Exhibit 10.12 to Discover Financial Services’ Annual Report on Form 10-K filed on January 28, 2009 and incorporated herein by reference thereto); Amendment No. 2 to Discover Financial Services Employee Stock Purchase Plan, effective as of December 1, 2009 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 9, 2010 and incorporated herein by reference thereto); and Amendment No. 3 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on September 28, 2011 and incorporated herein by reference thereto). | | | |
| | Offer of Employment, dated as of January 8, 1999 (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 12, 2007 and incorporated herein by reference thereto). | | | | | | Waiver of Change of Control Benefits, dated September 24, 2007 (filed as Exhibit 10.15 to Discover Financial Services’ Registration Statement on Form S-4 filed on November 27, 2007 and incorporated herein by reference thereto). | | | |
| | | | Exhibit
| | Description | | | Collateral Certificate Transfer Agreement, dated as of July 26, 2007 between Discover Bank, as Depositor and Discover Card Execution Note Trust (filed as Exhibit 4.4 to Discover Bank’s Current Report on Form 8-K filed on July 27, 2007 and incorporated herein by reference thereto). | | | |
| | | | | | | | | Exhibit Number | | Description | | | Amended and Restated Indenture, dated as of December 22, 2015, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.4 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto). | | | | | | Second Amended and Restated Indenture Supplement for the DiscoverSeries Notes, dated as of December 22, 2015, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.5 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto). | | | | | | Omnibus Amendment to Indenture Supplement and Terms Documents, dated as of July 2, 2009, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.1 to Discover Bank’s Current Report on Form 8-K filed on July 6, 2009 and incorporated herein by reference thereto). | | | | | | Discover Financial Services Change-in-Control Severance Policy Amended and Restated October 15, 2014 (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 16, 2014 and incorporated herein by reference thereto). | | | | | | Release and Settlement Agreement, executed as of October 27, 2008, by and among Discover Financial Services, DFS Services, LLC, Discover Bank, and their Subsidiaries and Affiliates; MasterCard Incorporated and MasterCard International Incorporated and their Affiliates; and Visa Inc. and its Affiliates and Predecessors including Visa U.S.A. Inc. and Visa International Service Association (filed as Exhibit 99.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 28, 2008 and incorporated herein by reference thereto). | | | | | | 2008 Year End Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.21 to Discover Financial Services’ Annual Report on Form 10-K filed on January 28, 2009 and incorporated herein by reference thereto). | | | | | | 2008 Special Grant Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.22 to Discover Financial Services’ Annual Report on Form 10-K filed on January 28, 2009 and incorporated herein by reference thereto). | | | | | | Form of Waiver, executed by each of Discover Financial Services’ senior executive officers and certain other employees (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on March 13, 2009 and incorporated herein by reference thereto). | | | | | | Form of Executive Compensation Agreement, dated March 13, 2009, executed by each of Discover Financial Services’ senior executive officers and certain other employees (filed as Exhibit 10.4 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 8, 2009 and incorporated herein by reference thereto). | | | | | | Form of Share Award Agreement Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10(a) to Discover Financial Services’ Current Report on Form 8-K filed on December 11, 2009 and incorporated herein by reference thereto). | | | | | | Amendment to 2009 Year End Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan, effective December 1, 2009 (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 9, 2010 and incorporated herein by reference thereto). | | | | | | Settlement Agreement and Mutual Release between Discover Financial Services and Morgan Stanley, dated February 11, 2010 (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on February 12, 2010 and incorporated herein by reference thereto). | | | | | | Purchase Price Adjustment Agreement by and among Citibank, N.A., The Student Loan Corporation and Discover Bank, dated September 17, 2010 (filed as Exhibit 10.32 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto). | | | |
| | | | Exhibit
| | Description | | | Amendment to Purchase Price Adjustment Agreement by and among Citibank, N.A., The Student Loan Corporation and Discover Bank, dated December 30, 2010 (filed as Exhibit 10.33 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto). | | | | | | Indemnification Agreement by and between Citibank, N.A. and Discover Bank, dated September 17, 2010 (filed as Exhibit 10.34 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto). | | | |
| | First Amendment to Indemnification Agreement by and between Citibank, N.A. and Discover Bank, dated December 30, 2010 (filed as Exhibit 10.35 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto). | | | |
| | Form Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.4 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 8, 2011 and incorporated herein by reference thereto). | | | | | | Form Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.5 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 8, 2011 and incorporated herein by reference thereto). | | | | | | Asset Purchase Agreement between Discover Bank and Citibank, N.A. dated August 31, 2011 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on September 28, 2011 and incorporated herein by reference thereto). | | | | | | Form 2012 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 4, 2012 and incorporated herein by reference thereto). | | | | | | Form 2012 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 4, 2012 and incorporated herein by reference thereto). | | | |
| | | | | | | | | Exhibit Number | | Description | | | Form 2013 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2013 and incorporated herein by reference thereto). | | | | | | Form 2013 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2013 and incorporated herein by reference thereto). | | | | | | Amendment No. 3 to the Directors’ Compensation Plan of Discover Financial Services, effective as of July 1, 2013 (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 30, 2013 and incorporated herein by reference thereto). | | | | | | Form of 2013 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 26, 2013 and incorporated herein by reference thereto). | | | | | | Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as an attachment to Discover Financial Services’ Proxy Statement on Schedule 14A filed on March 19, 2014 and incorporated herein by reference thereto). | | | | | | Form 2014 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly
Report on Form 10-Q filed on April 29, 2014 and incorporated herein by reference thereto).
| | | | | | Form 2014 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’
Quarterly Report on Form 10-Q filed on April 29, 2014 and incorporated herein by reference thereto).
| | | | | | Amendment No. 4 to the Directors’ Compensation Plan of Discover Financial Services, effective as of May 7, 2014 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on August 1, 2014 and incorporated herein by reference thereto).
| | | |
| | | | Exhibit
Number
| | Description | | | Form 2015 Award Certificate for Cash-Converted Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto). | | | | | | Form 2015 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto). | | | | | | Form 2015 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto). | | | | | | Form of 2015 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on April 30, 2015 and incorporated herein by reference thereto). | | | | | | Amendment No. 4 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on October 29, 2015 and incorporated herein by reference thereto). | | | | | | Form of 2015 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 21, 2015 and incorporated herein by reference thereto). | | | | | | Receivables Sale and Contribution Agreement, dated as of December 22, 2015 between Discover Bank and Discover Funding LLC (filed as Exhibit 4.1 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto). | | | | | | Form 2016 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.52 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2016 and incorporated herein by reference thereto). | | | |
| | | | | | | | | Exhibit Number | | Description | | | Form 2016 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.53 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2016 and incorporated herein by reference thereto). | | | | | | Amendment No. 5 to Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2017 (filed as Exhibit 10.54 to Discover Financial Services’ Annual Report on Form 10-K filed on February 23, 2017 and incorporated herein by reference thereto). | | | | | | Form 2017 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2017 and incorporated herein by reference thereto).
| | | | | | Form 2017 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2017 and incorporated herein by reference thereto). | | | | | | Form 2018 Award Certificate for Restricted Stock Units under Discover Financial Services Director’s Compensation Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto). | | | | | | Form 2018 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto). | | | | | | Form 2018 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto). | | | |
| | | | Exhibit
Number
| | Description | | | Amendment to 2017 Directors’ Annual Equity Award Certificate for Restricted Stock Units of Discover Financial Services, effective as of February 22, 2018 (filed as Exhibit 10.4 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto). | | | | | | Amendment No. 6 to the Directors’ Compensation Plan of Discover Financial Services, effective as of February 22, 2018 (filed as Exhibit 10.5 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto). | | | | | | Amendment No. 7 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2019 (filed as Exhibit 10.62 to Discover Financial Services’ Annual Report on Form 10-K filed on February 20, 2019 and incorporated herein by reference thereto). | | | | | | Amendment No. 8 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2019 (filed as Exhibit 10.63 to Discover Financial Services’ Annual Report on Form 10-K filed on February 20, 2019 and incorporated herein by reference thereto). | | | | | | Amendment No. 9 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2022 (filed as Exhibit 10.58 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2022 and incorporated herein by reference thereto). | | | | | | Amendment No. 10 to the Directors’ Compensation Plan of Discover Financial Services, effective as of December 14, 2022. | | | | | | Form 2019 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2019 and incorporated herein by reference thereto). | | | | | | Form 2019 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2019 and incorporated herein by reference thereto). | | | | | | Form 2020 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2020 and incorporated herein by reference thereto). | | | | | | Form 2020 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2020 and incorporated herein by reference thereto). | | | |
| | | | | | | | | Exhibit Number | | Description | | | Form 2021 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 4, 2021 and incorporated herein by reference thereto). | | | | | | Form 2021 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 4, 2021 and incorporated herein by reference thereto). | | | | | | Form 2022 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 22, 2022 and incorporated herein by reference thereto). | | | | | | Form 2022 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 28, 2022 and incorporated herein by reference thereto). | | | | | | Form 2022 Special Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 28, 2022 and incorporated herein by reference thereto). | | | | | | Subsidiaries of the Registrant. | | | | | | Consent of Independent Registered Public Accounting Firm. | | | | | | Powers of Attorney (included on signature page). | | | | | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | | | | | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | | | | | | 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 | | Interactive Data File — the following financial statements from Discover Financial Services Annual Report on Form 10-K formatted in inline XBRL: (1) Consolidated Statements of Financial Condition, (2) Consolidated Statements of Income, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Changes in Stockholders' Equity, (5) Consolidated Statements of Cash Flows and (6) Notes to the Consolidated Financial Statements. | | | | 104 | | Cover Page Interactive Data File — the cover page from Discover Financial Services Annual Report on Form 10-K formatted in inline XBRL and contained in Exhibit 101. | | | |
| | * | We agree to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to such agreement upon the request of the Commission in accordance with Item 601(b)(2) of Regulation S-K. |
| | † | Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 15(b) of this report. |
* We agree to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to such agreement upon the request of the Commission in accordance with Item 601(b)(2) of Regulation S-K. | | Item 16. | Form 10-K Summary |
† Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 15(b) of this report. Item 16. Form 10-K Summary None.
Signature Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | | | | | | | | | | Discover Financial Services (Registrant)
| | | | | | By: | | /s/ JOHN T. GREENE | | | | John T. Greene Executive Vice President, Chief Financial Officer
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Date: February 26, 202023, 2023
Power of Attorney We, the undersigned, hereby severally constitute WanjikuHope D. Mehlman and Philip J. Walcott and D. Christopher Greene,Castrogiovanni, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the annual report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 26, 2020. 23, 2023. | | | | | | | | Signature | Title | | | /s/ ROGER C. HOCHSCHILD | Chief Executive Officer and President, Director | Roger C. Hochschild | | | | /s/ JOHN T. GREENE | Executive Vice President, Chief Financial Officer (Principal Financial Officer) | John T. Greene | | | | /s/ ESDWARDHIFRA W. MC. KCGROGANOLSKY | Senior Vice President, Controller and Chief Accounting Officer (Principal (Principal Accounting Officer) | Edward W. McGroganShifra C. Kolsky | | | | /s/ LTAWRENCEHOMAS A. WG. MEINBACHAHERAS | Chairman of the Board | Lawrence A. WeinbachThomas G. Maheras | | | | /s/ JEFFREY S. ARONIN | Director | Jeffrey S. Aronin | | | | /s/ MARY K. BUSH | Director | Mary K. Bush | | | | /s/ GREGORY C. CASE | Director | Gregory C. Case | | | | /s/ CANDACE H. DUNCAN | Director | Candace H. Duncan | | | | /s/ JOSEPH F. EAZOR | Director | Joseph F. Eazor | | | | /s/ CYNTHIA A. GLASSMAN | Director | Cynthia A. Glassman | | | | /s/ THOMAS G. MAHERAS
| Director | Thomas G. Maheras | | | | /s/ MICHAEL H. MOSKOW | Director | Michael H. Moskow | | | | /s/ JOHN B. OWEN | Director | John B. Owen | | | | /s/ DAVID L. RAWLINSON | Director | David L. Rawlinson | | | | /s/ MARK A. THIERER | Director | Mark A. Thierer | | | | /s/ JENNIFER L. WONG | Director | Jennifer L. Wong | |
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