Washington, D.C. 20549
The table below presents the carrying amounts of certain assets and liabilities of Discover Financial Services’Services' consolidated variable interest entities ("VIEs"), which are included in the condensed consolidated statements of financial condition above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated VIEs. The liabilities in the table below include third-party liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts for which creditors have recourse to the general credit of Discover Financial Services.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments which are necessary for athe fair presentation of the results for the interim period. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with the Company’s 2016Company's 2021 audited consolidated financial statements filed with the Company’sCompany's annual report on Form 10-K for the year ended December 31, 2016.2021.
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 condensed 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 condensed 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.
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.
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.
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’sCompany's condensed consolidated statements of financial condition. The Company has not recorded any incremental contingent liability associated with its secured borrowing representations and warranties. Management believes that the
probability of having to replace, repurchase or sell assets pledged as collateral under secured borrowing arrangements, including an early amortization event, is low.
Diners Club and DFS Services LLC (on behalf of PULSE) have various counterparty exposures, which are listed below.below:
The maximum potential amount of future payments related to such contingent obligations is dependent upon the transaction volume processed between the time a potential counterparty defaults on its settlement and the time at which the Company disables the settlement of any further transactions for the defaulting party. However,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.
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 September 30, 2017,2022, the Company had not recorded any contingent liability in the condensed consolidated financial statements for these counterparty exposures and management believes that the probability of any payments under these arrangements is low.
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’sCompany'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 condensed 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. For example, Discover Bank and Discover Financial Services have been the subject of actions by the FDIC and the Federal Reserve, respectively, with respect to anti-money laundering and related compliance programs as referred to below. In addition, certainCertain subsidiaries of the Company are subject to a consent order with the CFPBConsumer Financial Protection Bureau ("CFPB") regarding certain private student loan servicing practices, as described below. Regulatory actions generally can include demands forPursuant 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 andor require customer restitution. Supervisory actions related to anti-money laundering and related laws and regulations will limit for a period of time the Company's ability to enter into certain types of acquisitions and make certain types of investments.restitution at any time.
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 $145 million.$190 million as of September 30, 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’sCompany's best estimate of such losses for those matters for which an estimate can be made, andmade. It does not represent the Company’sCompany'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 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 September 30, 2017 | | | | | | | |
Assets | | | | | | | |
U.S. Treasury securities | $ | 673 |
| | $ | — |
| | $ | — |
| | $ | 673 |
|
Residential mortgage-backed securities - Agency | — |
| | 776 |
| | — |
| | 776 |
|
Available-for-sale investment securities | $ | 673 |
| | $ | 776 |
| | $ | — |
| | $ | 1,449 |
|
| | | | | | | |
Derivative financial instruments(1) | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 3 |
|
| | | | | | | |
Liabilities | | | | | | | |
Derivative financial instruments(1) | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | 10 |
|
| | | | | | | |
Balance at December 31, 2016 | | | | | | | |
Assets | | | | | | | |
U.S. Treasury securities | $ | 674 |
| | $ | — |
| | $ | — |
| | $ | 674 |
|
Residential mortgage-backed securities - Agency | — |
| | 931 |
| | — |
| | 931 |
|
Available-for-sale investment securities | $ | 674 |
| | $ | 931 |
| | $ | — |
| | $ | 1,605 |
|
| | | | | | | |
Derivative financial instruments | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | 7 |
|
| | | | | | | |
Liabilities | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | 94 |
| | $ | — |
| | $ | 94 |
|
| | | | | | | |
| |
(1) | Effective in the first quarter of 2017, certain cash collateral amounts (variation margin) associated with derivative positions that are cleared through an exchange are reflected as offsets to the associated derivative asset and derivative liability balances, generally reducing the fair values to approximately zero. See Note 14: Derivatives and Hedging Activities for additional information. |
There were no 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 September 30, 2022 | | | | | | | |
Assets | | | | | | | |
Fair value - OCI | | | | | | | |
U.S. Treasury and U.S. GSE securities | $ | 6,084 | | | $ | 8 | | | $ | — | | | $ | 6,092 | |
Residential mortgage-backed securities - Agency | — | | | 589 | | | — | | | 589 | |
Available-for-sale investment securities | $ | 6,084 | | | $ | 597 | | | $ | — | | | $ | 6,681 | |
| | | | | | | |
Derivative financial instruments - cash flow hedges(1) | $ | — | | | $ | 2 | | | $ | — | | | $ | 2 | |
| | | | | | | |
Fair value - Net income | | | | | | | |
Marketable equity securities | $ | 58 | | | $ | — | | | $ | — | | | $ | 58 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Liabilities | | | | | | | |
Fair value - OCI | | | | | | | |
Derivative financial instruments - cash flow hedges(1) | $ | — | | | $ | 4 | | | $ | — | | | $ | 4 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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 three or nine months ended September 30, 2017 and 2016.Company's condensed 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 the 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 September 30, 2017,2022, 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 $758$617 million,, a weighted-average coupon of 2.81%4.04% 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.
As of October 16, 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 OIS to the SOFR OIS for U.S. Dollar cleared interest rate swaps. The Company's valuation methodology will result 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 of thetested for impairment. No impairments were recognized related to these assets is determined to be impaired. Duringduring the three and nine months ended September 30, 2017 and 2016, the2022. The Company had no materialrecognized $92 million of impairments related to these assets.assets during the nine months ended September 30, 2021.
Financial Instruments Measured at Other Than Fair Value
The following tables disclose the estimated fair value of the Company's financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions): |
| | | | | | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Carrying Value |
Balance at September 30, 2017 | | | | | | | | | |
Assets | | | | | | | | | |
States and political subdivisions of states | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
Residential mortgage-backed securities - Agency | — |
| | 179 |
| | — |
| | 179 |
| | 177 |
|
Held-to-maturity investment securities | $ | — |
| | $ | 180 |
| | $ | — |
| | $ | 180 |
| | $ | 178 |
|
| | | | | | | | | |
Cash and cash equivalents | $ | 13,249 |
| | $ | — |
| | $ | — |
| | $ | 13,249 |
| | $ | 13,249 |
|
Restricted cash | $ | 1,279 |
| | $ | — |
| | $ | — |
| | $ | 1,279 |
| | $ | 1,279 |
|
Net loan receivables | $ | — |
| | $ | — |
| | $ | 81,706 |
| | $ | 81,706 |
| | $ | 77,912 |
|
Accrued interest receivables | $ | — |
| | $ | 797 |
| | $ | — |
| | $ | 797 |
| | $ | 797 |
|
| | | | | | | | | |
Liabilities | | | | | | | | | |
Deposits | $ | — |
| | $ | 56,307 |
| | $ | — |
| | $ | 56,307 |
| | $ | 56,135 |
|
Long-term borrowings - owed to securitization investors | $ | — |
| | $ | 16,399 |
| | $ | 683 |
| | $ | 17,082 |
| | $ | 16,979 |
|
Other long-term borrowings | $ | — |
| | $ | 10,336 |
| | $ | — |
| | $ | 10,336 |
| | $ | 9,758 |
|
Accrued interest payables | $ | — |
| | $ | 188 |
| | $ | — |
| | $ | 188 |
| | $ | 188 |
|
| | | | | | | | | |
Balance at December 31, 2016 | | | | | | | | | |
Assets | | | | | | | | | |
States and political subdivisions of states | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | 2 |
|
Residential mortgage-backed securities - Agency | — |
| | 150 |
| | — |
| | 150 |
| | 150 |
|
Held-to-maturity investment securities | $ | — |
| | $ | 152 |
| | $ | — |
| | $ | 152 |
| | $ | 152 |
|
| | | | | | | | | |
Cash and cash equivalents | $ | 11,914 |
| | $ | — |
| | $ | — |
| | $ | 11,914 |
| | $ | 11,914 |
|
Restricted cash | $ | 95 |
| | $ | — |
| | $ | — |
| | $ | 95 |
| | $ | 95 |
|
Net loan receivables | $ | — |
| | $ | — |
| | $ | 78,252 |
| | $ | 78,252 |
| | $ | 75,087 |
|
Accrued interest receivables | $ | — |
| | $ | 724 |
| | $ | — |
| | $ | 724 |
| | $ | 724 |
|
| | | | | | | | | |
Liabilities | | | | | | | | | |
Deposits | $ | — |
| | $ | 52,183 |
| | $ | — |
| | $ | 52,183 |
| | $ | 51,992 |
|
Long-term borrowings - owed to securitization investors | $ | — |
| | $ | 15,617 |
| | $ | 900 |
| | $ | 16,517 |
| | $ | 16,411 |
|
Other long-term borrowings | $ | — |
| | $ | 9,470 |
| | $ | — |
| | $ | 9,470 |
| | $ | 9,032 |
|
Accrued interest payables | $ | — |
| | $ | 168 |
| | $ | — |
| | $ | 168 |
| | $ | 168 |
|
| | | | | | | | | |
The following tables disclose the estimated fair valuesvalue of thesethe Company's financial assets and financial liabilities whichthat are not required to be carried at fair value on(dollars in millions):
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Balance at September 30, 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 | $ | — | | | $ | 191 | | | $ | — | | | $ | 191 | | | $ | 216 | |
Held-to-maturity investment securities | $ | — | | | $ | 191 | | | $ | — | | | $ | 191 | | | $ | 216 | |
| | | | | | | | | |
Net loan receivables | $ | — | | | $ | — | | | $ | 104,096 | | | $ | 104,096 | | | $ | 97,847 | |
| | | | | | | | | |
Carrying value approximates fair value(1) | | | | | | | | | |
Cash and cash equivalents | $ | 10,004 | | | $ | — | | | $ | — | | | $ | 10,004 | | | $ | 10,004 | |
Restricted cash | $ | 1,866 | | | $ | — | | | $ | — | | | $ | 1,866 | | | $ | 1,866 | |
| | | | | | | | | |
Accrued interest receivables(2) | $ | — | | | $ | 1,103 | | | $ | — | | | $ | 1,103 | | | $ | 1,103 | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Amortized cost | | | | | | | | | |
Time deposits(3) | $ | — | | | $ | 26,699 | | | $ | — | | | $ | 26,699 | | | $ | 26,993 | |
| | | | | | | | | |
| | | | | | | | | |
Long-term borrowings - owed to securitization investors | $ | — | | | $ | 10,660 | | | $ | 88 | | | $ | 10,748 | | | $ | 11,092 | |
Other long-term borrowings | — | | | 8,588 | | | — | | | 8,588 | | | 9,085 | |
Long-term borrowings | $ | — | | | $ | 19,248 | | | $ | 88 | | | $ | 19,336 | | | $ | 20,177 | |
| | | | | | | | | |
Carrying value approximates fair value(1) | | | | | | | | | |
Accrued interest payables(2) | $ | — | | | $ | 160 | | | $ | — | | | $ | 160 | | | $ | 160 | |
| | | | | | | | | |
| | | | | | | | | |
Balance at December 31, 2021 | | | | | | | | | |
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 | |
| | | | | | | | | |
(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 or accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition, were determined by applying the fair value provisions discussed herein. The usecondition.
(3)Excludes deposits without contractually defined maturities for all periods presented.
Cash15. Derivatives and Cash EquivalentsHedging Activities
The carrying value of cash and cash equivalents approximates fair value due to the low level of risk these assets present to the Company as well as the relatively liquid nature of these assets, particularly given their short maturities.
Restricted Cash
The carrying value of restricted cash approximates fair value due to the low level of risk these assets present to the Company as well as the relatively liquid nature of these assets, particularly given their short maturities.
Held-to-Maturity Investment Securities
Held-to-maturity investment securities consist of residential mortgage-backed securities issued by agencies and municipal bonds. The fair value of residential mortgage-backed securities included in the held-to-maturity portfolio is estimated similarly to residential mortgage-backed securities carried at fair value on a recurring basis discussed herein. Municipal bonds are valued based on quoted market prices for the same or similar securities.
Net Loan Receivables
The Company's loan receivables are comprised of credit card and installment loans, including the PCI student loans. Fair value estimates are derived utilizing discounted cash flow analyses, the calculations of which are performed on groupings of loan receivables that are similar in terms of loan type and characteristics. Inputs to the cash flow analysis of each grouping consider recent prepayment trends and seasonality factors, if appropriate, as well as interest accrual estimates based on recent yields. The expected future cash flows, derived through the cash flow analysis, of each grouping are discounted at rates at which similar loans within each grouping could be originated under current market conditions. Significant inputs to the fair value measurement of the loan portfolio are unobservable and, as such, are classified as Level 3.
Accrued Interest Receivables
The carrying value of accrued interest receivables, which is included in other assets on the condensed consolidated statements of financial condition, approximates fair value as it is due in less than one year.
Deposits
The carrying values of money market deposits, savings deposits and demand deposits approximate fair value due to the potentially liquid nature of these deposits. For time deposits for which readily available market rates do not exist, fair values are estimated by discounting expected future cash flows using market rates currently offered for deposits with similar remaining maturities.
Long-Term Borrowings - Owed to Securitization Investors
Fair values of long-term borrowings owed to credit card securitization investors are determined utilizing quoted market prices of the same transactions and, as such, are classified as Level 2. Fair values of long-term borrowings owed to student loan securitization investors are calculated by discounting cash flows using estimated assumptions including, among other things, maturity and market discount rates. A portion of the difference between the carrying value and the fair value of the long-term borrowings owed to student loan securitization investors relates to purchase accounting adjustments recorded in connection with the December 2010 purchase of SLC. Significant inputs to these fair value measurements are unobservable and, as such, are classified as Level 3.
Other Long-Term Borrowings
Fair values of other long-term borrowings, consisting of subordinated and senior debt, are determined utilizing current observable market prices for those transactions and, as such, are classified as Level 2. A portion of the difference between the carrying value and the fair value of other long-term borrowings relates to the cash premiums paid in connection with the 2012 fiscal year debt exchanges.
Accrued Interest Payables
The carrying value of accrued interest payables, which is included in accrued expenses and other liabilities on the condensed consolidated statements of financial condition, approximates fair value as it is payable in less than one year.
| |
14. | 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’sCompany's exposure to interest rate movements and other identified risksforeign 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’sCompany'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 13:14: Fair Value Measurements and Disclosures 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 condensed consolidated statements of financial condition. Collateral amounts recorded in the condensed consolidated statements of financial condition are based on the net collateral posted or held position for each applicable legal entity's master netting arrangement with each counterparty. Certain 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, instead of as collateral in other assets or deposits.
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 securitized debt and deposits. The derivatives are designated as hedges of the risk of changes in cash flows on the Company's LIBOR or Federal Funds rate-based interest payments, andrate swaps qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging (“ ("ASC 815”815"). At September 30, 2022 and December 31, 2021, the Company's outstanding cash flow hedges related only to interest receipts from credit card receivables and had an initial maximum period of three years and two years, respectively.
The effective portion of the change in the fair value of derivatives designated as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows affect earnings. The ineffective portion of the change in fair value of the derivative, if any, is recognized directly in earnings. Amounts reported in AOCI related to derivatives at September 30, 20172022, will be reclassified to interest expenseincome as interest paymentsreceipts are madeaccrued on certain of the Company's floating-rate securitized debt or deposits.then outstanding credit card receivables. During the next 12 months, the Company estimates it will reclassify $7$11 million of pretax losses to interest expenseearnings primarily related to its derivatives designated as cash flow hedges.
Fair Value Hedges
The Company is exposed to changes in the fair value of certain of its fixed-rate debt obligations due to changes in interest rates. TheAt September 30, 2022 and December 31, 2021, the Company usesused interest rate swaps to manage its exposure to changes in fair value of certain fixed-rate senior notes,long-term borrowings, including securitized debt and bank notes, and interest-bearing brokered deposits attributable to changes in LIBOR,the Federal Funds OIS rate, which is a benchmark interest rate asdefined by ASC 815. At December 31, 2021, the Company also used an interest rate swap to manage its exposure to changes in fair value of certain securitized debt attributable to changes in the 1-month LIBOR rate, which is a benchmark interest rate defined by ASC 815. These interest rate swaps qualify as fair value hedges in accordance with ASC 815. Changes in both (i) the fair values of both (i) the derivatives and (ii) the hedged fixed-rate senior notes, securitized debt, bank notes and interest-bearing brokered deposits relatinglong-term borrowings attributable to the interest-rate risk being hedged are recorded in interest expense. The changes generally provide substantial offset to one another, with any difference or ineffectiveness recordedrecognized in interest expense. Any basis differences between the fair value and the carrying amount
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 condensed consolidated statements of income.
Derivatives Cleared Through an Exchange
The legal characterization of cashCash variation margin payments on derivatives cleared through a certainan 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 beginningreduced.
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 2017. Ifmillions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 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(2) | $ | 3,250 | | | 6 | | | $ | 2 | | | $ | 4 | | | $ | 250 | | | $ | — | | | $ | — | |
Interest rate swaps—fair value hedge | $ | 3,425 | | | 4 | | | — | | | — | | | $ | 6,125 | | | — | | | — | |
Derivatives not designated as hedges | | | | | | | | | | | | | |
Foreign exchange forward contracts(3) | $ | 24 | | | 7 | | | — | | | — | | | $ | 36 | | | — | | | — | |
| | | | | | | | | | | | | |
Total gross derivative assets/liabilities(4) | | | | | 2 | | | 4 | | | | | — | | | — | |
Less: collateral held/posted(5) | | | | | — | | | — | | | | | — | | | — | |
Total net derivative assets/liabilities | | | | | $ | 2 | | | $ | 4 | | | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
(1)The gross and net derivative assets and liabilities were immaterial as of December 31, 2021.
(2)At September 30, 2022, the changeCompany had been effectivetwo forward-starting interest rate swaps with a total notional amount of $1 billion with interest payments set to be exchanged starting in the prior year, bothfourth quarter of 2022. At December 31, 2021, the Company had no forward-starting interest rate swaps.
(3)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 September 30, 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.
(4)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 September 30, 2022 and December 31, 2021, the Company had one outstanding contract with a total notional amount of $10 million and $50 million, respectively, and immaterial fair values.
(5)Collateral amounts, which consist of cash and investment securities, are limited to the related derivative assets/liabilitiesasset/liability balance and do not include excess collateral postedreceived/pledged.
The following amounts were recorded on the condensed consolidated statements of financial condition related to cumulative basis adjustments for fair value hedges (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 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 | $ | 3,385 | | | $ | (4) | | | $ | 6,158 | | | $ | 83 | |
| | | | | | | |
(1)The balance includes $33 million and $48 million of cumulative hedging adjustments related to discontinued hedging relationships as of September 30, 2022 and December 31, 2016, would have been $79 million lower.
Derivatives Activity2021, respectively.
The following table summarizes the fair value (including accrued interest) and outstanding notional amounts of derivative instruments and related collateral balances (dollars in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Notional Amount | | Number of Outstanding Derivative Contracts | | Derivative Assets | | Derivative Liabilities | | Notional Amount | | Derivative Assets | | Derivative Liabilities |
Derivatives designated as hedges | | | | | | | | | | | | | |
Interest rate swaps—cash flow hedge(1) | $ | 3,800 |
| | 7 |
| | $ | 2 |
| | $ | 7 |
| | $ | 3,700 |
| | $ | — |
| | $ | 22 |
|
Interest rate swaps—fair value hedge(1) | $ | 5,332 |
| | 19 |
| | 1 |
| | 3 |
| | $ | 6,208 |
| | 7 |
| | 72 |
|
Derivatives not designated as hedges | | | | | | | | | | | | | |
Foreign exchange forward contracts(2) | $ | 13 |
| | 6 |
| | — |
| | — |
| | $ | 13 |
| | — |
| | — |
|
Interest rate swap | $ | — |
| | — |
| | — |
| | — |
| | $ | 149 |
| | — |
| | — |
|
Total gross derivative assets/liabilities(3) | | | | | 3 |
| | 10 |
| | | | 7 |
| | 94 |
|
Less: Collateral held/posted(4) | | | | | (1 | ) | | (10 | ) | | | | (2 | ) | | (94 | ) |
Total net derivative assets/liabilities | | | | | $ | 2 |
| | $ | — |
| | | | $ | 5 |
| | $ | — |
|
| | | | | | | | | | | | | |
The following table summarizes the impact of the derivative instruments on income and indicates where within the condensed consolidated financial statements such impact is reported (dollars in millions): | |
(1) | Effective in the first quarter of 2017, certain cash collateral amounts (variation margin) associated with derivative positions that are cleared through an exchange are reflected as offsets to the associated derivative asset and derivative liability balances, generally reducing the fair values to approximately zero. The affected contracts remain term instruments and are reflected in notional amounts and number of outstanding derivative contracts. |
| |
(2) | The foreign exchange forward contracts have notional amounts of EUR 7 million, GBP 3 million and SGD 1 million as of September 30, 2017 and notional amounts of EUR 6 million, GBP 5 million and SGD 1 million as of December 31, 2016.
|
| |
(3) | In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At September 30, 2017, the Company had one outstanding contract with a notional amount of $27 million and immaterial fair value. At December 31, 2016, the Company had one outstanding contract with a notional amount of $36 million and immaterial fair value. |
| |
(4) | Collateral amounts, which consist of both cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged. Effective in the first quarter of 2017, collateral held/posted excludes amounts that are recorded as offsets to the associated derivative asset or derivative liability balances. |
| | | | | | | | | | | | | | | | | | | |
| | | Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income |
| | | Interest Expense | | | | |
| | | Long-Term Borrowings | | Interest Income (Credit Card) | | Other Income |
For the Three Months Ended September 30, 2022 | | | | | | | |
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded | | | $ | (168) | | | $ | 2,783 | | | $ | 19 | |
| | | | | | | |
The effects of cash flow and fair value hedging | | | | | | | |
Losses on cash flow hedging relationship | | | | | | | |
Amounts reclassified from OCI into earnings | | | $ | (1) | | | $ | (1) | | | $ | — | |
| | | | | | | |
Gains (losses) on fair value hedging relationships | | | | | | | |
Gains on hedged items | | | $ | 3 | | | $ | — | | | $ | — | |
Losses on interest rate swaps | | | (11) | | | — | | | — | |
Total losses on fair value hedging relationships | | | $ | (8) | | | $ | — | | | $ | — | |
| | | | | | | |
The effects of derivatives not designated in hedging relationships | | | | | | | |
Gains on derivatives not designated as hedges | | | $ | — | | | $ | — | | | $ | 1 | |
| | | | | | | |
For the Three Months Ended September 30, 2021 | | | | | | | |
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded | | | $ | (113) | | | $ | 2,193 | | | $ | 18 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Gains (losses) on fair value hedging relationships | | | | | | | |
Gains on hedged items | | | $ | 45 | | | $ | — | | | $ | — | |
Losses on interest rate swaps | | | (9) | | | — | | | — | |
Total gains on fair value hedging relationships | | | $ | 36 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following tables summarize the impact of the derivative instruments on income and OCI and indicates where within the condensed consolidated financial statements such impact is reported (dollars in millions): |
| | | | | | | | | | | | | | | | | |
| | | Amount of Gain (Loss) Recognized in OCI |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| Location | | 2017 | | 2016 | | 2017 | | 2016 |
Derivatives designated as hedges | | | | | | | | | |
Interest rate swaps - cash flow/net investment hedges | | | | | | | | | |
Total gain (loss) recognized in OCI after amounts reclassified into earnings, pre-tax | OCI | | $ | 2 |
| | $ | 22 |
| | $ | 21 |
| | $ | (31 | ) |
Total gain (loss) recognized in OCI | | | $ | 2 |
| | $ | 22 |
| | $ | 21 |
| | $ | (31 | ) |
| | | | | | | | | |
| | | | | | | | | |
| | | Amount of (Loss) Gain Recognized in Income |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| Location | | 2017 | | 2016 | | 2017 | | 2016 |
Derivatives designated as hedges | | | | | | | | | |
Interest rate swaps - cash flow hedges | | | | | | | | | |
Amount reclassified from OCI into income | Interest Expense | | $ | (3 | ) | | $ | (9 | ) | | $ | (11 | ) | | $ | (27 | ) |
Total amount reclassified from OCI into income on cash flow hedges | | | (3 | ) |
| (9 | ) |
| (11 | ) |
| (27 | ) |
| | | | | | | | | |
Interest rate swaps - fair value hedges | | | | | | | | | |
Gain (loss) on interest rate swaps | | | 2 |
| | (19 | ) | | (1 | ) | | 25 |
|
(Loss) Gain on hedged items | | | (2 | ) | | 18 |
| | 2 |
| | (26 | ) |
Net ineffectiveness gain (loss) | Interest Expense | | — |
| | (1 | ) | | 1 |
| | (1 | ) |
| | | | | | | | | |
(Increase) decrease to interest expense related to net settlements on interest rate swaps | Interest Expense | | (1 | ) | | 9 |
| | 7 |
| | 26 |
|
Total (loss) gain on fair value hedges | | | (1 | ) | | 8 |
| | 8 |
| | 25 |
|
Total loss on derivatives designated as hedges recognized in income | | | $ | (4 | ) |
| $ | (1 | ) |
| $ | (3 | ) |
| $ | (2 | ) |
| | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | |
Total (loss) gain on derivatives not designated as hedges recognized in income | Other Income | | $ | (1 | ) | | $ | — |
| | $ | (2 | ) | | $ | — |
|
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income |
| | | Interest Expense | | Interest Income (Credit Card) | | |
| | | Long-Term Borrowings | | | Other Income |
For the Nine Months Ended September 30, 2022 | | | | | | | |
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded | | | $ | (416) | | | $ | 7,475 | | | $ | 64 | |
| | | | | | | |
The effects of cash flow and fair value hedging | | | | | | | |
Losses on cash flow hedging relationships | | | | | | | |
Amounts reclassified from OCI into earnings | | | $ | (3) | | | $ | (1) | | | $ | — | |
| | | | | | | |
Gains on fair value hedging relationships | | | | | | | |
Gains on hedged items | | | $ | 72 | | | $ | — | | | $ | — | |
Losses on interest rate swaps | | | (61) | | | — | | | — | |
Total gains on fair value hedging relationships | | | $ | 11 | | | $ | — | | | $ | — | |
| | | | | | | |
The effects of derivatives not designated in hedging relationships | | | | | | | |
Gains on derivatives not designated as hedges | | | $ | — | | | $ | — | | | $ | 2 | |
| | | | | | | |
For the Nine Months Ended September 30, 2021 | | | | | | | |
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded | | | $ | (356) | | | $ | 6,452 | | | $ | 47 | |
| | | | | | | |
The effects of cash flow and fair value hedging | | | | | | | |
Losses on cash flow hedging relationships | | | | | | | |
Amounts reclassified from OCI into earnings | | | $ | (2) | | | $ | — | | | $ | — | |
| | | | | | | |
Gains on fair value hedging relationships | | | | | | | |
Gains on hedged items | | | $ | 167 | | | $ | — | | | $ | — | |
Losses on interest rate swaps | | | (38) | | | — | | | — | |
Total gains on fair value hedging relationships | | | $ | 129 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
For the impact of the derivative instruments on OCI, see Note 8: 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 postThese collateral with a counterparty for its fair value and cash flow hedge interest rate swaps depending on the credit rating it or Discover Bank receives from specified major credit rating agencies. Collateral receivable or payable amounts are generally not offset against the fair value of these derivatives but are recorded separately in other assets or deposits. However, effective inMost of the first quarter of 2017, certainCompany's cash collateral amounts relatedrelate 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 September 30, 2017, Discover Bank’s credit rating met specified thresholds set by its counterparties. However, if its credit rating is reduced by one rating notch, Discover Bank would be required to post additional collateral. The amount of
additional collateral as of September 30, 2017 would have been $34 million. DFS (Parent Company) had no outstanding derivatives as of September 30, 2017, 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.
16. Segment Disclosures
The Company could also be declared in default onmanages its derivative obligations.
The Company’s business activities are managed in two segments: DirectDigital Banking and Payment Services.
Direct•Digital Banking: The DirectDigital 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 DirectDigital Banking revenues relate to interest income earned on the segment's loan products. Additionally, the Company’sCompany'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’sCompany'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’sCompany'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’sCompany'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’sCompany's chief operating decision maker.decision-maker.
The following table presents segment data (dollars in millions): |
| | | | | | | | | | | |
| Direct Banking | | Payment Services | | Total |
For the Three Months Ended September 30, 2017 | | | | | |
Interest income | | | | | |
Credit card loans | $ | 2,026 |
| | $ | — |
| | $ | 2,026 |
|
Private student loans | 132 |
| | — |
| | 132 |
|
PCI student loans | 39 |
| | — |
| | 39 |
|
Personal loans | 224 |
| | — |
| | 224 |
|
Other | 55 |
| | — |
| | 55 |
|
Total interest income | 2,476 |
| | — |
| | 2,476 |
|
Interest expense | 426 |
| | — |
| | 426 |
|
Net interest income | 2,050 |
| | — |
| | 2,050 |
|
Provision for loan losses | 675 |
| | (1 | ) | | 674 |
|
Other income | 401 |
| | 74 |
| | 475 |
|
Other expense | 909 |
| | 39 |
| | 948 |
|
Income before income tax expense | $ | 867 |
| | $ | 36 |
| | $ | 903 |
|
| | | | | |
For the Three Months Ended September 30, 2016 | | | | | |
Interest income | | | | | |
Credit card loans | $ | 1,812 |
| | $ | — |
| | $ | 1,812 |
|
Private student loans | 112 |
| | — |
| | 112 |
|
PCI student loans | 46 |
| | — |
| | 46 |
|
Personal loans | 185 |
| | — |
| | 185 |
|
Other | 29 |
| | — |
| | 29 |
|
Total interest income | 2,184 |
| | — |
| | 2,184 |
|
Interest expense | 359 |
| | — |
| | 359 |
|
Net interest income | 1,825 |
| | — |
| | 1,825 |
|
Provision for loan losses | 445 |
| | — |
| | 445 |
|
Other income | 408 |
| | 68 |
| | 476 |
|
Other expense | 857 |
| | 38 |
| | 895 |
|
Income before income tax expense | $ | 931 |
| | $ | 30 |
| | $ | 961 |
|
| | | | | |
| | | | | |
The following table presents segment data (dollars in millions): | | | | | | | | | | | | | | | | | |
| Digital Banking | | Payment Services | | Total |
For the Three Months Ended September 30, 2022 | | | | | |
Interest income | | | | | |
Credit card loans | $ | 2,783 | | | $ | — | | | $ | 2,783 | |
Private student loans | 211 | | | — | | | 211 | |
Personal loans | 221 | | | — | | | 221 | |
Other loans | 44 | | | — | | | 44 | |
Other interest income | 98 | | | — | | | 98 | |
Total interest income | 3,357 | | | — | | | 3,357 | |
Interest expense | 514 | | | — | | | 514 | |
Net interest income | 2,843 | | | — | | | 2,843 | |
Provision for credit losses | 773 | | | — | | | 773 | |
Other income | 541 | | | 95 | | | 636 | |
Other expense | 1,346 | | | 42 | | | 1,388 | |
Income before income taxes | $ | 1,265 | | | $ | 53 | | | $ | 1,318 | |
| | | | | |
For the Three Months Ended September 30, 2021 | | | | | |
Interest income | | | | | |
Credit card loans | $ | 2,193 | | | $ | — | | | $ | 2,193 | |
Private student loans | 184 | | | — | | | 184 | |
Personal loans | 219 | | | — | | | 219 | |
Other loans | 30 | | | — | | | 30 | |
Other interest income | 48 | | | — | | | 48 | |
Total interest income | 2,674 | | | — | | | 2,674 | |
Interest expense | 269 | | | — | | | 269 | |
Net interest income | 2,405 | | | — | | | 2,405 | |
Provision for credit losses | 185 | | | — | | | 185 | |
Other income (loss) | 447 | | | (75) | | | 372 | |
Other expense | 1,151 | | | 39 | | | 1,190 | |
Income (loss) before income taxes | $ | 1,516 | | | $ | (114) | | | $ | 1,402 | |
| | | | | |
The following table presents segment data (dollars in millions): | |
| | Direct Banking | | Payment Services | | Total | | Digital Banking | | Payment Services | | Total |
For the Nine Months Ended September 30, 2017 | | | | | | |
For the Nine Months Ended September 30, 2022 | | For the Nine Months Ended September 30, 2022 | | | | | |
Interest income | | | | | | Interest income | |
Credit card loans | $ | 5,818 |
| | $ | — |
| | $ | 5,818 |
| Credit card loans | $ | 7,475 | | | $ | — | | | $ | 7,475 | |
Private student loans | 383 |
| | — |
| | 383 |
| Private student loans | 597 | | | — | | | 597 | |
PCI student loans | 121 |
| | — |
| | 121 |
| |
Personal loans | 629 |
| | — |
| | 629 |
| Personal loans | 633 | | | — | | | 633 | |
Other | 141 |
| | — |
| | 141 |
| |
Other loans | | Other loans | 113 | | | — | | | 113 | |
Other interest income | | Other interest income | 190 | | | — | | | 190 | |
Total interest income | 7,092 |
| | — |
| | 7,092 |
| Total interest income | 9,008 | | | — | | | 9,008 | |
Interest expense | 1,212 |
| | — |
| | 1,212 |
| Interest expense | 1,076 | | | — | | | 1,076 | |
Net interest income | 5,880 |
| | — |
| | 5,880 |
| Net interest income | 7,932 | | | — | | | 7,932 | |
Provision for loan losses | 1,908 |
| | (8 | ) | | 1,900 |
| |
Provision for credit losses | | Provision for credit losses | 1,476 | | | — | | | 1,476 | |
Other income | | Other income | 1,584 | | | 89 | | | 1,673 | |
Other expense | | Other expense | 3,624 | | | 117 | | | 3,741 | |
Income (loss) before income tax expense | | Income (loss) before income tax expense | $ | 4,416 | | | $ | (28) | | | $ | 4,388 | |
| For the Nine Months Ended September 30, 2021 | | For the Nine Months Ended September 30, 2021 | |
Interest income | | Interest income | |
Credit card loans | | Credit card loans | $ | 6,452 | | | $ | — | | | $ | 6,452 | |
Private student loans | | Private student loans | 554 | | | — | | | 554 | |
Personal loans | | Personal loans | 662 | | | — | | | 662 | |
Other loans | | Other loans | 85 | | | — | | | 85 | |
Other interest income | | Other interest income | 156 | | | — | | | 156 | |
Total interest income | | Total interest income | 7,909 | | | — | | | 7,909 | |
Interest expense | | Interest expense | 875 | | | — | | | 875 | |
Net interest income | | Net interest income | 7,034 | | | — | | | 7,034 | |
Provision for credit losses | | Provision for credit losses | (45) | | | — | | | (45) | |
Other income | 1,184 |
| | 219 |
| | 1,403 |
| Other income | 1,284 | | | 833 | | | 2,117 | |
Other expense | 2,634 |
| | 111 |
| | 2,745 |
| Other expense | 3,290 | | | 203 | | | 3,493 | |
Income before income tax expense | $ | 2,522 |
| | $ | 116 |
| | $ | 2,638 |
| Income before income tax expense | $ | 5,073 | | | $ | 630 | | | $ | 5,703 | |
| | | | | | | | | | | |
For the Nine Months Ended September 30, 2016 | | | | | | |
Interest income | | | | | | |
Credit card loans | $ | 5,279 |
| | $ | — |
| | $ | 5,279 |
| |
Private student loans | 329 |
| | — |
| | 329 |
| |
PCI student loans | 142 |
| | — |
| | 142 |
| |
Personal loans | 523 |
| | — |
| | 523 |
| |
Other | 85 |
| | — |
| | 85 |
| |
Total interest income | 6,358 |
| | — |
| | 6,358 |
| |
Interest expense | 1,032 |
| | — |
| | 1,032 |
| |
Net interest income | 5,326 |
| | — |
| | 5,326 |
| |
Provision for loan losses | 1,279 |
| | 2 |
| | 1,281 |
| |
Other income | 1,210 |
| | 205 |
| | 1,415 |
| |
Other expense | 2,576 |
| | 111 |
| | 2,687 |
| |
Income before income tax expense | $ | 2,681 |
| | $ | 92 |
| | $ | 2,773 |
| |
| | | | | | |
Preferred Stock
On October 31, 2017, the Company issued 570,000 depositary shares, each representing a 1/100th interest in a share
17. Revenue from Contracts with Customers
ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), generally applies to the Company was approximately $563 million. On November 1, 2017,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 Company gave noticedistinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. The Company's revenue that is subject to redeem all 575,000this 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 Three Months Ended September 30, 2022 | | | | | |
Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 327 | | | $ | 19 | | | $ | 346 | |
Protection products revenue | 42 | | | — | | | 42 | |
Transaction processing revenue | — | | | 65 | | | 65 | |
Other income | 3 | | | 16 | | | 19 | |
Total other income subject to ASC 606(2) | 372 | | | 100 | | | 472 | |
Other income not subject to ASC 606 | | | | | |
Loan fee income | 168 | | | — | | | 168 | |
Unrealized gains (losses) on equity investments | — | | | (37) | | | (37) | |
Realized gains on equity investments | 1 | | | 32 | | | 33 | |
Total other income (loss) not subject to ASC 606 | 169 | | | (5) | | | 164 | |
Total other income (loss) by operating segment | $ | 541 | | | $ | 95 | | | $ | 636 | |
| | | | | |
For the Three Months Ended September 30, 2021 | | | | | |
Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 280 | | | $ | 19 | | | $ | 299 | |
Protection products revenue | 43 | | | — | | | 43 | |
Transaction processing revenue | — | | | 58 | | | 58 | |
Other income | 3 | | | 15 | | | 18 | |
Total other income subject to ASC 606(2) | 326 | | | 92 | | | 418 | |
Other income not subject to ASC 606 | | | | | |
Loan fee income | 121 | | | — | | | 121 | |
Unrealized gains (losses) on equity investments | — | | | (167) | | | (167) | |
| | | | | |
Total other income not subject to ASC 606 | 121 | | | (167) | | | (46) | |
Total other income (loss) by operating segment | $ | 447 | | | $ | (75) | | | $ | 372 | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Digital Banking | | Payment Services | | Total |
For the Nine Months Ended September 30, 2022 | | | | | |
Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 995 | | | $ | 61 | | | $ | 1,056 | |
Protection products revenue | 128 | | | — | | | 128 | |
Transaction processing revenue | — | | | 183 | | | 183 | |
Other income | 9 | | | 55 | | | 64 | |
Total other income subject to ASC 606(2) | 1,132 | | | 299 | | | 1,431 | |
Other income not subject to ASC 606 | | | | | |
Loan fee income | 450 | | | — | | | 450 | |
Unrealized gains (losses) on equity investments | — | | | (394) | | | (394) | |
Realized gains on equity investments | 2 | | | 184 | | | 186 | |
Total other income (loss) not subject to ASC 606 | 452 | | | (210) | | | 242 | |
Total other income by operating segment | $ | 1,584 | | | $ | 89 | | | $ | 1,673 | |
| | | | | |
For the Nine Months Ended September 30, 2021 | | | | | |
Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 826 | | | $ | 53 | | | $ | 879 | |
Protection products revenue | 129 | | | — | | | 129 | |
Transaction processing revenue | — | | | 167 | | | 167 | |
Other (loss) income | (4) | | | 51 | | | 47 | |
Total other income subject to ASC 606(2) | 951 | | | 271 | | | 1,222 | |
Other income not subject to ASC 606 | | | | | |
Loan fee income | 333 | | | — | | | 333 | |
Unrealized gains on equity investments | — | | | 562 | | | 562 | |
| | | | | |
Total other income not subject to ASC 606 | 333 | | | 562 | | | 895 | |
Total other income by operating segment | $ | 1,284 | | | $ | 833 | | | $ | 2,117 | |
| | | | | |
(1)Net of rewards, including Cashback Bonus rewards, of $811 million and outstanding shares$689 million for the three months ended September 30, 2022 and 2021, respectively, and $2.2 billion and $1.8 billion for the nine months ended September 30, 2022 and 2021, respectively.
(2)Excludes deposit product fees that are reported within net interest income, which were immaterial for the three and nine months ended September 30, 2022 and 2021.
For a detailed description of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (the "Series B preferred stock") and all corresponding depositary shares. the Company's significant revenue recognition accounting policies, see Note 2: Summary of Significant Accounting Policies to the consolidated financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2021.
18. Subsequent Events
The Company estimateshas evaluated events and transactions that the redemption of Series B preferred stock will reduce net income allocatedhave occurred subsequent to common stockholders by approximately $15 millionSeptember 30, 2022, and determined that there were no subsequent events that would require recognition or disclosure in the fourth quarter as a resultcondensed consolidated financial statements.
Item 2. Management's Discussion and Analysis of deferred issuance costs on Series B preferred stock.Financial Condition and Results of Operations
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report. This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,”"believe," "expect," "anticipate," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely," "forecast," and similar expressions. Such statements are based uponon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report and there is no undertaking to update or revise them as more information becomes available.
The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: the effect of the coronavirus disease 2019 ("COVID-19") pandemic and measures taken to mitigate the pandemic, including their impact on our credit quality and business operations as well as their impact on general economic and financial markets, changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence and consumer debt and investor sentiment; the impact of current, pending and future legislation, regulation, supervisory guidance and regulatory and legal actions, including, but not limited to, those related to financial regulatory reform, consumer financial services practices, anti-corruption and funding, capital and liquidity; the actions and initiatives of current and potential competitors; our ability to manage our expenses; our ability to successfully achieve card acceptance across our networks and maintain relationships with network participants; our ability to sustain and grow our private student loan, personal loan and home equity loan products; losses as a result of mortgage loan repurchase and indemnification obligations to secondary market purchasers; difficulty obtaining regulatory approval for, financing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; our ability to manage our credit risk, market risk, liquidity risk, operational risk, legal and compliance risk and strategic risk; the availability and cost of funding and capital; access to deposit, securitization, equity, debt and credit markets; the impact of rating agency actions; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; losses in our investment portfolio; limits on our ability to pay dividends and repurchase our common stock; limits on our ability to receive payments from our subsidiaries; fraudulent activities or material security breaches of key systems; our ability to remain organizationally effective; our ability to increase or sustain Discover card usage or attract new customers; our ability to maintain relationships with merchants; the effect of political, economic and market conditions, geopolitical events and unforeseen or catastrophic events; our ability to introduce new products and services; our ability to manage our relationships with third-party vendors; our ability to maintain current technology and integrate new and acquired systems; our ability to collect amounts for disputed transactions from merchants and merchant acquirers; our ability to attract and retain employees; our ability to protect our reputation and our intellectual property; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. We routinely evaluate and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or our debt or equity securities.
Additional factors that could cause our results to differ materially from those described below can be found in this section inof this quarterly report and in “Risk"Risk Factors,” “Business—Competition,” “Business—Supervision" "Business," and Regulation” and “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" in our annual report on Form 10-K for the year ended December 31, 2016,2021, which is filed with the SECSecurities and Exchange Commission ("SEC") and available at the SEC’sSEC's internet site (http:(https://www.sec.gov).
Introduction and Overview
Discover Financial Services ("DFS") is a directdigital banking and payment services company. We provide directdigital banking products and services and payment services through our subsidiaries. We offer our customers credit card loans, private student loans, personal loans, home equity loans and deposit products. We also operate the Discover Network, the PULSE network (“PULSE”("PULSE") and Diners Club International (“("Diners Club”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 point-of-sale terminals at retail locationsand 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.
Our primary revenues consist of interest income earned on loan receivables and fees earned from customers, financial institutions, merchants and issuers. The primary expenses required to operate our business include funding costs (interest
expense), loancredit loss provisions, customer rewards and expenses incurred to grow, manage and service our loan receivables and networks. Our business activities are funded primarily through consumer deposits, securitization of loan receivables and the issuance of unsecured debt.
COVID-19 Pandemic
For a discussion on how the risks related to the COVID-19 pandemic may affect our businesses, results of operations and financial condition, see "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2021.
Quarter Highlights
Net incomeThe highlights below compare results as of and for the three months ended September 30, 2017 was $602 million compared to $639 million2022, against results for the same period in 2016.the prior year.
•Net income was $1.0 billion, or $3.54 per diluted share, compared to net income of $1.1 billion, or $3.54 per diluted share, in the prior year.
•Total loans grew $6.9$15.4 billion, or 9%17%, from September 30, 2016 to $80.4$104.9 billion.
•Credit card loans grew $5.5$13.3 billion, or 9%19%, to $63.5 billion, and Discover card sales volume increased 5% from September 30, 2016.$83.6 billion.
Net•The net charge-off rate excluding PCIfor credit card loans increased 6127 basis points from the prior year to 2.71%1.92% and the credit card delinquency rate for credit card loans over 30 days past due increased 2763 basis points from the prior year to 2.14%2.11%.
•Direct-to-consumer deposits grew $3.4$4.2 billion, or 10%7%, from the prior year to $38.7$66.2 billion.
•Payment Services transaction dollar volume for the segment was $51.6$84.1 billion, up 16% from the prior year.
10%.Outlook
We planThe outlook below provides our current expectations for our financial results based on continuing to provide strong capital returns to shareholders through executing onmarket conditions, the regulatory and legal environment and our 2017 capital plan. We will continue to make material investments in marketing and remain focused on utilizing our rewards program to drive receivables growth. business strategies.
•We expect thiselevated loan growth to result in higherbased on the current expectations of sales trends and recent account growth.
•Based on the current interest income levels. Our total charge-off rate environment, net interest margin is expected to be higherincrease in comparison to 2021.
•We expect the total net charge-off rate to remain relatively flat, in comparison to the prior year, resulting from lower than expected losses year-to-date.
•We expect elevated employee compensation and we expectbenefits expense from higher headcount, but remain committed to add to the loan loss reserve to provide for the seasoning of recent loan growthmanaging expenses and increasing consumer leverage as a result of supply driven credit normalization. The announced redemption of our preferred stock (see Note 16: Subsequent Events to our condensed consolidated financial statements) will result in a reduction to earnings per share in the fourth quarter.
We continue to leverage our network to support our card-issuing business. In our payments segment, we continue to pursue new ways to grow volume and we expect competition to remain intense.make investments for profitable long term growth.
Regulatory Environment and Developments
In recent years, federal banking regulators have implementedBanking
Capital Standards and continueStress Testing
As a bank holding company, DFS is subject to proposemandatory supervisory stress tests every other year and finalize new regulations and supervisory guidance, including under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Regulators have also increased their examination and enforcement action activities. The Dodd-Frank Act creates a framework for regulation of large systemically significant financial firms, including Discover, through a variety of measures, including increasedis required to submit annual capital and liquidity requirements and limits on leverage and enhanced supervisory authority. The Dodd-Frank Act contains comprehensive provisions governing the practices and oversight of financial institutions as well as other participants in the financial markets. We expect regulatorsplans to continue taking formal enforcement actions against financial institutions in addition to addressing concerns through non-public supervisory actions or findings. While the new Congress and Administration have expressed support for Dodd-Frank modifications that could reduce regulatory burdens through a variety of channels including executive action, rulemaking and legislation, prospects for the enactment of significant changes are uncertain.
The impact of the evolving regulatory environment on our business and operations depends upon a number of factors, including supervisory priorities and actions, our actions, those of our competitors and other marketplace participants, and the behavior of consumers. Regulatory developments, enforcement actions, findings and ratings could affect supervisory priorities, actions, and rule-making, as well as negatively impact our business strategies, require us to limit or change our business practices, limit our product offerings, invest more management time and resources in compliance efforts, limit the fees we can charge for services, limit our ability to pursue certain business opportunities and obtain related required regulatory approvals, or change how we compensate certain of our employees. For example, in 2016, federal banking regulators issued a proposed rulemaking on incentive compensation which is prescriptive in nature and would require an extensive restructuring of incentive compensation practices for certain employees, including our executives. Any changes to our business or compensation structure arising out of this rule could impact our ability to attract, hire or retain certain personnel. The timing and substance of the final rule are unknown. In September 2017, the Board of Governors of the Federal Reserve System (the "Federal Reserve"based on forward-looking internal analysis of income and capital levels under expected and stressful conditions.DFS is also subject to capital buffer requirements, including the Stress Capital Buffer ("SCB") issued two proposals, one, which requires maintenance of regulatory capital levels above a threshold established based on the results of supervisory stress tests after accounting for planned dividend payments.
In January 2021, the Federal Reserve finalized regulatory amendments that would establishmade targeted changes to the capital planning, regulatory reporting and SCB requirements for firms subject to Category IV standards, including DFS, to be consistent with the Federal Reserve’s regulatory tailoring framework. The final rules generally align to instructions the Federal Reserve previously provided to Category IV firms regarding their respective capital plan submissions. The amended rules also provide Category IV firms with the option to submit to supervisory expectations for the
board of directors of bank holding companies and another that establishes a new rating systemstress tests during off years if they wish for the evaluationFederal Reserve to reset the stress test portion of large financial institutions. Comments on eachtheir SCB requirement. In connection with the final rulemaking, the Federal
Reserve revised the scope of application of its existing regulatory guidance for capital planning to align with the tailoring framework. However, the timing and substance of any final rulesadditional changes to existing guidance or new guidance are unknown. For more information on recent matters affecting Discover, see Note 12: Litigation and Regulatory Matters to our condensed consolidated financial statements. Regulatory developments, enforcement actions, findings and ratings could also have an impact on our strategies,uncertain.
In June 2021, the value of our assets, or otherwise adversely affect our businesses.
As a result ofFederal Reserve publicly announced the growing cybersecurity threat and the number of incidents involving unauthorized access to consumer information, including the September 2017 disclosure of a large data breach at a national credit reporting agency, banking regulators and policymakers at the federal and state levels are increasingly focused on measures to enhance data security and incident response capabilities. The Federal Financial Institutions Examination Council has revised examiner guidance for evaluating the adequacy of a financial institution's information security program and associated risk management practices. In addition, in October 2016, federal banking regulators issued an advanced notice of proposed rulemaking that provides for enhanced cyber risk management standards to increase the operational resilience of large financial services firms and reduce the systemic impact of a cybersecurity event. The timing and final form of any final rule is uncertain at this time. Legislation at various levels of government has also been proposed to address security breach notification and data security standards. While it is too early to know their impact, these developments could ultimately result in the imposition of requirements on Discover and other card issuers or networks that could increase costs or adversely affect the competitiveness of our credit card or debit card products. In addition, the size and scope of the 2017 national credit reporting agency breach may result in the financial services industry shifting to new means identifying and authenticating consumers.
Compliance expenditures have increased significantly for Discover and other financial services firms, and we expect them to continue to increase as regulators remain focused on controls and operational processes. We may face additional compliance and regulatory risk to the extent that we enter into new business arrangements with third-party service providers, alternative payment providers or other industry participants. The additional expense, time and resources needed to comply with ongoing regulatory requirements may adversely impact our business and results of operations.
Consumer Financial Services
The Consumer Financial Protection Bureau (the "CFPB") regulates consumer financial products and services, as well as certain financial services providers, including Discover. The CFPB has rulemaking and interpretive authority under the Dodd-Frank Act and other federal consumer financial services laws, as well as broad supervisory, examination and enforcement authority over designated financial services providers. The CFPB’s regulatory authority includes the exercise of rulemaking, supervision and enforcement powers with respect to “unfair, deceptive or abusive acts or practices” and consumer access to fair, transparent and competitive financial products and services. The CFPB's policy priorities for 2017, as in recent years, include a focus on several financial products of the type we offer (e.g. credit cards and student loans).
The CFPB recently issued a final rule that will significantly limit the use of pre-dispute arbitration agreements and class action waivers. For more information, see Note 12: Litigation and Regulatory Matters to our condensed consolidated financial statements.
In addition, the CFPB publishes regular Complaint Reports and Supervisory Highlights about specific products, services and practices. The CFPB also maintains an online consumer complaint portal that shows the nature of each consumer's complaint and the financial services provider's responses, such as whether the requested relief was provided. The complaint portal allows consumers' narratives of their complaints to be included, although the Bureau does not verify the accuracy of the narratives. On July 29, 2016 the CFPB proposed to replace the dispute function on the portal, whereby the customer can dispute a company’s response to the complaint, with a survey that will allow the customer to provide feedback on the financial services provider's handling of the complaint. The CFPB seeks to implement this survey in 2017. In addition to conducting regular examinations of regulated financial services providers the CFPB regularly collects account-level information about certain financial products (e.g. credit cards) from Discover and other large financial services providers. The CFPB's analysis of complaint and account-level data, together with its supervisory examinations, can inform future decisions about its regulatory and examination priorities and influence consumers' decisions about doing business with financial services providers.
Credit Cards
Pursuant to the CARD Act, the CFPB is conducting its bi-annual review of the consumer credit card market. The review may result in additional guidance for credit card issuers, regulatory changes or legislative recommendations to Congress. The cost and availability of credit, credit disclosures and consumer experience with debt collectors continue to be
an area of focus of the CFPB. The CFPB may propose debt collection regulations that apply to our lending business in 2017. The CFPB is developing a comprehensive debt collection rule that is expected to address practices of both third party debt collectors, which are currently regulated under the Fair Debt Collection Practices Act, and creditors like Discover.
Private Student Loans
There continues to be legislative and regulatory focus on the private student loan market, including by the CFPB, the Federal Deposit Insurance Corporation (the "FDIC") and some state legislatures and state attorneys general. This regulatory focus has resulted in an increase in supervisory examinations of Discover related to private student loans. On July 22, 2015, the CFPB and Discover entered into a consent order pertaining to certain student loan servicing practices of Discover Bank, The Student Loan Corporation and Discover Products, Inc. See Note 12: Litigation and Regulatory Matters to our condensed consolidated financial statements for more information.
Recent areas of regulatory attention include servicing, payments and collection practices, originations at for-profit schools, and other matters. Student loan servicing laws have been enacted in California and the District of Columbia, and similar bills are pending elsewhere that would impose new licensing, servicing, reporting and regulatory oversight requirements on non-bank student loan servicers. The enactment of new legislation or the adoption of new regulations or guidance may increase the complexity and expense of servicing student loans. Legislators and regulators may take additional actions that impact the student loan market in the future, which could cause us to change our private student loan products or servicing practices in ways that we may not currently anticipate.
Mortgage Lending
The mortgage industry continues to be an area of supervisory focus and the CFPB has stated that it will concentrate its examinations on a variety of mortgage-related topics including steering consumers to less favorable products, discrimination, abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan origination compensation and servicing practices. The CFPB has recently published several final rules impacting the mortgage industry. For example, on August 4, 2016, the CFPB issued final rules that expand the obligations of servicers and resolve some ambiguities. These changes will generally take effect in 2017. On July 7, 2017, the CFPB finalized updates to its "Know Before You Owe" mortgage disclosure rule. We are working to implement the changes for our home equity loan business.
Payment Networks
The Dodd-Frank Act contains several provisions impacting the debit card market, including network participation requirements and interchange fee limitations. The changing debit card environment, including competitor actions related to merchant and acquirer pricing and transaction routing strategies, has adversely affected, and is expected to continue to adversely affect, our PULSE network's business practices, network transaction volume, revenue and prospects for future growth. We continue to closely monitor competitor pricing strategies in order to assess their impact on our business and on competition in the marketplace. The U.S. Department of Justice is examining some of these competitor pricing strategies. In addition, PULSE filed a lawsuit against Visa in late 2014 with respect to these competitive concerns, which will significantly impact expensesstress tests for the payment services segment. In addition, the Dodd-Frank Act's network participation requirements impact PULSE's ability to enter into exclusivity arrangements, which affects PULSE's current business practices and may materially adversely affect its network transaction volume and revenue.
European interchange fee regulation entered into force in June 2015. The regulation, among other things, caps interchange fees of "four-party" networks such as Visa and MasterCard. However, the regulation provides that “three-party” networks should be treated as “four-party” networks when they license third-party providers to issue cards and/or acquire merchants or when they issue cards with a co-brand partner or through an agent. This means the caps apply to elements of the financial arrangements agreed to between Diners Club and each of our stand-alone acquirers in Western Europe. The caps took effect in December 2015. The regulation excludes commercial card transactions from the scope of the caps. The regulation also contains a number of business rules, which we have, to the extent applicable, implemented in our Diners Club business.
There are additional initiatives in Europe that may have an impact on our Diners Club business, including revisions to the Payment Services Directive ("PSD2") and the new General Data Protection Regulation ("GDPR"). The PSD2 was published in the Official Journal of the EU in December 2015. Each European Union member state will transpose the PSD2 into its national law, and in January 2018 the PSD2 will enter into force. Among other terms, the PSD2 includes provisions
that once transposed into local law will regulate surcharging and network access requirements, which may result in differential surcharging of Diners Club cards and may impact Diners Club licensing arrangements in Europe. The European Parliament's Civil Liberties, Justice and Home Affairs Committee approved the final draft of the GDPR in December 2015. The final GDPR was published in the Official Journal of the European Union on May 4, 2016. Organizations have two years to prepare before the legislation comes into force on May 25, 2018. We are preparing for implementation of the GDPR.
The Chinese State Council previously announced that foreign payments companies would be ablefirms required to participate in the Chinese domestic market2021 comprehensive capital analysis and be eligible to apply for a license to operate a Bank Card Clearing Institutionreview ("BCCI"CCAR") in China.process. In June 2016 the People’s Bank of China ("PBOC"), in conjunctionaccordance with the China Banking Regulatory Commission, promulgatedcapital plan rule amendments that were finalized in January 2021, DFS elected not to participate in the Administrative Measures2021 supervisory stress tests. Nevertheless, DFS was required to submit a capital plan based on BCCIs. On June 30, 2017,a forward-looking internal assessment of income and capital under baseline and stressful conditions. The Federal Reserve thereafter used our 2021 capital plan submission to assess its capital planning process and positions and, in August 2021, announced DFS' adjusted SCB requirement of 3.6% to reflect DFS' planned common stock dividends. This adjusted SCB is effective through October 1, 2022. Discover was a full participant in the PBOC published2022 CCAR process and submitted the implementation guidelines. We are analyzing any potential impact on our business and preparing for implementation.
2022 Capital Liquidity and Funding
Capital
Discover Financial Services and Discover Bank are subjectPlan to regulatory capital requirements that became effective January 1, 2015 under final rules issued by the Federal Reserve andby the FDIC to implement the provisions under the Basel Committee’s December 2010 framework (referred to as “Basel III”). The final capital rules ("Basel III rules") require minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios. In addition, the Basel III rules establish a capital conservation buffer above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 ("CET1") capital and result in higher required minimum ratios by up to 2.5%. The new capital conservation buffer requirement became effective on January 1, 2016; however, the buffer threshold amounts are subject to a gradual phase-in period. In 2016, the highest capital conservation buffer threshold was 0.625%, which has risen to 1.25% for the 2017 calendar year. The full 2.5% buffer requirement will not be fully phased-in until January 2019. A banking organization is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below any of the minimum capital requirements, taking into account the applicable capital conservation buffer thresholds. Based on our current capital composition and levels and business plans, we are and expect to continue to be in compliance with the requirements for the foreseeable future. For additional information, see "— Liquidity and Capital Resources — Capital."April 5, 2022 due date.
Federal banking regulators jointly issued a proposed rule on September 27, 2017 that would simplify the treatment of certain assets and deductions for institutions that are not subject to the advanced approaches capital rule. Among other things, the proposed rule would increase or adjust the deduction thresholds for certain mortgage servicing assets, deferred tax assets, investments in the capital of unconsolidated financial institutions, and minority interest. As proposed, the new rules would apply to Discover Financial Services and its subsidiary banks. We are in the process of assessing the potential impact of the proposed rule changes.
Liquidity
We are subject to the Federal Reserve's final rule implementing certain enhanced prudential standards under the Dodd-Frank Act for large U.S. bank holding companies, including enhanced liquidity and risk management requirements, which became effective January 1, 2015. The final rule prescribes a broad range of qualitative liquidity risk management practices.
Additionally, we are subject to the U.S. liquidity coverage ratio rule issued by federal banking regulators in 2014, which became effective on January 1, 2016. This quantitative requirement is designed to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organizations in the United States. The rule requires covered banks to maintain an amount of high-quality liquid assets sufficient to cover projected net cash outflows during a prospective 30-day calendar period under an acute, hypothetical liquidity stress scenario. Given our current asset size, we are subject to a modified liquidity coverage ratio requirement which requires a lower level of high-quality liquid assets to meet the minimum ratio requirement due to adjustments to the net cash outflow amount. Under the rule's transition period, we are required to maintain a liquidity ratio of 100% in 2017. As of September 30, 2017, our liquidity coverage ratio was in excess of the applicable regulatory requirement. On December 19, 2016,June 23, 2022, the Federal Reserve issued a final rule that will require banking institutions subjectreleased results of the 2022 CCAR exercise. Discover’s results showed strong capital levels under stress, well above regulatory minimums. These results were used to set the liquidity coverage ratio rule to publish quarterly public disclosures regardingnew SCB effective October 1, 2022. On August 4, 2022, the company’s liquidity risk profile and components of its liquidity coverage ratio calculation. Discover will be required to publish its first disclosure underFederal Reserve disclosed the rule beginningnew SCB for DFS is 2.5%, the fourth quarter of 2018.lowest possible requirement.
London Interbank Offered Rate
In April 2016, the federal banking agencies issued a notice of proposed rulemaking to implement, within the United States, the long-term liquidity standards previously issued at the international level by the Basel Committee on Banking
Supervision. The proposed rule would impose a new quantitative liquidity requirement called the Net Stable Funding Ratio (“NSFR”) to ensure that covered banking organizations maintain stable funding to meet their funding needs over a one year time horizon. The NSFR is intended to complement the shorter-term liquidity coverage ratio requirement. Under the proposed rule, we would be subject to a less stringent “modified” NSFR requirement. If adopted as a final rule, the minimum NSFR requirements would take effect on January 1, 2018.
Funding
On July 27, 2017, the UK Financial Conduct Authority ("FCA") announced that it would no longer encourage or compel banks to continue to contribute quotes and maintain the London Interbank Offered Rate ("LIBOR") after 2021. To support a smooth transition away from LIBOR, the Federal Reserve and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee ("ARRC"), a group of private-market participants tasked with facilitating a successful transition from U.S. dollar ("USD") LIBOR to a more robust reference rate. The ARRC initially identified the Secured Overnight Financing Rate ("SOFR") as its recommended alternative reference rate for USD LIBOR. The ARRC has also established several priorities and milestones to support the use of SOFR and SOFR-based indices, including developing contractual "fallback" language for capital markets and consumer products; providing clarity on legal, tax, accounting and regulatory matters; promoting broad outreach and education efforts around the LIBOR transition; and recommending spread adjustments for SOFR and SOFR-based indices, which will be of critical importance to market participants once USD LIBOR settings cease in 2023.
With regard to recent LIBOR transition developments, in March 2021, the FCA announced the future cessation and loss of representativeness for all LIBOR benchmark settings. While non-USD and several less frequently referenced USD LIBOR settings ceased publication immediately after December 31, 2021, commonly referenced USD LIBOR settings will cease publication immediately after June 30, 2023; this future cessation event will trigger fallback provisions in many financial contracts to convert their benchmark index from LIBOR to an alternative rate. In July 2021, the ARRC announced its recommendation of forward-looking term rates based on SOFR as additional alternative reference rate options.
In December 2021, the Consumer Financial Protection Bureau ("CFPB") finalized a rule to facilitate transition from LIBOR, which became effective on April 1, 2022. Specifically, this final rule provides guidance on LIBOR replacements and the LIBOR transition for purposes of Regulation Z. We have communicated with the CFPB regarding our plans for the LIBOR transition.
A cross-functional team is commonly usedoverseeing and managing our transition away from the use of LIBOR. This team assesses evolving industry and marketplace norms and conventions for LIBOR-indexed instruments, evaluates the impacts stemming from the future cessation of LIBOR publication and oversees and takes actions to transition our LIBOR exposures to alternative benchmark rates, usually SOFR. Our existing LIBOR exposures are limited to two instruments—variable-rate student loans and capital markets securities.
As of September 30, 2022, LIBOR-indexed variable-rate loans comprised approximately 40% of our private student loan portfolio and approximately 4% of our aggregate loan portfolio. These outstanding student loans indexed to LIBOR will convert to a SOFR index in 2023 when 3-month USD LIBOR will no longer be published. U.S. banking regulators have directed banks to cease entering into new contracts that use USD LIBOR as a benchmarkreference rate after December 31, 2021. Therefore, as of November 2021, we no longer originate new variable-rate student loans indexed to determineLIBOR. Instead, new originations of such loans are indexed solely to 3-month term SOFR published by the Chicago Mercantile Exchange.
We ceased entering into new LIBOR-indexed interest ratesrate derivatives in 2018 and have since actively reduced LIBOR exposures in our derivatives portfolio. During the third quarter of 2021, we terminated our last LIBOR-indexed interest rate swap maturing after June 2023; our last LIBOR-indexed interest rate swap matured in January 2022.
Most of our capital markets securities indexed to USD LIBOR are floating-rate asset-backed securities. Beginning in 2018, we included fallback provisions in all newly issued securities that will facilitate an orderly transition from LIBOR to an appropriate reference rate, which may be based on SOFR, once 1- and 3-month LIBOR cease to be published after June 2023. Approximately $1.5 billion of our capital markets securities that mature after June 2023 with no fallback provisions would be covered under New York LIBOR legislation enacted in April 2021 or federal legislation enacted in March 2022, which preempts the New York LIBOR legislation. This legislation would allow us to replace the LIBOR index with SOFR under a safe harbor provision.Approximately $500 million of our capital markets securities have a rate reset in August 2023 that contains a fallback provision that may not be covered under the New York LIBOR legislation or the federal legislation; however, we may decide to exercise our right to call and redeem those securities on their reset date.
We have prepared for certainthe cessation of USD LIBOR by taking steps to avoid new exposures and actively reduce our remaining exposures.We completed scheduled transition work before year-end 2021, including providing our stakeholders with information about the cessation of USD LIBOR and how it will affect their contracts with us. The transition process will continue through the end of 2023.
Consumer Financial Services
The CFPB regulates consumer financial products and instruments. Weservices and examines certain providers of consumer financial products and services, including Discover. The CFPB's authority includes rulemaking, supervisory and enforcement powers with respect to federal consumer protection laws; preventing "unfair, deceptive or abusive acts or practices" ("UDAAP") and ensuring that consumers have access to fair, transparent and competitive financial products and services. Historically, the CFPB's policy priorities focused on several financial products of the type we offer (e.g., credit cards and other consumer lending products). In addition, the CFPB is required by statute to undertake certain actions, including its biennial review of the consumer credit card market.
Under Director Rohit Chopra’s leadership, the CFPB’s priorities have focused on and are analyzingexpected to continue focusing on, among other things, increased enforcement of existing consumer protection laws, with a particular focus on fees charged to consumers, UDAAP, fair lending, student lending and servicing, debt collection and credit reporting. Additionally, detection of repeat offenders, such as companies that violate a formal court or agency order, has become a top priority for the CFPB. In remarks by Director Chopra in March 2022, he identified, as repeat offenders, several companies that have had multiple enforcement actions, including us. The CFPB has recently taken action against financial institutions for violating prior enforcement actions. Enhanced regulatory requirements, potential supervisory findings, or enforcement actions and ratings could negatively impact our ability to implement certain consumer-focused enhancements to product features and functionality and business strategies, limit or change our business practices, limit our consumer product offerings, cause us to invest more management time and resources in compliance efforts or limit our ability to obtain related required regulatory approvals. The additional expense, time and resources needed to comply with ongoing or new regulatory requirements may adversely impact the cost of and access to credit for consumers and results of business operations.
In December 2020, certain of our subsidiaries entered into a consent order with the CFPB regarding identified private student loan servicing practices. See Note 13: Litigation and Regulatory Matters to our condensed consolidated financial statements for more information.
Data Security and Privacy
Policymakers at the federal and state levels remain focused on enhancing data security and data breach incident response requirements. Furthermore, regulations and legislation at various levels of government have been proposed and enacted to augment consumer data privacy standards. The California Consumer Privacy Act ("CCPA") creates a broad set of privacy rights and remedies modeled in part on the European Union's General Data Protection Regulation. The CCPA went into effect in January 2020, and the California Attorney General's final regulations became effective in August 2020, with enforcement beginning in July 2020. The California Privacy Rights Act ("CPRA"), a ballot measure led by the original proponent of the CCPA, passed in November 2020, with an effective date of January 1, 2023, and enforcement set to begin on July 1, 2023. The CPRA replaces the CCPA to enhance consumer privacy protections further and creates a new California Privacy Protection Agency ("CPPA"). The CPPA Board released a Notice of Proposed Rulemaking initiating a 45-day comment period, which closed on August 23, 2022, with final regulations still forthcoming. While the CPRA retains an exemption for information collected, processed, sold, or disclosed subject to the Gramm-Leach-Bliley Act, we continue to evaluate the impact of the CPRA on our businesses and other providers of consumer financial services.
Environmental, Social and Governance Matters
Environmental, social and governance ("ESG") issues, including climate change, human capital and governance practices, are a significant area of focus by lawmakers at the state and federal levels, regulatory agencies, shareholders and other stakeholders. Proposed legislation and rulemakings have been issued or are being considered, including proposals to require disclosure of climate, cybersecurity and other ESG metrics and risk. The potential impact to us of these legislative and regulatory developments is uncertain at this time.
In particular, in March 2022, the Securities and Exchange Commission proposed climate-related disclosure requirements. Through an enterprise-wide working group, we continue to assess the potential impact on our business.of the proposed rules, if adopted.
Segments
We manage our business activities in two segments, DirectDigital Banking and Payment Services, based on the products and services provided. For a detailed description of the operations of each segment, as well as the allocation conventions used in our business segment reporting, see Note 15:16: Segment Disclosures to our condensed consolidated financial statements.
The following table presents segment data (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Digital Banking | | | | | | | |
Interest income | | | | | | | |
Credit card loans | $ | 2,783 | | | $ | 2,193 | | | $ | 7,475 | | | $ | 6,452 | |
Private student loans | 211 | | | 184 | | | 597 | | | 554 | |
Personal loans | 221 | | | 219 | | | 633 | | | 662 | |
Other loans | 44 | | | 30 | | | 113 | | | 85 | |
Other interest income | 98 | | | 48 | | | 190 | | | 156 | |
Total interest income | 3,357 | | | 2,674 | | | 9,008 | | | 7,909 | |
Interest expense | 514 | | | 269 | | | 1,076 | | | 875 | |
Net interest income | 2,843 | | | 2,405 | | | 7,932 | | | 7,034 | |
Provision for credit losses | 773 | | | 185 | | | 1,476 | | | (45) | |
Other income | 541 | | | 447 | | | 1,584 | | | 1,284 | |
Other expense | 1,346 | | | 1,151 | | | 3,624 | | | 3,290 | |
Income before income taxes | 1,265 | | | 1,516 | | | 4,416 | | | 5,073 | |
Payment Services | | | | | | | |
| | | | | | | |
| | | | | | | |
Other income (loss) | 95 | | | (75) | | | 89 | | | 833 | |
Other expense | 42 | | | 39 | | | 117 | | | 203 | |
Income (loss) before income taxes | 53 | | | (114) | | | (28) | | | 630 | |
Total income before income taxes | $ | 1,318 | | | $ | 1,402 | | | $ | 4,388 | | | $ | 5,703 | |
| | | | | | | |
The following table presents information on transaction volume (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Network Transaction Volume | | | | | | | |
PULSE Network | $ | 63,437 | | | $ | 59,872 | | | $ | 186,265 | | | $ | 183,126 | |
Network Partners | 11,894 | | | 10,377 | | | 34,109 | | | 29,474 | |
Diners Club(1) | 8,793 | | | 6,547 | | | 24,350 | | | 18,570 | |
Total Payment Services | 84,124 | | | 76,796 | | | 244,724 | | | 231,170 | |
Discover Network — Proprietary(2) | 56,633 | | | 49,360 | | | 160,600 | | | 135,763 | |
Total Network Transaction Volume | $ | 140,757 | | | $ | 126,156 | | | $ | 405,324 | | | $ | 366,933 | |
Transactions Processed on Networks | | | | | | | |
Discover Network | 924 | | | 868 | | | 2,671 | | | 2,345 | |
PULSE Network | 1,611 | | | 1,415 | | | 4,534 | | | 4,124 | |
Total Transactions Processed on Networks | 2,535 | | | 2,283 | | | 7,205 | | | 6,469 | |
Credit Card Volume | | | | | | | |
Discover Card Volume(3) | $ | 58,561 | | | $ | 50,389 | | | $ | 165,324 | | | $ | 138,772 | |
Discover Card Sales Volume(4) | $ | 54,793 | | | $ | 47,613 | | | $ | 154,982 | | | $ | 130,817 | |
| | | | | | | |
(1)Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment.
(2)Represents gross Discover card sales volume on the Discover Network.
(3)Represents Discover card activity related to sales net of returns, balance transfers, cash advances and other activity.
(4)Represents Discover card activity related to sales net of returns.
The following table presents segment data (dollars in millions): |
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Direct Banking | | | | | | | |
Interest income | | | | | | | |
Credit card | $ | 2,026 |
| | $ | 1,812 |
| | $ | 5,818 |
| | $ | 5,279 |
|
Private student loans | 132 |
| | 112 |
| | 383 |
| | 329 |
|
PCI student loans | 39 |
| | 46 |
| | 121 |
| | 142 |
|
Personal loans | 224 |
| | 185 |
| | 629 |
| | 523 |
|
Other | 55 |
| | 29 |
| | 141 |
| | 85 |
|
Total interest income | 2,476 |
| | 2,184 |
| | 7,092 |
| | 6,358 |
|
Interest expense | 426 |
| | 359 |
| | 1,212 |
| | 1,032 |
|
Net interest income | 2,050 |
| | 1,825 |
| | 5,880 |
| | 5,326 |
|
Provision for loan losses | 675 |
| | 445 |
| | 1,908 |
| | 1,279 |
|
Other income | 401 |
| | 408 |
| | 1,184 |
| | 1,210 |
|
Other expense | 909 |
| | 857 |
| | 2,634 |
| | 2,576 |
|
Income before income tax expense | 867 |
| | 931 |
| | 2,522 |
| | 2,681 |
|
Payment Services | | | | | | | |
Provision for loan losses | (1 | ) | | — |
| | (8 | ) | | 2 |
|
Other income | 74 |
| | 68 |
| | 219 |
| | 205 |
|
Other expense | 39 |
| | 38 |
| | 111 |
| | 111 |
|
Income before income tax expense | 36 |
| | 30 |
| | 116 |
| | 92 |
|
Total income before income tax expense | $ | 903 |
| | $ | 961 |
| | $ | 2,638 |
| | $ | 2,773 |
|
| | | | | | | |
The following table presents information on transaction volume (in millions): |
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Network Transaction Volume | | | | | | | |
PULSE Network | $ | 39,828 |
| | $ | 33,913 |
| | $ | 114,742 |
| | $ | 102,449 |
|
Network Partners | 3,811 |
| | 3,313 |
| | 10,933 |
| | 10,598 |
|
Diners Club(1) | 7,989 |
| | 7,331 |
| | 23,171 |
| | 21,267 |
|
Total Payment Services | 51,628 |
| | 44,557 |
| | 148,846 |
| | 134,314 |
|
Discover Network—Proprietary(2) | 33,576 |
| | 31,759 |
| | 96,777 |
| | 92,115 |
|
Total Volume | $ | 85,204 |
| | $ | 76,316 |
| | $ | 245,623 |
| | $ | 226,429 |
|
Transactions Processed on Networks | | | | | | | |
Discover Network | 579 |
| | 535 |
| | 1,633 |
| | 1,559 |
|
PULSE Network | 996 |
| | 871 |
| | 2,827 |
| | 2,565 |
|
Total | 1,575 |
| | 1,406 |
| | 4,460 |
| | 4,124 |
|
Credit Card Volume | | | | | | | |
Discover Card Volume(3) | $ | 35,581 |
| | $ | 33,471 |
| | $ | 103,284 |
| | $ | 96,884 |
|
Discover Card Sales Volume(4) | $ | 32,161 |
| | $ | 30,683 |
| | $ | 93,467 |
| | $ | 88,937 |
|
| | |
|
| | | | |
| |
(1) | Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment. |
| |
(2) | Represents gross proprietary sales volume on the Discover Network. |
| |
(3) | Represents Discover card activity related to net sales, balance transfers, cash advances and other activity. |
| |
(4) | Represents Discover card activity related to net sales. |
DirectDigital Banking
Our DirectDigital Banking segment reported pretax income of $867 million$1.3 billion and $2.5$4.4 billion, respectively, for the three and nine months ended September 30, 2017, respectively,2022, as compared to a pretax income of $931 million$1.5 billion and $2.7$5.1 billion, respectively, for the three and nine months ended September 30, 2016, respectively.2021.
Net interest marginincome increased for the three and nine months ended September 30, 20172022, as compared to the same periods in 20162021, primarily driven by a higher yieldsaverage level of receivables and higher yield on credit card loans, partially offset by higher funding costs. The increase in yields on credit card loans was primarily due to prime rate increases and a higher portion of revolving card receivables, partially offset by higher promotional balances in the card portfolio and higher interest charge-offs. Interest income increased duringfor the three and nine months ended September 30, 20172022, as compared to the same periods in 20162021, due to a higher average level of loan growthreceivables and yield expansion.higher market rates. Interest expense increased duringfor the three and nine months ended September 30, 20172022, as compared to the same periods in 2016 primarily2021, due to higher funding costs driven by higher market rates. The interest expense increase for the three months ended September 30, 2022 was also driven by a larger funding base, higher market rates and a change in funding mix.base.
For the three and nine months ended September 30, 2017,2022, the overall portfolio provision for loancredit losses increased as compared to the same periods in 20162021. The increase was primarily due to higher levels of charge-offs combined with a larger reserve build.driven by continued loan growth and credit normalization. For a detailed discussion on provision for loancredit losses, see "— Loan Quality — Provision and Allowance for LoanCredit Losses."
Total other income remained flat in the three months ended September 30, 2017 and decreased in the nine months ended September 30, 2017 as compared to the same periods in 2016. During the nine months ended September 30, 2017, the decrease was due primarily to higher promotional rewards offset by the increase in discount and interchange revenue, both of which were primarily the result of higher sales volume. The increase in loan fee income was primarily due to an increase in late fees.
Total other expense increased in the three and nine months ended September 30, 2017 as compared to the same periods in 2016. During the three and nine months ended September 30, 2017, the increase was primarily driven by an increase in employee compensation and benefits and professional fees offset by a decrease in information processing and communications. The increase in employee compensation and benefits was primarily driven by the impact of added headcount for regulatory and compliance needs and higher average salaries. The increase in professional fees was driven primarily by investments in technology and infrastructure as well as higher spend in collection efforts in 2017, offset by the completion of a look back project related to anti-money laundering remediation in 2016. The decrease in information processing and communications was primarily the result of infrastructure efficiencies.
Discover card sales volume was $32.2 billion and $93.5 billion for the three and nine months ended September 30, 2017,2022, as compared to the same periods in 2021, which was due to increases in net discount and interchange revenue and loan fee income. The increase in discount interchange revenue was partially offset by an increase in rewards, both of which were driven by higher sales volume. Loan fee income increased primarily due to a higher volume of late payments.
Total other expense increased for the three and nine months ended September 30, 2022, as compared to the same periods in 2021, primarily due to increases in marketing and business development, employee compensation and benefits and professional fees. The increase in marketing and business development was driven by growth investments in card and consumer banking. Employee compensation and benefits increased primarily from higher headcount. The increase in professional fees was due primarily to investments in technology and increased consulting costs.
Discover card sales volume was $54.8 billion and $155 billion, respectively, for the three and nine months ended September 30, 2022, which was an increase of 4.8%15.1% and 5.1%18.5%, respectively, as compared to the same periods in 2016.2021. This volume growth was primarily driven by an increase inhigher consumer spending.spending across all spending categories.
Payment Services
Our Payment Services segment reported pretax income of $36$53 million and $116a pretax loss of $28 million, respectively, for the three and nine months ended September 30, 2017, respectively,2022, as compared to pretax loss of $114 million and pretax income of $30$630 million, and $92 millionrespectively, for the same periods in 2016.2021. The increase in segment pretax income for the three months ended September 30, 2022 was primarily driven by anthe change in fair value of equity investments that are carried at fair value because the shares are publicly traded. The fair value adjustments resulted in the recognition of smaller unrealized losses in the current period compared to the prior period. Also contributing to the increase in transaction processing revenuewere realized gains on equity investments due to higher point-of-sale transactions.
Downturnssales in the global economy or negative impactscurrent period.
The decrease in foreign currency may adversely affect our financial condition or results of operations in our Payment Services segment. We continue to work with our Diners Club licensees with regard to their ability to maintain financing sufficient to support business operations. We may continue to provide additional support insegment pretax income for the future, including loans, facilitating transfer of ownership, or acquiring assets or licensees, which may cause us to incur losses. The licensees that we currently consider to be of concern accounted for approximately 3% and 4% of Diners Club revenues during the three and nine months ended September 30, 2017, respectively.2022 was driven by fair value adjustments of equity investments that resulted in the recognition of unrealized losses in the current period and unrealized gains in the prior period. This decrease was offset by an increase in realized gains on equity investments due to sales in the current period.
Critical Accounting Estimates
In preparing our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United StatesU.S. ("GAAP"), management must make judgments and use estimates and assumptions about the effects of matters that are uncertain. For estimates that involve a high degree of judgment and subjectivity, it is possible that different estimates could reasonably be derived for the same period. For estimates that are particularly sensitive to changes in economic or market conditions, significant changes to the estimated amount from period to period are also possible. Management believes the current assumptions and other considerations used to estimate amounts reflected in our condensed consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts in our condensed consolidated financial statements, the resulting changes could have a material effect on our consolidated results of
operations and, in certain cases, could have a material effect on our consolidated financial condition. Management has identified the estimates related to our allowance for loancredit losses the evaluation of goodwill and other non-amortizable intangible assets for potential impairment, the accrual of income taxes and estimates of future cash flows associated with PCI loans as a critical accounting estimates. These criticalestimate.
Allowance for Credit Losses
The allowance for credit losses was approximately $7.1 billion at September 30, 2022, which reflects a $304 millionbuild over June 30, 2022. The allowance for credit losses represents management’s estimate of expected credit losses over the remaining expected life of our financial assets measured at amortized cost and certain off-balance sheet loan commitments. Changes in the allowance for credit losses, and in the related provision for credit losses, can materially affect net income.
In estimating the expected credit losses, we use a combination of statistical models and qualitative analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced to estimate the allowance for credit losses. For more information on these judgments and our accounting estimates are discussed in greater detailpolicies and methodologies used to determine the allowance for credit losses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Loan Quality," Note 4: Loan Receivables and Note 2: Summary of Significant Accounting Policies to our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2016. That discussion can be found within “Management’s Discussion2021.
One of the key assumptions requiring significant judgment in estimating the current expected credit losses ("CECL") on a quarterly basis is the determination of the macroeconomic forecasts used in the loss forecast models. For the reasonable and Analysissupportable loss forecast period, we consider forecasts of Financial Conditionmultiple economic scenarios that generally include a base scenario with one or more optimistic (upside) or pessimistic (downside) scenarios. These scenarios incorporate a variety of macroeconomic variables, including annualized gross domestic product growth and Resultsunemployment rate. The scenarios that are chosen each quarter and the amount of Operations” underweighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal and third-party economists and industry trends. Assumptions about the heading “— Critical Accounting Estimates.” There have not been any materialmacroeconomic environment are inherently uncertain and, as a result, actual changes in the methods usedallowance for credit losses may be different from the simulated scenario presented below.
To demonstrate the sensitivity of the estimated credit losses to formulate these critical accounting estimates from those discussedthe macroeconomic scenarios, we compared the modeled credit losses determined using our base and one or more adverse macroeconomic scenarios. Our allowance for credit losses would increase by approximately $578 million at September 30, 2022 if we applied 100% weight to the most adverse scenario in our annual reportsensitivity analysis to reflect the economic deterioration from a resurgence of COVID-19 and resulting economic stress, as well as increasing inflationary pressures, including persistent supply-chain disruptions and the influence of geopolitical events.
The sensitivity disclosed above is hypothetical. It is difficult to estimate how potential changes in any one factor or input, such as the weighting of macroeconomic forecasts, might affect the overall allowance for credit losses because we consider a variety of factors and inputs in estimating the allowance for credit losses. The macroeconomic scenarios used are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. The inputs in the macroeconomic scenarios may not change at the same rate and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor or input may offset deterioration in others. As a result, the sensitivity analysis above does not necessarily reflect the nature and extent of future changes in the allowance for credit losses. It is intended to provide insights into the impact of different judgments about the economy on Form 10-Kour modeled loss estimates for the year ended December 31, 2016.loan portfolio and does not imply any expectation of future losses. Furthermore, the hypothetical increase in our allowance for credit losses for loans does not incorporate the impact of management judgment for qualitative factors applied in the current allowance for credit losses, which may have a positive or negative effect on our actual financial condition and results of operations.
The overall economic environment directly impacts the macroeconomic variables that are used in the loss forecast models. If management used different assumptions about the economic environment in estimating expected credit losses, the impact to the allowance for credit losses could have a material effect on our consolidated financial condition and results of operations. In addition, if we experience a rapidly changing economic environment, as experienced during the COVID-19 pandemic, the uncertainty around the credit loss forecasts may increase, both due to the uncertainty of the economic forecasts and the challenges our models may have in incorporating them.
Earnings Summary
The following table outlines changes in our condensed consolidated statements of income (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | 2022 vs. 2021 Increase (Decrease) | | For the Nine Months Ended September 30, | | 2022 vs. 2021 Increase (Decrease) |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Interest income | $ | 3,357 | | | $ | 2,674 | | | $ | 683 | | | 26 | % | | $ | 9,008 | | | $ | 7,909 | | | $ | 1,099 | | | 14 | % |
Interest expense | 514 | | | 269 | | | 245 | | | 91 | % | | 1,076 | | | 875 | | | 201 | | | 23 | % |
Net interest income | 2,843 | | | 2,405 | | | 438 | | | 18 | % | | 7,932 | | | 7,034 | | | 898 | | | 13 | % |
Provision for credit losses | 773 | | | 185 | | | 588 | | | 318 | % | | 1,476 | | | (45) | | | 1,521 | | | (3,380) | % |
Net interest income after provision for credit losses | 2,070 | | | 2,220 | | | (150) | | | (7) | % | | 6,456 | | | 7,079 | | | (623) | | | (9) | % |
Other income | 636 | | | 372 | | | 264 | | | 71 | % | | 1,673 | | | 2,117 | | | (444) | | | (21) | % |
Other expense | 1,388 | | | 1,190 | | | 198 | | | 17 | % | | 3,741 | | | 3,493 | | | 248 | | | 7 | % |
Income before income tax expense | 1,318 | | | 1,402 | | | (84) | | | (6) | % | | 4,388 | | | 5,703 | | | (1,315) | | | (23) | % |
Income tax expense | 312 | | | 311 | | | 1 | | | — | % | | 1,029 | | | 1,321 | | | (292) | | | (22) | % |
Net income | $ | 1,006 | | | $ | 1,091 | | | $ | (85) | | | (8) | % | | $ | 3,359 | | | $ | 4,382 | | | $ | (1,023) | | | (23) | % |
Net income allocated to common stockholders | $ | 967 | | | $ | 1,055 | | | $ | (88) | | | (8) | % | | $ | 3,277 | | | $ | 4,289 | | | $ | (1,012) | | | (24) | % |
| | | | | | | | | | | | | | | |
The following table outlines changes in our condensed consolidated statements of income (dollars in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | 2017 vs. 2016 Increase (Decrease) | | For the Nine Months Ended September 30, | | 2017 vs. 2016 Increase (Decrease) |
| 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Interest income | $ | 2,476 |
| | $ | 2,184 |
| | $ | 292 |
| | 13 | % | | $ | 7,092 |
| | $ | 6,358 |
| | $ | 734 |
| | 12 | % |
Interest expense | 426 |
| | 359 |
| | 67 |
| | 19 | % | | 1,212 |
| | 1,032 |
| | 180 |
| | 17 | % |
Net interest income | 2,050 |
| | 1,825 |
| | 225 |
| | 12 | % | | 5,880 |
| | 5,326 |
| | 554 |
| | 10 | % |
Provision for loan losses | 674 |
| | 445 |
| | 229 |
| | 51 | % | | 1,900 |
| | 1,281 |
| | 619 |
| | 48 | % |
Net interest income after provision for loan losses | 1,376 |
| | 1,380 |
| | (4 | ) | | — | % | | 3,980 |
| | 4,045 |
| | (65 | ) | | (2 | )% |
Other income | 475 |
| | 476 |
| | (1 | ) | | — | % | | 1,403 |
| | 1,415 |
| | (12 | ) | | (1 | )% |
Other expense | 948 |
| | 895 |
| | 53 |
| | 6 | % | | 2,745 |
| | 2,687 |
| | 58 |
| | 2 | % |
Income before income tax expense | 903 |
| | 961 |
| | (58 | ) | | (6 | )% | | 2,638 |
| | 2,773 |
| | (135 | ) | | (5 | )% |
Income tax expense | 301 |
| | 322 |
| | (21 | ) | | (7 | )% | | 926 |
| | 943 |
| | (17 | ) | | (2 | )% |
Net income | $ | 602 |
| | $ | 639 |
| | $ | (37 | ) | | (6 | )% | | $ | 1,712 |
| | $ | 1,830 |
| | $ | (118 | ) | | (6 | )% |
| | | | | | | | | | | | | | | |
Net Interest Income
The table that follows this section has been provided to supplement the discussion below and provide further analysis of net interest income and net interest margin. Net interest income represents the difference between interest income earned on our interest-earning assets and the interest expense incurred to finance those assets. We analyze net interest income in total by calculating net interest margin (net interest income as a percentage of average total loan receivables) and net yield on interest-bearinginterest-earning assets (net interest income as a percentage of average total interest-earning assets). We also separately consider the impact of the level of loan receivables and the related interest yield and the impact of the cost of funds related to each of our funding sources, along with the income generated by our liquidity portfolio, on net interest income.
Our interest-earning assets consist of: (i) cash and cash equivalents primarily related to amounts on deposit with the Federal Reserve Bank of Philadelphia, (ii) restricted cash, (iii) other short-term investments, (iv) investment securities and (v) loan receivables. Our interest-bearing liabilities consist primarily of deposits, both direct-to-consumer and brokered, and long-term borrowings, including amounts owed to securitization investors. NetThe following factors influence net interest income is influenced by the following:income:
•The level and composition of loan receivables, including the proportion of credit card loans to other loans, as well as the proportion of loan receivables bearing interest at promotional rates as compared to standard rates;
•The credit performance of our loans, particularly with regard to charge-offs of finance charges, which reduce interest income;
•The terms of long-term borrowings and certificates of deposit upon initial offering, including maturity and interest rate;
•The interest rates necessary to attract and maintain direct-to-consumer deposits;
•The level and composition of other interest-bearinginterest-earning assets, and liabilities, including our liquidity portfolio;portfolio, and interest-bearing liabilities;
•Changes in the interest rate environment, including the levels of interest rates and the relationships among interest rate indices, such as the prime rate, the Federal Fundsfederal funds rate, the interest rate on reserve balances and LIBOR; and
•The effectiveness of interest rate swaps in our interest rate risk management program; andprogram.
The difference between the carrying amount and future cash flows expected to be collected on PCI loans.
Net interest marginincome increased for the three and nine months ended September 30, 20172022, as compared to the same periods in 20162021, primarily driven by a higher yieldsaverage level of receivables and higher yield on credit card loans, partially offset by higher funding costs. Interest income increased for the three and nine months ended September 30, 2022, as compared to the same periods in 2021, due to a higher average level of loan receivables and higher market rates. Interest expense increased for the three and nine months ended September 30, 2022, as compared to the same periods in 2021, due to higher funding costs driven by higher market rates. The interest expense increase for the three months ended September 30, 2022 was also driven by a larger funding base.
Average Balance Sheet Analysis
(dollars in yieldsmillions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, |
| 2022 | | 2021 |
| Average Balance | | Yield/Rate | | Interest | | Average Balance | | Yield/Rate | | Interest |
Assets | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 10,057 | | | 2.29 | % | | $ | 58 | | | $ | 12,192 | | | 0.16 | % | | $ | 3 | |
Restricted cash | 853 | | | 2.25 | % | | $ | 5 | | | 571 | | | 0.03 | % | | NM |
Other short-term investments | NM | | 0.10 | % | | NM | | NM | | 0.10 | % | | NM |
Investment securities | 6,000 | | | 2.32 | % | | 35 | | | 8,431 | | | 2.09 | % | | 45 | |
Loan receivables(1) | | | | | | | | | | | |
Credit card loans(2)(3) | 81,445 | | | 13.56 | % | | 2,783 | | | 69,416 | | | 12.53 | % | | 2,193 | |
Private student loans | 10,132 | | | 8.26 | % | | 211 | | | 9,932 | | | 7.36 | % | | 184 | |
Personal loans | 7,408 | | | 11.83 | % | | 221 | | | 6,900 | | | 12.61 | % | | 219 | |
Other loans | 3,050 | | | 5.70 | % | | 44 | | | 2,108 | | | 5.41 | % | | 30 | |
Total loan receivables | 102,035 | | | 12.67 | % | | 3,259 | | | 88,356 | | | 11.79 | % | | 2,626 | |
Total interest-earning assets | 118,945 | | | 11.20 | % | | 3,357 | | | 109,550 | | | 9.68 | % | | 2,674 | |
Allowance for credit losses | (6,758) | | | | | | | (7,020) | | | | | |
Other assets | 5,923 | | | | | | | 6,430 | | | | | |
Total assets(4) | $ | 118,110 | | | | | | | $ | 108,960 | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | |
Interest-bearing deposits | | | | | | | | | | | |
Time deposits | $ | 25,279 | | | 1.97 | % | | 125 | | | $ | 22,804 | | | 1.76 | % | | 101 | |
Money market deposits | 8,432 | | | 1.92 | % | | 41 | | | 8,108 | | | 0.53 | % | | 11 | |
Other interest-bearing savings deposits | 44,372 | | | 1.60 | % | | 179 | | | 41,059 | | | 0.42 | % | | 44 | |
Total interest-bearing deposits | 78,083 | | | 1.76 | % | | 345 | | | 71,971 | | | 0.86 | % | | 156 | |
Borrowings | | | | | | | | | | | |
Short-term borrowings | 98 | | | 1.62 | % | | $ | 1.00 | | | 6 | | | 0.24 | % | | NM |
Securitized borrowings(5)(6)(7) | 10,246 | | | 2.79 | % | | 72 | | | 8,292 | | | 1.10 | % | | 22 | |
Other long-term borrowings(6)(7) | 9,087 | | | 4.20 | % | | 96 | | | 9,550 | | | 3.78 | % | | 91 | |
Total borrowings | 19,431 | | | 3.45 | % | | 169 | | | 17,848 | | | 2.53 | % | | 113 | |
Total interest-bearing liabilities | 97,514 | | | 2.09 | % | | 514 | | | 89,819 | | | 1.19 | % | | 269 | |
Other liabilities and stockholders' equity(8) | 20,596 | | | | | | | 19,141 | | | | | |
Total liabilities and stockholders' equity | $ | 118,110 | | | | | | | $ | 108,960 | | | | | |
Net interest income | | | | | $ | 2,843 | | | | | | | $ | 2,405 | |
Net interest margin(9) | | | 11.05 | % | | | | | | 10.80 | % | | |
Net yield on interest-earning assets(10) | | | 9.48 | % | | | | | | 8.71 | % | | |
Interest rate spread(11) | | | 9.11 | % | | | | | | 8.49 | % | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2022 | | 2021 |
| Average Balance | | Yield/Rate | | Interest | | Average Balance | | Yield/Rate | | Interest |
Assets | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 9,074 | | | 1.20 | % | | $ | 81 | | | $ | 15,725 | | | 0.12 | % | | $ | 14 | |
Restricted cash | 556 | | | 1.19 | % | | 5 | | | 536 | | | 0.03 | % | | NM |
Other short-term investments | NM | | 0.11 | % | | NM | | 235 | | | 0.12 | % | | NM |
Investment securities | 6,094 | | | 2.28 | % | | 104 | | | 9,125 | | | 2.08 | % | | 142 | |
Loan receivables(1) | | | | | | | | | | | |
Credit card loans(2)(3) | 76,832 | | | 13.01 | % | | 7,475 | | | 68,522 | | | 12.59 | % | | 6,452 | |
Private student loans | 10,225 | | | 7.81 | % | | 597 | | | 10,044 | | | 7.38 | % | | 554 | |
Personal loans | 7,101 | | | 11.92 | % | | 633 | | | 6,953 | | | 12.73 | % | | 662 | |
Other loans | 2,697 | | | 5.60 | % | | 113 | | | 2,002 | | | 5.64 | % | | 85 | |
Total loan receivables | 96,855 | | | 12.17 | % | | 8,818 | | | 87,521 | | | 11.84 | % | | 7,753 | |
Total interest-earning assets | 112,579 | | | 10.70 | % | | 9,008 | | | 113,142 | | | 9.35 | % | | 7,909 | |
Allowance for credit losses | (6,740) | | | | | | | (7,521) | | | | | |
Other assets | 6,014 | | | | | | | 6,189 | | | | | |
Total assets(4) | $ | 111,853 | | | | | | | $ | 111,810 | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | |
Interest-bearing deposits | | | | | | | | | | | |
Time deposits | $ | 21,772 | | | 1.73 | % | | 281 | | | $ | 24,856 | | | 1.90 | % | | 354 | |
Money market deposits | 8,322 | | | 1.14 | % | | 71 | | | 8,151 | | | 0.53 | % | | 32 | |
Other interest-bearing savings deposits | 43,476 | | | 0.94 | % | | 306 | | | 40,760 | | | 0.43 | % | | 133 | |
Total interest-bearing deposits | 73,570 | | | 1.20 | % | | 658 | | | 73,767 | | | 0.94 | % | | 519 | |
Borrowings | | | | | | | | | | | |
Short-term borrowings | 300 | | | 0.69 | % | | 2 | | | 3 | | | 0.21 | % | | NM |
Securitized borrowings(5)(6)(7) | 8,758 | | | 2.06 | % | | 135 | | | 9,798 | | | 1.05 | % | | 77 | |
Other long-term borrowings(6)(7) | 9,233 | | | 4.07 | % | | 281 | | | 10,037 | | | 3.72 | % | | 279 | |
Total borrowings | 18,291 | | | 3.05 | % | | 418 | | | 19,838 | | | 2.40 | % | | 356 | |
Total interest-bearing liabilities | 91,861 | | | 1.57 | % | | 1,076 | | | 93,605 | | | 1.25 | % | | 875 | |
Other liabilities and stockholders’ equity(8) | 19,992 | | | | | | | 18,205 | | | | | |
Total liabilities and stockholders’ equity | $ | 111,853 | | | | | | | $ | 111,810 | | | | | |
Net interest income | | | | | $ | 7,932 | | | | | | | $ | 7,034 | |
Net interest margin(9) | | | 10.95 | % | | | | | | 10.74 | % | | |
Net yield on interest-earning assets(10) | | | 9.42 | % | | | | | | 8.31 | % | | |
Interest rate spread(11) | | | 9.13 | % | | | | | | 8.10 | % | | |
| | | | | | | | | | | |
(1)Average balances of loan receivables and yield calculations include non-accruing loans. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.
(2)Interest income on credit card loans includes $99 million and $73 million of amortization of balance transfer fees for the three months ended September 30, 2022 and 2021, respectively, and $261 million and $217 million for the nine months ended September 30, 2022 and 2021, respectively.
(3)Includes the impact of interest rate swap agreements used to change a portion of floating-rate assets to fixed-rate assets for the three and nine months ended September 30, 2022 and 2021.
(4)The return on average assets, based on net income, was primarily0.85% and 1.00% for the three months ended September 30, 2022 and 2021, respectively, and 3.00% and 3.92% for the nine months ended September 30, 2022 and 2021, respectively.
(5)Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the three and nine months ended September 30, 2022 and 2021.
(6)Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding for the three and nine months ended September 30, 2022 and 2021.
(7)Includes the impact of terminated derivatives formerly designated as fair value hedges for the three and nine months ended September 30, 2022 and 2021.
(8)The return on average stockholders' equity, based on net income, was 6.86% and 8.08% for the three months ended September 30, 2022 and 2021, respectively, and 23.61% and 34.96% for the nine months ended September 30, 2022 and 2021, respectively.
(9)Net interest margin represents net interest income as a percentage of average total loan receivables.
(10)Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
(11)Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
Loan Quality
Impact of the COVID-19 Pandemic on the Loan Portfolio
The COVID-19 pandemic and its impact on the economy significantly affected our sales volume and credit card loan growth during the first half of 2021. We tightened credit standards for new accounts and for growing existing accounts across all products and reduced our marketing and customer acquisition expenditures at the onset of the pandemic. Recognizing the strong economic recovery from the COVID-19 pandemic-induced recession, we returned most of our underwriting criteria to pre-pandemic standards and resumed our investment in marketing and business development during the second quarter of 2021. This change in our credit underwriting, in addition to changes in consumer spending behavior, increased marketing and the re-opening of the U.S. economy upon expiration of certain COVID-19 containment measures, contributed to an increase in sales volume for the three and nine months ended September 30, 2022, when compared to the same periods in 2021. Our outstanding loan receivables as of September 30, 2022, increased when compared to December 31, 2021, due to prime rate increasesstrong sales and new account growth.
Troubled debt restructuring ("TDR") program balances and the number of accounts reported as TDRs were favorably impacted by accounting and financial reporting exemptions provided by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") for the year ended December 31, 2021. See Note 4: Loan Receivables to our annual report on Form 10-K for the year ended December 31, 2021, for more information about the impact of the CARES Act on loan modifications.
The table below reflects the number and balance of both new loan modifications reported as TDRs and new loan modifications excluded from the TDR designation pursuant to the CARES Act (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts that entered a loan modification program and were classified as TDRs during the period | | Accounts that entered a loan modification program and were exempt from the TDR designation pursuant to the CARES Act(1) |
| Number of Accounts | | Balances | | Number of Accounts | | Balances |
For the Three Months Ended September 30, 2022 | | | | | | | |
Credit card loans | 63,803 | | | $ | 414 | | | — | | | $ | — | |
Private student loans | 1,863 | | | $ | 36 | | | — | | | $ | — | |
Personal loans | 1,799 | | | $ | 25 | | | — | | | $ | — | |
| | | | | | | |
For the Three Months Ended September 30, 2021 | | | | | | | |
Credit card loans | 13,964 | | | $ | 86 | | | 27,925 | | | $ | 200 | |
Private student loans | 102 | | | $ | 2 | | | 2,325 | | | $ | 46 | |
Personal loans | 888 | | | $ | 10 | | | 239 | | | $ | 3 | |
| | | | | | | |
For the Nine Months Ended September 30, 2022 | | | | | | | |
Credit card loans | 167,655 | | | $ | 1,071 | | | — | | | $ | — | |
Private student loans | 5,141 | | | $ | 96 | | | — | | | $ | — | |
Personal loans | 4,561 | | | $ | 62 | | | — | | | $ | — | |
| | | | | | | |
For the Nine Months Ended September 30, 2021 | | | | | | | |
Credit card loans | 48,887 | | | $ | 315 | | | 97,449 | | | $ | 697 | |
Private student loans | 355 | | | $ | 7 | | | 7,038 | | | $ | 135 | |
Personal loans | 3,102 | | | $ | 38 | | | 1,177 | | | $ | 18 | |
| | | | | | | |
(1)Accounts that entered into a higher portionloan modification on or after January 1, 2022, are not eligible for this exemption.
The number and balance of revolvingnew credit card receivables, partially offset by higher promotional balances in the card portfolio and higher interest charge-offs. Interest incomepersonal loan modifications increased during the three and nine months ended September 30, 2017 as2022, when compared to total modifications, including both TDRs and those exempt from the TDR designation, in the same periods in 20162021. The increase was primarily due to the expiration of government stimulus and disaster relief programs.
The number and balance of new private student loan growth and yield expansion. Interest expense increasedmodifications decreased during the three and nine months ended September 30, 2017 as2022, when compared to total modifications, including both TDRs and those exempt from the TDR designations, in the same periods in 20162021, due primarily due to heightened utilization of programs in the prior periods driven by the impacts of the COVID-19 pandemic on student loan borrowers.
The following table provides the number of accounts that exited a larger funding base, higher market ratestemporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act and a changecorresponding outstanding balances along with the amount of the outstanding balances that were delinquent (30 or more days past due) upon exiting the temporary loan modification program (dollars in funding mix.millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | |
| 2022 | | 2021 | | | | | | |
| Number of Accounts | | Outstanding Balances | | Balances Delinquent(1) | | Number of Accounts | | Outstanding Balances | | Balances Delinquent(1) | | | | | | |
Credit card loans | 20,229 | | | $ | 109 | | | $ | 23 | | | 42,067 | | | $ | 254 | | | $ | 35 | | | | | | | |
Private student loans | 308 | | | $ | 7 | | | NM | | 2,290 | | | $ | 40 | | | NM | | | | | | |
Personal loans | 70 | | | $ | 1 | | | NM | | 1,307 | | | $ | 21 | | | NM | | | | | | |
| | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | | | | | |
| 2022 | | 2021 | | | | | | |
| Number of Accounts | | Outstanding Balances | | Balances Delinquent(1) | | Number of Accounts | | Outstanding Balances | | Balances Delinquent(1) | | | | | | |
Credit card loans | 79,621 | | | $ | 437 | | | $ | 89 | | | 155,712 | | | $ | 955 | | | $ | 129 | | | | | | | |
Private student loans | 3,773 | | | $ | 74 | | | $ | 5 | | | 6,024 | | | $ | 106 | | | NM | | | | | | |
Personal loans | 598 | | | $ | 8 | | | $ | 2 | | | 4,101 | | | $ | 61 | | | NM | | | | | | |
| | | | | | | | | | | | | | | | | |
(1)Includes balances charged off at the end of the month the account exited the temporary loan modification program. The balances charged off were not meaningful for the three and nine months ended September 30, 2022 and 2021.
Our estimate of expected loss reflected in our allowance for credit losses includes the risk associated with all loans, including all modified loans. Refer to Note 3: Loan Receivables to our condensed consolidated financial statements for more details on modification programs, TDRs and the allowance for credit losses.
Loan receivables consist of the following (dollars in millions): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Credit card loans | $ | 83,630 | | | $ | 74,369 | |
Other loans | | | |
Private student loans | 10,349 | | | 10,113 | |
Personal loans | 7,674 | | | 6,936 | |
Other loans | 3,255 | | | 2,266 | |
Total other loans | 21,278 | | | 19,315 | |
Total loan receivables | 104,908 | | | 93,684 | |
Allowance for credit losses | (7,061) | | | (6,822) | |
Net loan receivables | $ | 97,847 | | | $ | 86,862 | |
| | | |
Average Balance Sheet Analysis (dollars in millions) |
| | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, |
| 2017 | | 2016 |
| Average Balance | | Rate | | Interest | | Average Balance | | Rate | | Interest |
Assets | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 12,895 |
| | 1.26 | % | | $ | 42 |
| | $ | 10,419 |
| | 0.50 | % | | $ | 13 |
|
Restricted cash | 848 |
| | 1.15 | % | | 2 |
| | 621 |
| | 0.32 | % | | 1 |
|
Other short-term investments | — |
| | — | % | | — |
| | 1,048 |
| | 0.87 | % | | 2 |
|
Investment securities | 1,652 |
| | 1.62 | % | | 6 |
| | 2,294 |
| | 1.49 | % | | 9 |
|
Loan receivables(1) | | | | | | | | | | | |
Credit card(2) | 62,647 |
| | 12.83 | % | | 2,026 |
| | 57,561 |
| | 12.53 | % | | 1,812 |
|
Personal loans | 7,208 |
| | 12.33 | % | | 224 |
| | 6,036 |
| | 12.23 | % | | 186 |
|
Private student loans | 6,725 |
| | 7.79 | % | | 132 |
| | 6,023 |
| | 7.41 | % | | 112 |
|
PCI student loans | 2,261 |
| | 6.88 | % | | 39 |
| | 2,772 |
| | 6.52 | % | | 45 |
|
Other | 348 |
| | 5.56 | % | | 5 |
| | 276 |
| | 4.96 | % | | 4 |
|
Total loan receivables | 79,189 |
| | 12.15 | % | | 2,426 |
| | 72,668 |
| | 11.82 | % | | 2,159 |
|
Total interest-earning assets | 94,584 |
| | 10.39 | % | | 2,476 |
| | 87,050 |
| | 9.98 | % | | 2,184 |
|
Allowance for loan losses | (2,379 | ) | | | | | | (1,947 | ) | | | | |
Other assets | 4,192 |
| | | | | | 4,282 |
| | | | |
Total assets | $ | 96,397 |
| | | | | | $ | 89,385 |
| | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | |
Interest-bearing deposits | | | | | | | | | | | |
Time deposits(3) | $ | 26,862 |
| | 1.93 | % | | 131 |
| | $ | 24,495 |
| | 1.83 | % | | 112 |
|
Money market deposits(4) | 6,772 |
| | 1.35 | % | | 23 |
| | 6,939 |
| | 1.10 | % | | 19 |
|
Other interest-bearing savings deposits | 20,458 |
| | 1.23 | % | | 64 |
| | 17,321 |
| | 1.05 | % | | 47 |
|
Total interest-bearing deposits(5) | 54,092 |
| | 1.59 | % | | 218 |
| | 48,755 |
| | 1.45 | % | | 178 |
|
Borrowings | | | | | | | | | | | |
Short-term borrowings | 1 |
| | 1.33 | % | | — |
| | 2 |
| | 0.62 | % | | — |
|
Securitized borrowings(3)(4) | 17,206 |
| | 2.37 | % | | 103 |
| | 16,736 |
| | 2.07 | % | | 87 |
|
Other long-term borrowings(3) | 9,721 |
| | 4.30 | % | | 105 |
| | 8,746 |
| | 4.27 | % | | 94 |
|
Total borrowings | 26,928 |
| | 3.07 | % | | 208 |
| | 25,484 |
| | 2.82 | % | | 181 |
|
Total interest-bearing liabilities | 81,020 |
| | 2.08 | % | | 426 |
| | 74,239 |
| | 1.92 | % | | 359 |
|
Other liabilities and stockholders’ equity | 15,377 |
| | | | | | 15,146 |
| | | | |
Total liabilities and stockholders’ equity | $ | 96,397 |
| | | | | | $ | 89,385 |
| | | | |
Net interest income | | | | | $ | 2,050 |
| | | | | | $ | 1,825 |
|
Net interest margin(6) | | | 10.28 | % | | | | | | 9.99 | % | | |
Net yield on interest-bearing assets(7) | | | 8.60 | % | | | | | | 8.34 | % | | |
Interest rate spread(8) | | | 8.31 | % | | | | | | 8.06 | % | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Average Balance Sheet Analysis (dollars in millions) |
| | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2017 | | 2016 |
| Average Balance | | Rate | | Interest | | Average Balance | | Rate | | Interest |
Assets | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 13,166 |
| | 1.04 | % | | $ | 103 |
| | $ | 10,541 |
| | 0.50 | % | | $ | 40 |
|
Restricted cash | 742 |
| | 0.92 | % | | 5 |
| | 562 |
| | 0.37 | % | | 2 |
|
Other short-term investments | — |
| | — | % | | — |
| | 635 |
| | 0.86 | % | | 3 |
|
Investment securities | 1,693 |
| | 1.61 | % | | 20 |
| | 2,662 |
| | 1.49 | % | | 30 |
|
Loan receivables(1) | | | | | | | | | | | |
Credit card(2) | 61,165 |
| | 12.72 | % | | 5,818 |
| | 56,606 |
| | 12.46 | % | | 5,279 |
|
Personal loans | 6,872 |
| | 12.24 | % | | 629 |
| | 5,717 |
| | 12.23 | % | | 523 |
|
Private student loans | 6,679 |
| | 7.67 | % | | 383 |
| | 5,953 |
| | 7.38 | % | | 329 |
|
PCI student loans | 2,388 |
| | 6.75 | % | | 121 |
| | 2,906 |
| | 6.51 | % | | 142 |
|
Other | 316 |
| | 5.52 | % | | 13 |
| | 260 |
| | 5.06 | % | | 10 |
|
Total loan receivables | 77,420 |
| | 12.03 | % | | 6,964 |
| | 71,442 |
| | 11.75 | % | | 6,283 |
|
Total interest-earning assets | 93,021 |
| | 10.19 | % | | 7,092 |
| | 85,842 |
| | 9.89 | % | | 6,358 |
|
Allowance for loan losses | (2,270 | ) | | | | | | (1,910 | ) | | | | |
Other assets | 4,169 |
| | | | | | 4,411 |
| | | | |
Total assets | $ | 94,920 |
| | | | | | $ | 88,343 |
| | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | |
Interest-bearing deposits | | | | | | | | | | | |
Time deposits(3) | $ | 26,512 |
| | 1.90 | % | | 376 |
| | $ | 24,874 |
| | 1.75 | % | | 325 |
|
Money market deposits(4) | 6,830 |
| | 1.25 | % | | 64 |
| | 6,942 |
| | 1.07 | % | | 55 |
|
Other interest-bearing savings deposits | 19,732 |
| | 1.14 | % | | 168 |
| | 16,260 |
| | 1.03 | % | | 126 |
|
Total interest-bearing deposits(5) | 53,074 |
| | 1.53 | % | | 608 |
| | 48,076 |
| | 1.41 | % | | 506 |
|
Borrowings | | | | | | | | | | | |
Short-term borrowings | 2 |
| | 1.02 | % | | — |
| | 2 |
| | 0.63 | % | | — |
|
Securitized borrowings(3)(4) | 16,770 |
| | 2.29 | % | | 287 |
| | 16,773 |
| | 2.06 | % | | 258 |
|
Other long-term borrowings(3) | 9,767 |
| | 4.35 | % | | 317 |
| | 8,224 |
| | 4.35 | % | | 268 |
|
Total borrowings | 26,539 |
| | 3.04 | % | | 604 |
| | 24,999 |
| | 2.81 | % | | 526 |
|
Total interest-bearing liabilities | 79,613 |
| | 2.03 | % | | 1,212 |
| | 73,075 |
| | 1.89 | % | | 1,032 |
|
Other liabilities and stockholders’ equity | 15,307 |
| | | | | | 15,268 |
| | | | |
Total liabilities and stockholders’ equity | $ | 94,920 |
| | | | | | $ | 88,343 |
| | | | |
Net interest income | | | | | $ | 5,880 |
| | | | | | $ | 5,326 |
|
Net interest margin(6) | | | 10.16 | % | | | | | | 9.96 | % | | |
Net yield on interest-bearing assets(7) | | | 8.45 | % | | | | | | 8.29 | % | | |
Interest rate spread(8) | | | 8.16 | % | | | | | | 8.00 | % | | |
| | | | | | | | | | | |
| |
(1) | Average balances of loan receivables include non-accruing loans, which are included in the yield calculations. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above. |
| |
(2) | Interest income on credit card loans includes $55 million and $51 million of amortization of balance transfer fees for the three months ended September 30, 2017 and 2016, respectively. Interest income on credit card loans includes $161 million and $144 million of amortization of balance transfer fees for the nine months ended September 30, 2017 and 2016, respectively. |
| |
(3) | Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding. |
| |
(4) | Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding. |
| |
(5) | Includes the impact of FDIC insurance premiums and Large Institution Surcharge. |
| |
(6) | Net interest margin represents net interest income as a percentage of average total loan receivables. |
| |
(7) | Net yield on interest-bearing assets represents net interest income as a percentage of average total interest-earning assets. |
| |
(8) | Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities. |
Loan Quality
Loan receivables consist of the following (dollars in millions): |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Loan receivables | | | |
Credit card loans | $ | 63,475 |
| | $ | 61,522 |
|
Other loans | | | |
Personal loans | 7,397 |
| | 6,481 |
|
Private student loans | 6,998 |
| | 6,393 |
|
Other | 371 |
| | 274 |
|
Total other loans | 14,766 |
| | 13,148 |
|
PCI loans(1) | 2,202 |
| | 2,584 |
|
Total loan receivables | 80,443 |
| | 77,254 |
|
Allowance for loan losses | (2,531 | ) | | (2,167 | ) |
Net loan receivables | $ | 77,912 |
| | $ | 75,087 |
|
| | | |
| |
(1) | Represents PCI private student loans. See Note 3: Loan Receivables to our condensed consolidated financial statements for more information regarding PCI loans. |
Provision and Allowance for LoanCredit Losses
Provision for loancredit losses is the expense related to maintaining the allowance for loancredit losses at an appropriate level to absorb the estimated probableestimate of credit losses inanticipated over the remaining expected life of loan portfolioreceivables at each period end date. While establishingIn deriving the estimate of expected credit losses, we consider the collectability of principal, interest and fees associated with our loan receivables. We also consider expected recoveries of amounts that were either previously charged off or are expected to be charged-off. Establishing the estimate for probableexpected credit losses requires significant management judgment, thejudgment. The factors that influence the provision for loancredit losses include:
•Increases or decreases in outstanding loan balances, including:
•Changes in consumer spending, payment and credit utilization behaviors;
•The level of originations and maturities; and
•Changes in the overall mix of accounts and products within the portfolio;
•The credit quality of the loan portfolio, which reflects our credit granting practices and the effectiveness of collection efforts, among other factors;
•The impact of current and predictive general economic conditions on the consumer, including national and regional conditions, unemployment levels, bankruptcy trends and interest rate movements;
Changes in consumer spending and payment behaviors;
Changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio and maturation of the loan portfolio;
•The level and direction of historical losses; and anticipated loan delinquencies and charge-offs;
The credit quality of the loan portfolio, which reflects, among other factors, our credit granting practices and effectiveness of collection efforts; and
•Regulatory changes or new regulatory guidance.
In determiningRefer to "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates" and Note 3: Loan Receivables to our condensed consolidated financial statements for more details on how we estimate the allowance for loan losses, we estimate probable losses separately for segments of the loan portfolio that have similar risk characteristics. We use a migration analysis to estimate the likelihood that a loan will progress through the various stages of delinquency. We use other analyses to estimate losses incurred from non-delinquent accounts, which adds to the identification of loss emergence. We use these analyses together as a basis for determiningcredit losses.
The following tables provide changes in our allowance for credit losses (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2022 |
| Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
Balance at June 30, 2022 | $ | 5,307 | | | $ | 832 | | | $ | 572 | | | $ | 46 | | | $ | 6,757 | |
Additions | | | | | | | | | |
Provision for credit losses(1) | 649 | | | 20 | | | 69 | | | 5 | | | 743 | |
Deductions | | | | | | | | | |
Charge-offs | (592) | | | (29) | | | (38) | | | — | | | (659) | |
Recoveries | 197 | | | 6 | | | 17 | | | — | | | 220 | |
Net charge-offs | (395) | | | (23) | | | (21) | | | — | | | (439) | |
| | | | | | | | | |
Balance at September 30, 2022 | $ | 5,561 | | | $ | 829 | | | $ | 620 | | | $ | 51 | | | $ | 7,061 | |
| | | | | | | | | |
| For the Three Months Ended September 30, 2021 |
| Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
Balance at June 30, 2021 | $ | 5,409 | | | $ | 828 | | | $ | 745 | | | $ | 44 | | | $ | 7,026 | |
Additions | | | | | | | | | |
Provision for credit losses(1) | 178 | | | 46 | | | (64) | | | — | | | 160 | |
Deductions | | | | | | | | | |
Charge-offs | (495) | | | (23) | | | (38) | | | — | | | (556) | |
Recoveries | 206 | | | 6 | | | 19 | | | — | | | 231 | |
Net charge-offs | (289) | | | (17) | | | (19) | | | — | | | (325) | |
| | | | | | | | | |
Balance at September 30, 2021 | $ | 5,298 | | | $ | 857 | | | $ | 662 | | | $ | 44 | | | $ | 6,861 | |
| | | | | | | | | |
| For the Nine Months Ended September 30, 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) | 1,395 | | | 54 | | | 19 | | | 7 | | | 1,475 | |
Deductions | | | | | | | | | |
Charge-offs | (1,720) | | | (86) | | | (115) | | | — | | | (1,921) | |
Recoveries | 613 | | | 18 | | | 54 | | | — | | | 685 | |
Net charge-offs | (1,107) | | | (68) | | | (61) | | | — | | | (1,236) | |
| | | | | | | | | |
Balance at September 30, 2022 | $ | 5,561 | | | $ | 829 | | | $ | 620 | | | $ | 51 | | | $ | 7,061 | |
| | | | | | | | | |
| For the Nine Months Ended September 30, 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) | (18) | | | 61 | | | (96) | | | 6 | | | (47) | |
Deductions | | | | | | | | | |
Charge-offs | (1,778) | | | (63) | | | (150) | | | — | | | (1,991) | |
Recoveries | 603 | | | 19 | | | 51 | | | — | | | 673 | |
Net charge-offs | (1,175) | | | (44) | | | (99) | | | — | | | (1,318) | |
| | | | | | | | | |
Balance at September 30, 2021 | $ | 5,298 | | | $ | 857 | | | $ | 662 | | | $ | 44 | | | $ | 6,861 | |
| | | | | | | | | |
(1)Excludes a $30 million and $25 million adjustment of the liability for expected credit losses on unfunded commitments for the three months ended September 30, 2022 and 2021, respectively, and $1 million and $2 million for the nine months ended September 30, 2022 and 2021, respectively, as the liability is recorded in accrued expenses and other liabilities in our condensed consolidated statements of financial condition.
The allowance for credit losses was approximately $7.1 billion at September 30, 2022, which reflects a $304 millionbuild over June 30, 2022 and a $239 million build from December 31, 2021. Thebuild in the allowance for credit losses for the three and nine months ended September 30, 2022 was primarily driven by continued loan losses.growth.
Our 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 September 30, 2022, we used a macroeconomic forecast that projected (i) an unemployment rate of 4.2% at the end of 2022, peaking at 4.6% during 2023 and finishing the year at 4.5%; and (ii) 0.2% annualized decline in the real gross domestic product for 2022 and 1.8% annualized growth in the real gross domestic product for 2023.
In estimating expected credit losses, we 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. During 2022, the Federal Reserve raised its federal funds rate target range multiple times and signaled additional rate hikes throughout the remainder of the year. 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 we 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, we determined that a reversion period of 12 months was appropriate for the same reason. We applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented.
The provision for loancredit losses is the amount of expense realized after considering the level of net charge-offs in the period and the required amount of allowance for loancredit losses at the balance sheet date. For the three and nine months ended September 30, 2017,2022, the provision for loancredit losses increasedby $229$583 million or 51%, and $619 million, or 48%,$1.5 billion respectively, as compared to the same periods in 2016.2021. The increase was primarily due to higher levels of charge-offs combined with a larger reserve build for the three and nine months ended September 30, 2017 as compared to the same periods in 2016.
During the quarter, certain customers with accounts in Federal Emergency Management Agency designated hurricane disaster areas were provided relief that had the effect of freezing the customer payment status, suspending late fees and placing a hold on collection efforts. We recorded an adjustment of $17 million to expense for loans that would have otherwise charged off without such relief. The ultimate impact may be somewhat greater than this amount as we continue to evaluate the longer term ramifications on borrowers in the affected areas.
The allowance for loan losses was $2.5 billion at September 30, 2017, which reflects a $364 million reserve build over the amount of the allowance for loan losses at December 31, 2016. The reserve build was due to seasoning ofdriven by continued loan growth and increasing consumer leverage.credit normalization.
The following tables provide changes in our allowance for loan losses (dollars in millions): |
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2017 |
| Credit Card | | Personal Loans | | Student Loans(1) | | Other | | Total |
Balance at beginning of period | $ | 1,980 |
| | $ | 235 |
| | $ | 159 |
| | $ | 10 |
| | $ | 2,384 |
|
Additions | | | | | | | | | |
Provision for loan losses | 550 |
| | 91 |
| | 34 |
| | (1 | ) | | 674 |
|
Deductions | | | | | | | | | |
Charge-offs | (555 | ) | | (64 | ) | | (32 | ) | | — |
| | (651 | ) |
Recoveries | 116 |
| | 6 |
| | 2 |
| | — |
| | 124 |
|
Net charge-offs | (439 | ) | | (58 | ) | | (30 | ) | | — |
| | (527 | ) |
Balance at end of period | $ | 2,091 |
| | $ | 268 |
| | $ | 163 |
| | $ | 9 |
| | $ | 2,531 |
|
|
|
| | | | | | | |
|
|
| For the Three Months Ended September 30, 2016 |
| Credit Card | | Personal Loans | | Student Loans(1) | | Other | | Total |
Balance at beginning of period | $ | 1,603 |
| | $ | 176 |
| | $ | 151 |
| | $ | 19 |
| | $ | 1,949 |
|
Additions | | | | | | | | | |
Provision for loan losses | 372 |
| | 51 |
| | 21 |
| | 1 |
| | 445 |
|
Deductions | | | | | | | | | |
Charge-offs | (425 | ) | | (46 | ) | | (17 | ) | | — |
| | (488 | ) |
Recoveries | 111 |
| | 5 |
| | 2 |
| | — |
| | 118 |
|
Net charge-offs | (314 | ) | | (41 | ) | | (15 | ) | | — |
| | (370 | ) |
Balance at end of period | $ | 1,661 |
| | $ | 186 |
| | $ | 157 |
| | $ | 20 |
| | $ | 2,024 |
|
| | | | | | | | | |
| For the Nine Months Ended September 30, 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 | 1,607 |
| | 231 |
| | 69 |
| | (7 | ) | | 1,900 |
|
Deductions | | | | | | | | | |
Charge-offs | (1,651 | ) | | (182 | ) | | (71 | ) | | (3 | ) | | (1,907 | ) |
Recoveries | 345 |
| | 19 |
| | 7 |
| | — |
| | 371 |
|
Net charge-offs | (1,306 | ) | | (163 | ) | | (64 | ) | | (3 | ) | | (1,536 | ) |
Balance at end of period | $ | 2,091 |
| | $ | 268 |
| | $ | 163 |
| | $ | 9 |
| | $ | 2,531 |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
| For the Nine Months Ended September 30, 2016 |
| Credit Card | | Personal Loans | | Student Loans(1) | | Other | | Total |
Balance at beginning of period | $ | 1,554 |
| | $ | 155 |
| | $ | 143 |
| | $ | 17 |
| | $ | 1,869 |
|
Additions | | | | | | | | | |
Provision for loan losses | 1,081 |
| | 139 |
| | 58 |
| | 3 |
| | 1,281 |
|
Deductions | | | | | | | | | |
Charge-offs | (1,312 | ) | | (123 | ) | | (51 | ) | | — |
| | (1,486 | ) |
Recoveries | 338 |
| | 15 |
| | 7 |
| | — |
| | 360 |
|
Net charge-offs | (974 | ) | | (108 | ) | | (44 | ) | | — |
| | (1,126 | ) |
Balance at end of period | $ | 1,661 |
| | $ | 186 |
| | $ | 157 |
| | $ | 20 |
| | $ | 2,024 |
|
| | | | | | | | | |
| |
(1) | Includes both PCI and non-PCI private student loans. |
Net Charge-offs
Our net charge-offs include the principal amount of losses charged off less principal recoveries and exclude charged-off and recovered interest and fees and fraud losses. Charged-off and recovered interest and fees are recorded in interest income and loan fee income, respectively, which is effectively a reclassification of the provision for loancredit losses, while fraud losses are recorded in other expense. Credit card
The following table presents amounts and rates of net charge-offs of key loan receivables are charged off at the end of the month during which an account becomes 180 days contractually past due. Personal loansproducts (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| $ | | % | | $ | | % | | $ | | % | | $ | | % |
Credit card loans | $ | 395 | | | 1.92 | % | | $ | 289 | | | 1.65 | % | | $ | 1,107 | | | 1.93 | % | | $ | 1,175 | | | 2.29 | % |
Private student loans | $ | 23 | | | 0.91 | % | | $ | 17 | | | 0.68 | % | | $ | 68 | | | 0.89 | % | | $ | 44 | | | 0.58 | % |
Personal loans | $ | 21 | | | 1.14 | % | | $ | 19 | | | 1.11 | % | | $ | 61 | | | 1.16 | % | | $ | 99 | | | 1.91 | % |
| | | | | | | | | | | | | | | |
The net charge-offs and private student loans, which are closed-end consumer loan receivables, are generally charged off at the end of the month during which an account becomes 120 days contractually past due. Generally, customer bankruptcies and probate accounts are charged off at the end of the month 60 days following the receipt of notification of the bankruptcy or death but not later than the 180-day or 120-day contractual time frame.
The following table presents amounts and rates of net charge-offs of key loan products (dollars in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| $ | | % | | $ | | % | | $ | | % | | $ | | % |
Credit card loans | $ | 439 |
| | 2.80 | % | | $ | 314 |
| | 2.17 | % | | $ | 1,306 |
| | 2.86 | % | | $ | 974 |
| | 2.30 | % |
Personal loans | $ | 58 |
| | 3.19 | % | | $ | 41 |
| | 2.63 | % | | $ | 163 |
| | 3.18 | % | | $ | 108 |
| | 2.49 | % |
Private student loans (excluding PCI(1)) | $ | 30 |
| | 1.52 | % | | $ | 15 |
| | 1.02 | % | | $ | 64 |
| | 1.17 | % | | $ | 44 |
| | 0.99 | % |
| | | | | | | | | | | | | | | |
| |
(1) | Charge-offs for PCI loans did not result in a charge to earnings during any of the periods presented and are therefore excluded from the calculation. See Note 3: Loan Receivables to our condensed consolidated financial statements for more information regarding the accounting for charge-offs on PCI loans. |
The net charge-off rates on our credit card loans, personal loans and private student loans excluding PCIfor all loan products increased by 63, 56, and 50 basis points for the three months ended September 30, 2017, respectively,2022, when compared to the same periods in 2021, primarily due to credit normalization. The net charge-offs and net charge-off rates for credit card and personal loans decreased for the nine months ended September 30, 2022, as compared to the same period in 2021. The decrease in net charge-offs for credit card was primarily driven by lower average balances at charge off. The net charge-off rate for credit card benefited from a higher average level of loan receivables period-over-period. The decrease in net charge-offs and the net charge-off rate for personal loans was primarily driven by continued benefit from tighter credit underwriting standards implemented in 2020. The increase in net charge-offs and the net charge-off rate for private student loans for the nine months ended September 30, 2022, when compared to the same period in 2016. The net charge-off rates on our credit card loans, personal loans and private student loans excluding PCI increased by 56, 69 and 18 basis points for the nine months ended September 30, 2017, respectively, when compared to the same periods in 2016. The increase for all three portfolios2021, was primarily driven by seasoningcredit normalization and the diminishing benefit from pandemic programs.
Delinquencies
Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.
The following table presents the amounts and delinquency rates of key loan products that are 30 and 90 days or more delinquent, loan receivables that are not accruing interest regardless of delinquency and loans restructured in TDR programs (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| $ | | % | | $ | | % |
Loans 30 or more days delinquent | | | | | | | |
Credit card loans | $ | 1,761 | | | 2.11 | % | | $ | 1,232 | | | 1.66 | % |
Private student loans | $ | 201 | | | 1.94 | % | | $ | 157 | | | 1.55 | % |
Personal loans | $ | 53 | | | 0.69 | % | | $ | 48 | | | 0.69 | % |
| | | | | | | |
Total loan receivables | $ | 2,034 | | | 1.94 | % | | $ | 1,451 | | | 1.55 | % |
| | | | | | | |
Loans 90 or more days delinquent(1) | | | | | | | |
Credit card loans | $ | 770 | | | 0.92 | % | | $ | 562 | | | 0.76 | % |
Private student loans | $ | 43 | | | 0.42 | % | | $ | 36 | | | 0.35 | % |
Personal loans | $ | 14 | | | 0.18 | % | | $ | 13 | | | 0.20 | % |
| | | | | | | |
Total loan receivables | $ | 837 | | | 0.80 | % | | $ | 618 | | | 0.66 | % |
| | | | | | | |
Loans not accruing interest | $ | 224 | | | 0.21 | % | | $ | 225 | | | 0.24 | % |
| | | | | | | |
Troubled debt restructurings: | | | | | | | |
Credit card loans(2)(3)(4) | | | | | | | |
Currently enrolled | $ | 1,371 | | | 1.64 | % | | $ | 833 | | | 1.12 | % |
No longer enrolled | 212 | | | 0.25 | | | 267 | | | 0.36 | |
Total credit card loans | $ | 1,583 | | | 1.89 | % | | $ | 1,100 | | | 1.48 | % |
Private student loans(5) | $ | 309 | | | 2.99 | % | | $ | 249 | | | 2.46 | % |
Personal loans(6) | $ | 177 | | | 2.31 | % | | $ | 187 | | | 2.70 | % |
| | | | | | | |
The following table presents the amounts and rates of key loan products that are 30 and 90 days or more delinquent, loan receivables that are not accruing interest, regardless of delinquency and restructured loans (dollars in millions): |
| | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| $ | | % | | $ | | % |
Loans 30 or more days delinquent | | | | | | | |
Credit card loans | $ | 1,359 |
| | 2.14 | % | | $ | 1,252 |
| | 2.04 | % |
Personal loans | $ | 94 |
| | 1.27 | % | | $ | 74 |
| | 1.12 | % |
Private student loans (excluding PCI loans(1)) | $ | 150 |
| | 2.14 | % | | $ | 141 |
| | 2.22 | % |
| | | | | | | |
Loans 90 or more days delinquent | | | | | | | |
Credit card loans | $ | 646 |
| | 1.02 | % | | $ | 597 |
| | 0.97 | % |
Personal loans | $ | 26 |
| | 0.35 | % | | $ | 19 |
| | 0.29 | % |
Private student loans (excluding PCI loans(1)) | $ | 36 |
| | 0.52 | % | | $ | 35 |
| | 0.55 | % |
| | | | | | | |
Loans not accruing interest | $ | 225 |
| | 0.29 | % | | $ | 216 |
| | 0.29 | % |
| | | | | | | |
Restructured loans | | | | | | | |
Credit card loans(2) | $ | 1,180 |
| | 1.86 | % | | $ | 1,085 |
| | 1.76 | % |
Personal loans(3) | $ | 99 |
| | 1.34 | % | | $ | 81 |
| | 1.25 | % |
Private student loans (excluding PCI loans(1))(4) | $ | 126 |
| | 1.80 | % | | $ | 86 |
| | 1.35 | % |
| | | | | | | |
(1)Credit card loans that were 90 or more days delinquent at September 30, 2022 and December 31, 2021, included $55 million and $73 million, respectively, in modified loans exempt from the TDR designation pursuant to the CARES Act. Within private student and personal loans that were 90 or more days delinquent at September 30, 2022 and December 31, 2021, the respective amounts associated with modifications exempt from the TDR designation under the CARES Act were immaterial. | |
(1) | Excludes PCI loans which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because we are recognizing interest income on a pool of loans, it is all considered to be performing. |
| |
(2) | Restructured credit card loans include $66 million and $60 million at September 30, 2017 and December 31, 2016, respectively, that are also included in loans over 90 days delinquent or more. |
| |
(3) | Restructured personal loans include $4 million and $2 million at September 30, 2017 and December 31, 2016, respectively, that are also included in loans over 90 days delinquent or more. |
| |
(4) | Restructured private student loans include $4 million and $3 million at September 30, 2017 and December 31, 2016, that are also included in loans over 90 days delinquent or more. |
(2)We estimate that interest income recognized on credit card loans restructured in TDR programs was $35 million and $24 million for the three months ended September 30, 2022 and 2021, respectively, and $87 million and $84 million for the nine months ended September 30, 2022 and 2021, respectively. We do not separately track interest income on loans in TDR programs. We estimate this amount by applying an average interest rate to the average loans in the various TDR programs.
(3)We estimate that the incremental interest income that would have been recorded in accordance with the original terms of credit card loans restructured in TDR programs was $37 million and $34 million for the three months ended September 30, 2022 and 2021, respectively, and $100 million and $106 million for the nine months ended September 30, 2022 and 2021, respectively. We do not separately track the amount of incremental interest income that would have been recorded if the loans in TDR programs had not been restructured and interest had instead been recorded in accordance with the original terms. We estimate this amount by applying the difference between the average interest rate earned on non-modified loans and the average interest rate earned on loans in the TDR programs to the average loans in the TDR programs.
(4)Credit card loans restructured in TDR programs include $89 million and $45 million at September 30, 2022 and December 31, 2021, respectively, which are also included in loans 90 or more days delinquent.
(5)Private student loans restructured in TDR programs include $8 million and $7 million at September 30, 2022 and December 31, 2021, respectively, which are also included in loans 90 or more days delinquent.
(6)Personal loans restructured in TDR programs include $4 million at September 30, 2022 and December 31, 2021, which are also included in loans 90 or more days delinquent.
The 30-day and 90-day delinquency rates in the table above include all loans, including TDRs, modified loans exempt from TDR status and prior modifications that are no longer required to be reported as TDRs. The 30-day and 90-day delinquency rates for credit card loans and personal loans at September 30, 2017 increased as compared to December 31, 2016 primarily due to seasoning of continued loan growth. The 30-day delinquency rates for private student loans at September 30, 2017 decreased as2022, increased compared to December 31, 2016 due to seasonality while the2021, primarily driven by credit normalization. The 30-day and 90-day delinquency rate remained relatively flatrates for personal loans at September 30, 2017 as2022, remained relatively flat compared to December 31, 2016.2021.
The restructuredbalance of credit card and personal loan balances private student loans reported as TDRs increasedat September 30, 2017 increased as2022, compared to December 31, 20162021, primarily due to loan growth and seasoning. Atthe expiration of the CARES Act exemption for new modifications effective January 1,
2022. The balance of personal loans reported as TDRs decreased at September 30, 2017, the restructured private student loan balance increased as2022, compared to December 31, 20162021, primarily due to continued benefit from tighter credit underwriting standards implemented in 2020, partially offset by enrollments in loan modification programs that are no longer exempt from the TDR designation under the CARES Act. To provide additional clarity with respect to credit card loans classified as TDRs, the table above presents loans that are currently enrolled in modification programs separately from loans that have exited those programs but retain that classification.
The following table provides the balance of loan receivables restructured through a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | | | | |
| $ | | % | | $ | | % | | | | | | | | |
Credit card loans | $ | 1,261 | | | 1.51 | % | | $ | 1,620 | | | 2.18 | % | | | | | | | | |
Private student loans | $ | 202 | | | 1.95 | % | | $ | 242 | | | 2.39 | % | | | | | | | | |
Personal loans | $ | 22 | | | 0.29 | % | | $ | 45 | | | 0.65 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
We believe loan modification programs are useful in assisting customers experiencing financial difficulties and help to prevent defaults. We plan to continue to use loan modification programs as a resultmeans to provide relief to customers experiencing financial difficulties. See Note 3: Loan Receivables to our condensed consolidated financial statements for additional description of greater utilizationour use of loan modification programs available as more loans have entered into repayment.to provide relief to customers experiencing financial hardship.
Modified and Restructured Loans
We have loan modification programs that provide for temporary or permanent hardship relief for our credit cardFor information regarding modified and restructured loans, to borrowers experiencing financial difficulties. The temporary hardship program primarily consists of a reduced minimum payment and an interest rate reduction, both lasting for a period no longer than 12 months. The permanent modification program involves changing the structuresee "— Loan Quality — Delinquencies", "— Loan Quality — Impact of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rateCOVID-19 Pandemic on the loan. The permanent modification program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. We also make permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans continue to be subject to the original minimum payment termsLoan Portfolio" and do not normally include waiver of unpaid principal, interest or fees. Credit card loans included in temporary and permanent programs are accounted for as troubled debt restructurings. For additional information regarding the accounting treatment for these loans as well as
amounts recorded in the financial statements related to these loans, see Note 3: Loan Receivables to our condensed consolidated financial statements.
For personal loan customers, in certain situations we offer various payment programs, including temporary and permanent programs. The temporary programs normally consist of a reduction of the minimum payment for a period of no longer than 12 months with the option of a final balloon payment required at the end of the loan term or an extension of the maturity date with the total term not exceeding nine years. Further, in certain circumstances, the interest rate on the loan is reduced. The permanent programs involve changing the terms of the loan in order to pay off the outstanding balance over a longer term and also in certain circumstances reducing the interest rate on the loan. Similar to the temporary programs, the total term may not exceed nine years. We also allow permanent loan modifications for customers who request financial assistance through external sources, similar to our credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are accounted for as troubled debt restructurings.
At September 30, 2017, there was $5.3 billion of private student loans in repayment, which includes both PCI and non-PCI loans to students who are not in deferment. To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, we may offer hardship forbearance or programs that include payment deferral, temporary payment reduction, temporary interest rate reduction or extended terms. A modified loan typically meets the definition of a troubled debt restructuring based on the cumulative length of the concession period and an evaluation of the credit quality of the borrower based on FICO scores. Prior to the third quarter of 2016, only a second forbearance when the borrower was 30 days or greater delinquent was considered a troubled debt restructuring. The balance of student loans being accounted for as troubled debt restructurings has increased since then, although it has not led to significant changes in the balance of overall allowance for loan losses.
Borrower performance after using payment programs or forbearance is monitored and we believe the programs help to prevent defaults and are useful in assisting customers experiencing financial difficulties. We plan to continue to use payment programs and forbearance and, as a result, we expect to have additional loans classified as troubled debt restructurings in the future.
Other Income
The following table presents the components of other income (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | 2022 vs 2021 Increase (Decrease) | | For the Nine Months Ended September 30, | | 2022 vs. 2021 Increase (Decrease) |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Discount and interchange revenue, net(1) | $ | 346 | | | $ | 299 | | | $ | 47 | | | 16 | % | | $ | 1,056 | | | $ | 879 | | | $ | 177 | | | 20 | % |
Protection products revenue | 42 | | | 43 | | | (1) | | | (2) | % | | 128 | | | 129 | | | (1) | | | (1) | % |
Loan fee income | 168 | | | 121 | | | 47 | | | 39 | % | | 450 | | | 333 | | | 117 | | | 35 | % |
Transaction processing revenue | 65 | | | 58 | | | 7 | | | 12 | % | | 183 | | | 167 | | | 16 | | | 10 | % |
Unrealized (losses) gains on equity investments | (37) | | | (167) | | | 130 | | | (78) | % | | (394) | | | 562 | | | (956) | | | (170) | % |
Realized gains on equity investments | 33 | | | — | | | 33 | | | NM | | 186 | | | — | | | 186 | | | NM |
Other income | 19 | | | 18 | | | 1 | | | 6 | % | | 64 | | | 47 | | | 17 | | | 36 | % |
Total other income | $ | 636 | | | $ | 372 | | | $ | 264 | | | 71 | % | | $ | 1,673 | | | $ | 2,117 | | | $ | (444) | | | (21) | % |
| | | | | | | | | | | | | | | |
The following table presents the components of other income (dollars in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | 2017 vs. 2016 (Decrease) Increase | | For the Nine Months Ended September 30, | | 2017 vs. 2016 (Decrease) Increase |
| 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Discount and interchange revenue, net(1) | $ | 258 |
| | $ | 263 |
| | $ | (5 | ) | | (2 | )% | | $ | 769 |
| | $ | 801 |
| | $ | (32 | ) | | (4 | )% |
Protection products revenue | 55 |
| | 60 |
| | (5 | ) | | (8 | )% | | 169 |
| | 180 |
| | (11 | ) | | (6 | )% |
Loan fee income | 95 |
| | 91 |
| | 4 |
| | 4 | % | | 267 |
| | 250 |
| | 17 |
| | 7 | % |
Transaction processing revenue | 43 |
| | 40 |
| | 3 |
| | 8 | % | | 124 |
| | 115 |
| | 9 |
| | 8 | % |
Gain on investments | 3 |
| | — |
| | 3 |
| | 100 | % | | 3 |
| | — |
| | 3 |
| | 100 | % |
Other income | 21 |
| | 22 |
| | (1 | ) | | (5 | )% | | 71 |
| | 69 |
| | 2 |
| | 3 | % |
Total other income | $ | 475 |
| | $ | 476 |
| | $ | (1 | ) | | — | % | | $ | 1,403 |
| | $ | 1,415 |
| | $ | (12 | ) | | (1 | )% |
| | | | | | | | | | | | | | | |
| |
(1) | Net of rewards, including Cashback Bonus rewards, of $417 million and $368(1)Net of rewards, including Cashback Bonus rewards, of $811 million and $689 million for the three months ended September 30, 2017 and 2016, respectively, and of $1.2 billion and $1.0 billion for the nine months ended September 30, 2017 and 2016, respectively.
|
Total other income remained flat in the three months ended September 30, 20172022 and decreased by $12 million in2021, respectively, and $2.2 billion and $1.8 billion for the nine months ended September 30, 20172022 and 2021, respectively.
Total other income increased for the three months ended September 30, 2022, as compared to the same periodsperiod in 2016. During2021, primarily due to the change in fair value of equity investments, net discount and interchange revenue, loan fee income and realized gains on equity investments. The fair value adjustments resulted in the recognition of smaller unrealized losses in the current period compared to the prior period. The increase in discount and interchange revenue was partially offset by an increase in rewards, both of which were driven by higher sales volume. Loan fee income increased primarily due to a higher volume of late payments. Realized gains on equity investments increased due to sales in the current period.
Total other income decreased for the nine months ended September 30, 2017,2022, as compared to the decrease wassame period in 2021, primarily due primarily to higher promotional rewardsthe change in fair value of equity investments offset by increases in realized gains on equity investments, net discount and interchange revenue and loan fee income. The fair value adjustments resulted in the recognition of unrealized losses in the current period and unrealized gains in the prior period. Realized gains on equity investments increased due to
sales in the current period. The increase in discount and interchange revenue was partially offset by an increase in rewards, both of which were primarily the result ofdriven by higher sales volume. The increase in loanLoan fee income wasincreased primarily due to an increase ina higher volume of late fees.payments.
Other Expense
The following table represents the components of other expense (dollars in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | 2017 vs. 2016 Increase (Decrease) | | For the Nine Months Ended September 30, | | 2017 vs. 2016 Increase (Decrease) |
| 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Employee compensation and benefits | $ | 371 |
| | $ | 342 |
| | $ | 29 |
| | 8 | % | | $ | 1,101 |
| | $ | 1,027 |
| | $ | 74 |
| | 7 | % |
Marketing and business development | 203 |
| | 195 |
| | 8 |
| | 4 | % | | 563 |
| | 555 |
| | 8 |
| | 1 | % |
Information processing and communications | 78 |
| | 81 |
| | (3 | ) | | (4 | )% | | 235 |
| | 258 |
| | (23 | ) | | (9 | )% |
Professional fees | 163 |
| | 143 |
| | 20 |
| | 14 | % | | 466 |
| | 453 |
| | 13 |
| | 3 | % |
Premises and equipment | 25 |
| | 25 |
| | — |
| | — | % | | 73 |
| | 72 |
| | 1 |
| | 1 | % |
Other expense | 108 |
| | 109 |
| | (1 | ) | | (1 | )% | | 307 |
| | 322 |
| | (15 | ) | | (5 | )% |
Total other expense | $ | 948 |
| | $ | 895 |
| | $ | 53 |
| | 6 | % | | $ | 2,745 |
| | $ | 2,687 |
| | $ | 58 |
| | 2 | % |
| | | | | | | | | | | | | | | |
The following table represents the components of other expense (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | 2022 vs. 2021 Increase (Decrease) | | For the Nine Months Ended September 30, | | 2022 vs. 2021 Increase (Decrease) |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Employee compensation and benefits | $ | 551 | | | $ | 483 | | | $ | 68 | | | 14 | % | | $ | 1,566 | | | $ | 1,487 | | | $ | 79 | | | 5 | % |
Marketing and business development | 276 | | | 210 | | | 66 | | | 31 | % | | 722 | | | 539 | | | 183 | | | 34 | % |
Information processing and communications | 124 | | | 121 | | | 3 | | | 2 | % | | 370 | | | 375 | | | (5) | | | (1) | % |
Professional fees | 241 | | | 198 | | | 43 | | | 22 | % | | 607 | | | 567 | | | 40 | | | 7 | % |
Premises and equipment | 22 | | | 23 | | | (1) | | | (4) | % | | 70 | | | 69 | | | 1 | | | 1 | % |
Other expense | 174 | | | 155 | | | 19 | | | 12 | % | | 406 | | | 456 | | | (50) | | | (11) | % |
Total other expense | $ | 1,388 | | | $ | 1,190 | | | $ | 198 | | | 17 | % | | $ | 3,741 | | | $ | 3,493 | | | $ | 248 | | | 7 | % |
| | | | | | | | | | | | | | | |
Total other expense increased in the three and nine months ended September 30, 2017 by $53 million and $58 million, respectively, as compared to the same periods in 2016. During the three and nine months ended September 30, 2017, the increase was primarily driven by an increase in employee compensation and benefits and professional fees offset by a decrease in information processing and communications. The increase in employee compensation and benefits was primarily driven by the impact of added headcount for regulatory and compliance needs and higher average salaries. The increase in professional fees was driven primarily by investments in technology and infrastructure as well as higher spend in collection efforts in 2017, offset by the completion of a look back project related to anti-money laundering remediation in 2016. The decrease in information processing and communications was primarily the result of infrastructure efficiencies.
Income Tax Expense
The following table presents the calculation of the effective income tax rate (dollars in millions, except effective income tax rate): |
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Income before income tax expense | $ | 903 |
| | $ | 961 |
| | $ | 2,638 |
| | $ | 2,773 |
|
Income tax expense | $ | 301 |
| | $ | 322 |
| | $ | 926 |
| | $ | 943 |
|
Effective income tax rate | 33.3 | % |
| 33.5 | % |
| 35.1 | % |
| 34.0 | % |
| | | | | | | |
Income tax expense decreased $21 million and $17 million for the three and nine months ended September 30, 2017, respectively,2022, as compared to the same periods in 2016.2021, primarily due to increases in marketing and business development, employee compensation and benefits and professional fees. The increase in marketing and business development was driven by growth investments in card and consumer banking. Employee compensation and benefits increased primarily from higher headcount. The increase in professional fees was due primarily to investments in technology and increased consulting costs. The increase in total other expense for the nine months ended September 30, 2022 was offset primarily by a decrease in other expense driven by certain one-time items in the prior period.
Income Tax Expense
The following table presents the calculation of the effective income tax rate (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Income before income taxes | $ | 1,318 | | | $ | 1,402 | | | $ | 4,388 | | | $ | 5,703 | |
Income tax expense | $ | 312 | | | $ | 311 | | | $ | 1,029 | | | $ | 1,321 | |
Effective income tax rate | 23.6 | % | | 22.2 | % | | 23.4 | % | | 23.2 | % |
| | | | | | | |
Income tax expense was flat for the three months ended September 30, 2017 of 33.3% decreased from 33.5% for2022, as compared to the same period in 2016 primarily due to resolution of certain2021. Income tax matters. The effective tax rateexpense decreased $292 million for the nine months ended September 30, 2017 of 35.1% increased from 34.0% for2022, as compared to the same period in 20162021, primarily due to a decrease in pretax income. The effective tax rate increased for the three and nine months ended September 30, 2022, as compared to the same periods in 2021, primarily due to a settlement with tax authorities in the United States Congress Joint Committee on Taxation ("USCJCT") that occurred in 2016.prior periods.
Liquidity and Capital Resources
Funding and Liquidity
We seek to maintain stable, diversified and cost-effective funding sources and a strong liquidity profile in order to fund our business and repay or refinance our maturing obligations under both normal operating conditions and periods of economic or financial stress. In managing our liquidity risk, we seek to maintain a prudent liability maturity profile and ready access to an ample store of primary and contingent liquidity sources. Our primary funding sources include direct-to-consumer and brokered deposits, public term asset-backed securitizations and other short-term and long-term borrowings. Our primary liquidity sources include a liquidity portfolio comprisedcomposed of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities, andas well as secured borrowing capacity through private term asset-backed securitizations.securitizations and Federal Home Loan Bank ("FHLB") advances. In addition, we have unused borrowing capacity withat the Federal Reserve discount window, which provides another source of contingent liquidity.
Funding Sources
Deposits
We offer deposit products to customers through two channels: (i) through direct marketing, internet origination and affinity relationships (“("direct-to-consumer deposits”deposits"); and (ii) indirectly through contractual arrangements with securities brokerage firms (“("brokered deposits”deposits"). Direct-to-consumer deposits include online savings accounts, certificates of deposit, money market accounts, onlineIRA savings and checking accounts, and IRA certificates of deposit while brokeredand checking/debit accounts. Brokered deposits include certificates of deposit and sweep accounts. In December 2020, the Federal Deposit Insurance Corporation ("FDIC") issued the final rule on revisions to its brokered deposits regulation. In accordance with this final rule, our regulatory reporting reflects the changes required to deposit categorizations. Specifically, certain retail deposit products such as affinity deposits and deposits generated through certain sweep deposit relationships will no longer be categorized as brokered for regulatory reporting purposes. At September 30, 2017,2022, we had $38.7$66.2 billion of direct-to-consumer deposits and $17.4$16.6 billion of brokered deposits, of which there are $71.8 billion of deposit balances due in less than one year and other deposits.$11.0 billion of deposit balances due in one year or thereafter.
Credit Card Securitization Financing
We use the securitization ofsecuritize credit card receivables as a source of funding. We access the asset-backed securitization market using the Discover Card Master Trust I ("DCMT") and the Discover Card Execution Note Trust ("DCENT"), through which we. In connection with our securitization transactions, credit card receivables are transferred to DCMT. DCMT has issued a certificate representing the beneficial interest in its credit card receivables to DCENT. We issue DCENT DiscoverSeries notes both publiclyin public and through private transactions.transactions, which are collateralized by the beneficial interest certificate held by DCENT. From time to time, we may add credit card receivables to these trustsDCMT to create sufficient funding capacity for future securitizations while managing the seller’sseller's interest. We retain significant exposure to the performance of trust assetsthe securitized credit card receivables through holdings ofholding the seller's interest and subordinated security classes of DCENT.DCENT DiscoverSeries notes. At September 30, 2022, we had $11.0 billion of outstanding public asset-backed securities and $3.3 billion of outstanding subordinated asset-backed securities that had been issued to our wholly owned subsidiaries.
The securitization structures include certain features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements, the insufficiency of which triggers early repayment of the securities. We refer to this as "economic early amortization," which is based on excess spread levels. Excess spread is the amount by which income received by a trustwith respect to the securitized credit card receivables during a collection period including interest collections, fees and interchange, exceeds the fees and expenses of the trustDCENT during such collection period, including interest expense, servicing fees and charged-off receivables. In the event of an economic early amortization, which would occur if the excess spread fell below 0% on a three-month rolling average basis, we would be required to repay the affectedall outstanding securitized borrowings using available collections received bywith respect to the trust (thesecuritized credit card receivables. For the three months ended September 30, 2022, the DiscoverSeries three-month rolling average excess spread was 14.21%. The period of ultimate repayment would be determined by the amount and timing of collections received). An early amortization event would negatively impact our liquidity and require us to utilize our available non-securitization related contingent liquidity or rely on alternative funding sources, which may or may not be available at the time. As of September 30, 2017, the DiscoverSeries three-month rolling average excess spread was 13.21%.received.
We may elect to add receivables to the restricted pool of receivables subject to certain requirements. Through our wholly-ownedwholly owned indirect subsidiary, Discover Funding LLC, we are required to maintain an interest in a contractual minimum level of receivables in the trustDCMT in excess of the face value of outstanding investors’investors' interests. This excessminimum interest is referred to as the minimum seller’sseller's interest. The required minimum seller’sseller's interest in the pool of trust receivables which is included in credit card loan receivables restricted for securitization investors, is set at approximately 7% in excess of the total investors’investors' interests, (whichwhich includes interests held by third parties as well as those interests held by us).us. If the level of receivables in the trustDCMT were to fall below the required minimum, we would be required to add receivables from the unrestricted pool of receivables, which would increase the amount of credit card loan receivables restricted for securitization investors. A decline in the amount of the excess seller’sseller's interest could occur if balance repayments and charge-offs exceeded new lending on the securitized accounts or as a result of changes in total outstanding investors’investors' interests. Seller's interest is impacted byexhibits seasonality as higher receivable balance repayments tend to occur in the first calendar year quarter. If we could not add enough receivables to satisfy the minimum seller's interest requirement, an early amortization (or repayment) of investors’investors' interests would be triggered. No
An early amortization event would impair our liquidity and may require us to utilize our available non-securitization-related contingent liquidity or rely on alternative funding sources, which may or may not be available at the time. We have several strategies we can deploy to prevent an early amortization event. For instance, we could add receivables to DCMT, which would reduce our available borrowing capacity at the Federal Reserve discount window. As of September 30, 2022, there were $24.7 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization
investors for the three orand nine months ended September 30, 2017.2022. Alternatively, we could employ structured discounting, which was used effectively in 2009 to bolster excess spread and mitigate early amortization risk.
At September 30, 2017, we had $16.4 billionThe following table summarizes expected contractual maturities of outstanding public asset-backed securities and $5.1 billion of outstanding subordinated asset-backed securitiesthe investors' interests in credit card securitizations, excluding those that hadhave been issued to our wholly-owned subsidiaries.wholly owned subsidiaries (dollars in millions): | | | | | | | | | | | | | | | | | | |
At September 30, 2022 | Total | | Less Than One Year | | | One Year and Thereafter |
Scheduled maturities of borrowings - owed to credit card securitization investors | $ | 11,004 | | | $ | 3,292 | | | | $ | 7,712 | |
| | | | | | |
The following table summarizes expected contractual maturities of the investors’ interests in credit card securitizations, excluding those that have been issued to our wholly-owned subsidiaries (dollars in millions): |
| | | | | | | | | | | | | | | | | | | |
At September 30, 2017 | Total | | Less Than One Year | | One Year Through Three Years | | Four Years Through Five Years | | After Five Years |
Scheduled maturities of long-term borrowings - owed to credit card securitization investors | $ | 16,330 |
| | $ | 4,173 |
| | $ | 8,709 |
| | $ | 2,128 |
| | $ | 1,320 |
|
| | | | | | | | | |
The triple-A rating"AAA(sf)" and "Aaa(sf)" ratings of the DCENT DiscoverSeries Class A Notes issued to date hashave been based, in part, on an FDIC rule, which created a safe harbor that provides that the FDIC, as conservator or receiver, will not usinguse its power to disaffirm or repudiate contracts, seek to reclaim or recover assets transferred in connection with a securitization, or recharacterize themassets transferred in connection with a securitization as assets of the insured depository institution, provided such transfer satisfies the conditions for sale accounting treatment under previous GAAP. Although the implementation of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 860, Transfers and Servicing, no longer qualified certain transfers of assets for sale accounting treatment, the FDIC approved a final rule that preserved the safe-harbor treatment applicable to revolving trusts and master trusts, including DCMT, so long as those trusts would have satisfied the original FDIC safe harbor if evaluated under GAAP pertaining to transfers of financial assets in effect prior to December 1, 2009. OtherHowever, other legislative and regulatory developments may however, impact our ability and/or desire to issue asset-backed securities in the future.
Federal Home Loan Bank Advances
Discover Bank is a member bank of the FHLB of Chicago, one of 11 FHLBs that, along with the Office of Finance, compose the FHLB System. The FHLBs are government-sponsored enterprises of the U.S. ("U.S. GSEs") chartered to improve the availability of funds to support home ownership. As such, senior debt obligations of the FHLBs feature the same credit ratings as U.S. Treasury securities and are considered high-quality liquid assets for bank regulatory purposes. Consequently, the FHLBs benefit from consistent capital market access during nearly all macroeconomic and financial market conditions and low funding costs, which they pass on to their member banks when they borrow advances. Thus, we consider FHLB advances a stable and reliable funding source for Discover Bank for short-term contingent liquidity and long-term asset-liability management.
As a member of the FHLB of Chicago, Discover Bank has access to short- and long-term advance structures with maturities ranging from overnight to 30 years. At September 30, 2022, we had total committed borrowing capacity of $2.1 billion based on the amount and type of assets pledged, none of which was drawn. Under certain stressed conditions, we could pledge our liquidity portfolio securities and borrow against them at a modest reduction to their value.
Other Long-Term Borrowings—Private Student Loans
At September 30, 2017, we had $6642022, $88 million of remaining principal balancewas outstanding on securitized debt assumed as part of theour acquisition of The Student Loan Corporation. Principal and interest payments on the underlying private student loans will reduce the balance of these secured borrowings over time.
Other Long-Term Borrowings - Borrowings—Corporate and Bank Debt
The following table provides a summary of Discover Financial Services (Parent Company) and Discover Bank outstanding fixed-rate debt (dollars in millions): |
| | | |
At September 30, 2017 | Principal Amount Outstanding |
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2019-2027 | $ | 2,900 |
|
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing 2017-2031 | $ | 279 |
|
Discover Bank fixed-rate senior bank notes, maturing 2018-2026 | $ | 6,150 |
|
Discover Bank fixed-rate subordinated bank notes, maturing 2019-2020 | $ | 700 |
|
| |
CertainThe following table provides a summary of Discover Financial Services (Parent Company) and Discover Bank outstanding fixed-rate debt (dollars in millions): | | | | | |
At September 30, 2022 | Principal Amount Outstanding |
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2022-2027 | $ | 3,100 | |
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing 2022-2031 | $ | 167 | |
Discover Bank fixed-rate senior bank notes, maturing 2023-2030 | $ | 5,350 | |
Discover Bank fixed-rate subordinated bank notes, maturing 2028 | $ | 500 | |
| |
At September 30, 2022, $501 million of interest on our fixed-rate debt is due in less than one year and $1.1 billion of interest is due in one year and thereafter. See Note 6: Long-Term Borrowings to our condensed consolidated financial statements for more information on the maturities of our long-term borrowings. Certain DFS senior notes require us to offer to repurchase the notes at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change of control involving us and a corresponding ratings downgrade to below investment grade.
Short-Term Borrowings
As part of our regular funding strategy, we may, from time to time, borrow short-term funds in the federal funds market or the repurchase (“repo”("repo") market through repurchase agreements. Federal funds are short-term, unsecured loans between banks or other financial entities with a Federal Reserve account. Funds borrowed in the repo market are short-term, collateralized loans, usually secured with highly-ratedhighly rated investment securities such as U.S. Treasury bills or notes, or federal agency mortgage bonds or debentures.debentures issued by government agencies or U.S. GSEs. At September 30, 2017 and December 31, 2016,2022, there were no outstanding balances in the federal funds market or under repurchase agreements. Additionally, we have access to short-term advance structures through the FHLB of Chicago and privately placed asset-backed securitizations. At September 30, 2022, there were no short-term advances outstanding from the FHLB.
Additional Funding Sources
Private Asset-Backed Securitizations
We have access to committed undrawn borrowing capacity through privately placed asset-backed securitizations. At September 30, 2017, we had total committed capacity of $6.0 billion, none of which was drawn. While we may utilize funding from these private securitizations from time to time for normal business operations, their committed nature also makes them a reliable contingency funding source. Therefore, we reserve some undrawn capacity, based uponinformed by our liquidity stress testingtest results, for potential contingency funding needs. At September 30, 2022, we had a total committed capacity of $3.5 billion, none of which was drawn. We also seek to ensure the stability and reliability of these securitizations by staggering their maturity dates, and renewing them approximately one year prior to their scheduled maturity dates.dates and periodically drawing them for operational tests and seasonal funding needs.
Federal Reserve
Discover Bank has access to the Federal Reserve Bank of Philadelphia’sPhiladelphia's discount window. As of September 30, 2017,2022, Discover Bank had $27.7$39.9 billion of available borrowing capacity through the discount window based on the amount and type
of assets pledged. Wepledged, primarily consumer loans. As of September 30, 2022, we have no borrowings outstanding under the discount window and reserve this capacity as a source of contingency funding.contingent liquidity.
Funding Uses
Our primary uses of funds include the extensions of loans and credit to customers, primarily through Discover Bank,Bank; the maintenance of sufficient working capital for routine operations; the service of our debt and capital obligations, including interest, principal and dividend payments; and the purchase of investment securities for our liquidity portfolio, working capital,portfolio.
In addition to originating consumer loans to new customers, we also extend credit to existing customers, which primarily arises from agreements 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 September 30, 2022, our unused credit arrangements were approximately $225.6 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 the normal course of business, we enter into various contracts for goods and services, such as consulting, outsourcing, data, sponsorships, software licenses, telecommunications, global merchant acceptance and cashback rewards, among other things. These contracts are legally binding and specify all significant terms, including any applicable fixed future cash payments.
As of September 30, 2022, we have debt obligations, common stock and preferred stock outstanding. Refer to “— Funding Sources” and “— Capital” for more information related to our debt obligations and capital service. service, respectively, and the timing of expected payments.
We assess funding uses and liquidity needs under stressed and normal operating conditions, considering primary uses of funding, such as on-balance sheet loans and contingent uses of funding, such as the need to post additional collateral for derivatives positions. In order toTo anticipate funding needs under stress, we conduct liquidity stress testingtests to assess the impact of idiosyncratic, market-wide,systemic and hybrid (i.e., idiosyncratic and systemic) scenarios with varying levels of liquidity risk reflecting a range of stress severity. If we determine we have excess cash and cash equivalents, we may invest in highly liquid, unencumbered assets that we expect to be able to convert to cash quickly and with little loss of value using the repo market or outright sales.
Guarantees
Guarantees are contracts or indemnification agreements that may 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 may 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. 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. See Note 12: Commitments, Contingencies and Guarantees to our consolidated financial statements for further discussion regarding our guarantees.
Credit Ratings
Our borrowing costs and capacity in certain funding markets, including those for securitizations and unsecured senior and subordinated debt, may be affected by the credit ratings of DFS, Discover Bank and the securitization trusts. Downgrades in these credit ratings could result in higher interest expense on our unsecured debt and asset securitizations, as well as higher collateralcredit enhancement requirements for both our public and private asset securitizations. In addition to increased funding costs, deterioration in our credit ratings could reduce our borrowing capacity in the unsecured debt and asset securitization capital markets.
We also maintain agreements with certain ofThe table below reflects our derivative counterparties that contain provisions that require DFS and Discover Bank to maintain an investment grade credit rating from specified major credit rating agencies. At September 30, 2017, Discover Bank's credit rating met specified thresholds set by its counterparties. However, if Discover Bank'scurrent credit ratings were reduced by one ratings notch, Discover Bank would be required to post additional collateral, which, as of September 30, 2017, would have been $34 million. DFS (Parent Company) had no outstanding derivatives as of September 30, 2017, therefore, no collateral was required.
and outlooks: | | | | | | | | | | | | | | | | | |
| 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 | Positive | | Stable | | Stable |
Discover Bank | | | | | |
Senior unsecured debt | Baa2 | | BBB | | BBB+ |
Outlook for Discover Bank senior unsecured debt | Positive | | Stable | | Stable |
Subordinated debt | Baa2 | | BBB- | | BBB |
Discover Card Execution Note Trust (DCENT) | | | | | |
Class A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Our credit ratings are summarized in the following table:(1) | Aaa(sf) | | AAA(sf) | | AAA(sf) |
| | | | | |
| Moody’s Investors Service | | Standard & Poor’s | | Fitch
|
(1)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. 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.
Ratings
Discover Financial Services | | | | | |
Senior unsecured debt | Ba1 | | BBB- | | BBB+ |
Outlook for Discover Financial Services senior unsecured debt | Stable | | Stable | | Stable |
Discover Bank | | | | | |
Senior unsecured debt | Baa3 | | BBB | | BBB+ |
Outlook for Discover Bank senior unsecured debt | Stable | | Stable | | Stable |
Subordinated debt | Ba1 | | BBB- | | BBB |
Discover Card Execution Note Trust | | | | | |
Class A(1)
| Aaa(sf) | | AAA(sf) | | AAA(sf) |
| | | | | |
| |
(1) | An “sf” in the rating denotes rating agency identification for structured finance product ratings. |
Liquidity
We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy debt obligations under 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 forwe follow in managing liquidity risk across our business. The policy is approved by the Board of Directors withapproves the implementation responsibilities delegated topolicy and the Asset and Liability Management Committee (the “ALCO”"ALCO"). is responsible for its implementation. Additionally, we maintain a liquidity management framework document that 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”("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 testingtests 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 contingency liquidity sources include our liquidity portfolio securities, which we could sell, repo or borrow against, and private securitizations with unused borrowing capacity, whichcapacity. In addition, we could utilizeborrow FHLB advances by pledging securities to satisfy liquidity needs during stressed or normal conditions.the FHLB of Chicago. Moreover, we have unused borrowing capacity with the Federal Reserve discount window, which provides an additional source of contingency 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 addition,such an environment, we have unused capacity withmay also take actions to curtail the Federal Reserve discount windowsize of our balance sheet, which provides a source of contingentwould reduce the need for funding and liquidity.
At September 30, 2017,2022, our liquidity portfolio is comprisedcomposed 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 Statement of Financial Conditionbalance sheet as well as operational requirements, market conditions and market conditions.interest rate risk management objectives.
At September 30, 2017,2022, our liquidity portfolio and undrawn credit facilities were $47.6$61.5 billion, which was $4.8is $8.6 billion higher than the balance at December 31, 2016.2021, primarily as a result of additional borrowing capacity available through the discount window. During the three and nine months ended September 30, 2017,2022, the average balance of our liquidity portfolio was $14.7$16.0 billion and $15.1$15.3 billion, respectively. Our liquidity portfolio and undrawn facilities consist of the following (dollars in millions):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Liquidity portfolio | | | |
Cash and cash equivalents(1) | $ | 9,205 | | | $ | 8,080 | |
| | | |
Investment securities(2) | 6,837 | | | 6,879 | |
Total liquidity portfolio | 16,042 | | | 14,959 | |
Private asset-backed securitizations(3) | 3,500 | | | 3,500 | |
Federal Home Loan Bank of Chicago | 2,078 | | | 150 | |
Primary liquidity sources | 21,620 | | | 18,609 | |
Federal Reserve discount window(3) | 39,888 | | | 34,254 | |
Total liquidity portfolio and undrawn credit facilities | $ | 61,508 | | | $ | 52,863 | |
| | | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (dollars in millions) |
Liquidity portfolio | | | |
Cash and cash equivalents(1) | $ | 12,489 |
| | $ | 11,103 |
|
Investment securities(2) | 1,417 |
| | 1,532 |
|
Total liquidity portfolio | 13,906 |
| | 12,635 |
|
Private asset-backed securitizations(3) | 6,000 |
| | 6,000 |
|
Primary liquidity sources | 19,906 |
| | 18,635 |
|
Federal Reserve discount window(3) | 27,696 |
| | 24,194 |
|
Total liquidity portfolio and undrawn credit facilities | $ | 47,602 |
| | $ | 42,829 |
|
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(1)Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes. | |
(1) | Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes. |
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(2) | Excludes $32 million and $73 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of September 30, 2017 and December 31, 2016, respectively.(2)Excludes $35 million and $27 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of September 30, 2022 and December 31, 2021, respectively. (3)See "— Additional Funding Sources" for additional information. |
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(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 include dividendsincluding 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. At September 30, 2017, Discover Financial Services had sufficient cash resources to fund the dividend and debt service payments for more than 18 months.
WeIn managing this metric, we structure our debt maturity schedule to minimizemanage prudently the amount of debt maturing at the bank holding company within a short period of time.period. See Note 6: Long-Term Borrowings to our condensed consolidated financial statements for further information regarding our debt. Our ALCO and Board of Directors regularly review our compliance with our liquidity limits as a bank holding company, which are established in accordance with the liquidity risk appetite articulated by our Board.
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 initiativesreforms, such as those related to the adoption 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 the future.managing our capital position.
In 2013, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC issued the Basel III rules applicable to DFS and Discover Bank. Under those rules, DFS and Discover Bank are subject to regulatory capital rules issued by the Federal Reserve and the FDIC, respectively, under the Basel Committee's December 2010 framework ("Basel III rules"). Under the Basel III rules, 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. Additional phase-in requirements related to components of the final capital rules will become effective through 2019. The Basel III rules include newrequire DFS and Discover Bank to maintain minimum and "well-capitalized" risk-based capital and leverage ratios effective January 1, 2015, and refine the definition ofdefine what constitutes "capital"capital for purposes of calculating those ratiosratios.
On March 27, 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 which certain requirements are subjectCECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, we have elected to phase-in periods through the end of 2018 (the "transition period"). During the transition period, the effectsdefer recognition of the changes toestimated impact of CECL on regulatory capital (i.e., certain deductionsfor 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 adjustments) are recognized in 20% increments from 2015 through 2018. For example, one2021. The phase-in of the deductions fromCECL accounting model decreased CET1 capital, goodwill and intangibles, was subject to a 40%by $537 million as of total deduction in 2015 that increased to 60% in 2016 and so on, until reaching 100% deduction of total in 2018.January 1, 2022. For additional information regarding the risk-based capital and leverage ratios, see Note 10:11: Capital Adequacy to our condensed consolidated financial statements.
On March 4, 2020, the Federal Reserve announced the SCB final rule, which imposes limitations on DFS' capital distributions if we do not maintain our risk-based capital ratios above 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 fourth through seventh quarters of its nine-quarter capital planning horizon, expressed as a percentage of RWAs. 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 did not opt-in to such year's supervisory stress tests as part of the Federal Reserve's CCAR process receives an adjusted SCB requirement that is updated to reflect its planned common stock dividends per the firm's annual capital plan. On August 5, 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 Plan. DFS’ SCB was effective on October 1, 2021, and slightly increased from our SCB in effect for the preceding year, which was 3.5%. See "— Regulatory Environment and Developments — Banking — Capital Standards and Stress Testing" for additional information.
DFS elected to not participate in the 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"). On 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 September 30, 2022, DFS and Discover Bank met the requirements for "well-capitalized" status under the Federal Reserve's Regulation Y and the prompt corrective action rules and corresponding FDIC requirements, respectively, exceeding the regulatory minimums to which they were subject under the applicable rules.
Basel III rules also introduced a capital conservation buffer on top of the minimum risk-weighted asset ratios. The buffer is designed to absorb losses during periods of economic stress. The calculation of the buffer started to phase in beginning on January 1, 2016 at the rate of 0.625% and increases by 0.625% on each subsequent January 1 until it reaches the maximum 2.5% on January 1, 2019. When the capital conservation buffer is fully phased-in on January 1, 2019, this will effectively result in minimum ratios of (i) CET1 to risk-weighted assets of at least 7.0%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5% and (iii) Total capital to risk-weighted assets of at least 10.5%. Banking institutions with a capital ratio below the required amount will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
Another main component of the Basel III rules is a prescribed standardized approach for calculating risk-weighted assets that expands the risk-weight range from 0% to 100% (under Basel I) to 0% to 1,250% (under Basel III). The new range is intended to be more risk-sensitive and the risk weight assigned depends on the nature of the asset in question.
The Basel III rules provide for a number of the deductions from and adjustments to CET1, to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15%.
Basel III also requiresrequire 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 III Regulatory Capital Disclosures."
At September 30, 2017, 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.
As discussed in Note 10: Capital Adequacy to our condensed consolidated financial statements, we are subject to a CET1 capital ratio requirement under the Basel III rules. We believe that providing an estimate of our capital position based on the Basel III fully phased-in rules is important to complement the existing capital ratios and for comparability to other financial institutions. In addition, we disclose tangible common equity, which represents common equity less goodwill and intangibles. Management believes that common stockholders' equity excluding goodwill and intangibles is a more meaningful measure to investors as a measure of our true net asset value. As ofAt September 30, 2017, the CET1 capital ratio calculated under Basel III fully phased-in rules and2022, tangible common equity areis 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, they are considered to be non-GAAP financial measures.regulations. Other financial services companies may also disclose this ratio and metricmeasure and definitions may vary, so wevary. We advise users of this information to exercise caution in comparing this ratio and metricmeasure for different companies.
The following table provides a reconciliation of total common stockholders’ equity (a U.S. GAAP financial measure) to tangible common equity (dollars in millions): |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Total common stockholders’ equity(1) | $ | 10,627 |
| | $ | 10,763 |
|
Less: Goodwill | (255 | ) | | (255 | ) |
Less: Intangible assets, net | (163 | ) | | (166 | ) |
Tangible common equity | $ | 10,209 |
| | $ | 10,342 |
|
| | | |
The following table reconciles total common stockholders' equity (a GAAP financial measure) to tangible common equity (dollars in millions): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Total common stockholders' equity(1) | $ | 13,230 | | | $ | 12,352 | |
Less: goodwill | (255) | | | (255) | |
| | | |
Tangible common equity | $ | 12,975 | | | $ | 12,097 | |
| | | |
(1)Total common stockholders' equity is calculated as total stockholders' equity less preferred stock.
Our Board of Directors declared the following common stock dividends during 2022 and 2021: | | | | | | | | | | | | | | | | | | | | |
(1)Declaration Date | Total common stockholders’ equity is calculated as total stockholders’ equity less preferred stock. | Record Date | | Payment Date | | Dividend per Share |
The following table provides a reconciliation of CET1 capital calculated under Basel III transition rules to CET1 capital and risk-weighted assets calculated under fully phased-in Basel III rules (dollars in millions): |
| | | |
| September 30, 2017 |
Common equity Tier 1 capital (Basel III transition) | $ | 10,419 |
|
Adjustments related to capital components during transition(1) | (25 | ) |
Common equity Tier 1 capital (Basel III fully phased-in) | $ | 10,394 |
|
| |
Risk-weighted assets (Basel III fully phased-in)(2) | $ | 83,303 |
|
Common equity Tier 1 capital ratio (Basel III fully phased-in) | 12.5 | % |
| |
2022 | | | | | | |
(1)October 18, 2022 | Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion. | 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 18, 2021 | | March 04, 2021 | | 0.50 | |
Total common stock dividends | | $ | 2.30 | |
| | | | | | |
(2)2021 | Key differences under fully phased-in Basel III rules in the calculation of risk-weighted assets include higher risk weighting for past-due loans and unfunded commitments. | | | | | |
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 | |
| | | | | | |
Additionally, we are required to submit an annual capital plan toOur Board of Directors declared the Federal Reserve that includes an assessment of our expected uses and sources of capital over a nine-quarter planning horizon. We submitted our annual capital plan to the Federal Reserve under the Federal Reserve’s CCAR program and received notice in June 2017 that the Federal Reserve does not object to our proposed capital plan, including planned quarterly capital distributions through June 30, 2018. Our ability to make capital distributions, including our ability to pay dividends on or repurchase shares of our common stock, will continue to be subject to the Federal Reserve’s review and non-objection of the actions that we propose each year in our annual capital plan.
Also in June 2017, the Federal Reserve published the results of its annual supervisory stress tests for bank holding companies with $50 billion or more in total consolidated assets, including DFS. At that same time, we published company-run stress test results for DFS and Discover Bank. DFS is required to publish company-run stress tests results twice each year in accordance with Federal Reserve rules and Discover Bank is required to publish bank-run stress test results under FDIC rules.
We recently declared a quarterly cash dividend on our common stock of $0.35 per share, payable on December 7, 2017 to holders of record on November 22, 2017, which is consistent with last quarter. We also recently declared a quarterly cash dividend on ourfollowing Series C preferred stock
dividends during 2022 and 2021: | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | |
Our Board of $16.25 per share, equal to $0.40625Directors 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 | | $ | 61.25 | |
| | | | | | |
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 payable on December 1, 2017,plus $15.48 to holdersaccount for the long first dividend period.
On July 25, 2017, ourOur Board of Directors approved a new share repurchase program authorizing the repurchase ofin April 2022. The new program authorizes up to $2.8$4.2 billion of our outstanding shares of common stock. The program expires on October 31, 2018 and may be terminated at any time.share repurchases through June 30, 2023. This programshare repurchase authorization replaced the prior $2.5a $2.4 billion share repurchase program, which had $562 million of remaining authorization. During the three months ended September 30, 2017,expired on March 31, 2022. If and when we repurchased approximately 9 millionrepurchase our shares or 2%, of our outstanding common stock for $555 million. We expect to continue to make share repurchases under our repurchase program from time to time based on market conditions and other factors, subject to legal and regulatory requirements and restrictions, including approval from the Federal Reserve as described above. Share repurchases under the program, we may be made through a variety ofuse various methods, including open market purchases, privately negotiated transactions or other purchases, including block trades, accelerated share repurchase transactions, or any combination of such methods. During the three months ended September 30, 2022, we repurchased approximately 2 million shares for approximately $210 million. During the nine months ended September 30, 2022, we repurchased approximately 16 million shares for approximately $1.7 billion.
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. As we previously disclosed in July 2022, we suspended our existing share repurchase program because of an internal investigation relating to our student loan servicing practices and related compliance matters that is being conducted under the oversight of a board-appointed independent special committee. The investigation is ongoing, and the previously announced suspension of our share repurchase program remains in effect. We continue to communicate with our regulators regarding the internal investigation, and we may be subject to reviews, investigations, proceedings 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, also noted above, current or future regulatory initiativesreforms may require us to hold more capital in the future. Thereor could adversely impact our capital level. As 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.
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 NetworkItem 3. Quantitative and certain transactions processed by PULSE and Diners Club. See Note 11: Commitments, Contingencies and Guarantees to our condensed consolidated financial statements for further discussion regarding our guarantees.Qualitative Disclosures About Market Risk
Contractual Obligations and Contingent Liabilities and Commitments
In the normal course of business, we enter into various contractual obligations that may require future cash payments. Contractual obligations at September 30, 2017, which include deposits, long-term borrowings, operating and capital lease obligations, interest payments on fixed-rate debt, purchase obligations and other liabilities were $86.7 billion. For a description of our contractual obligations, see our annual report on Form 10-K for the year ended December 31, 2016 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Contingent Liabilities and Commitments.”
We extend credit for consumer loans, primarily arising from agreements with customers for unused lines of credit on certain credit cards, provided there is no violation of conditions established in the related agreement. At September 30, 2017, our unused commitments were approximately $188.3 billion. These commitments, substantially all of which we can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification. In addition, in the ordinary course of business, we guarantee
payment on behalf of subsidiaries relating to contractual obligations with external parties. The activities of the subsidiaries covered by any such guarantees are included in our condensed consolidated financial statements.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses for aan 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 increases to the interest rate we owepaid on our borrowings. Changes in interest rates and competitorour competitors' responses to those changes may influence customer payment rates, loan balances or deposit account activity. WeAs a result, we may incur higher funding costs as a result, which has the potential tothat 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 theour mix of variablevariable- and fixed-rate assets.assets and liabilities. To the extent that asset and related financingthe repricing characteristics of the assets and liabilities in a particular portfolio are not sufficiently matched, effectively, we may utilize interest rate derivative contracts, such as swap agreements, to achieve our objectives. Interest rate swap agreements effectively convert the underlying asset or liability from fixed- to floating-rate or from floating- to fixed-rate. See Note 14:15: Derivatives and Hedging Activities to our condensed consolidated financial statements for information on our derivatives activity.
We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12-month 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 increasechange 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 that affect our results would increasechange instantaneously, simultaneously and to the same degree.
Our interest rate sensitiveinterest-rate-sensitive assets include our variable ratevariable-rate loan receivables and thecertain assets that make upin our liquidity portfolio. We have restrictionslimitations on our ability to mitigate interest rate risk by adjusting rates on existing balances andbalances. Further, competitive actions may restrictlimit our ability to increase the rates that we charge to customers for new loans. At September 30, 2017,2022, the majority of our credit card and private student loans were atcharge 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 purposes of measuring rate sensitivity for such loans, only the effect of the hypothetical 100 basis point increase in the underlying market-based indexed rate has been considered. For assets that havewith a fixed interest rate but whichthat 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 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 LIBOR,Secured 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 which 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 are 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 above.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 design,composition, competitor actions which may affectaffecting 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.
AssumingOur 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 100 basis point increaseand parallel change in the interest rates affecting all interest rate sensitive assets and liabilities at September 30, 2017, we estimate that(dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 | | At December 31, 2021 |
Basis point change | $ | | % | | $ | | % |
+100 | $ | 205 | | | 1.66 | % | | $ | 154 | | | 1.51 | % |
-100 | $ | (199) | | | (1.61) | % | | NM | | NM |
| | | | | | | |
An estimated impact on net interest income over the following 12-month period would increase by approximately $211 million, or 3%. Assuming an immediate 100 basis point increaseof a decrease in the interest rates affecting allat December 31, 2021 was not provided as many of our interest rate sensitive assets and liabilities at December 31, 2016, we estimated that net interest income over the following 12-month period would increase by approximately $201 million, or 3%. Should an immediate 100 basis point interest rate decrease occur, we estimate that the impact would be approximately the inverse of the result of an immediate 100 basis point increase. However, at currentwere tied to interest rates there is a higher level of uncertainty in the assumptions used to derive this estimate because a decline of(i.e., prime and federal funds) that magnitude would result in awere near zero interest rate environment.their historical minimum levels and, therefore, could not materially decrease.
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Item 4. | Controls and Procedures |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"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’sSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
74
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Part II. | OTHER INFORMATION |
For a descriptionTable of legal proceedings, seeContents
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
•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
•CET1: Common Equity Tier 1
•CFPB: Consumer Financial Protection Bureau
•COVID-19: Coronavirus Disease 2019
•CPPA: California Privacy Protection Agency
•CPRA: California Privacy Rights Act
•DCENT: Discover Card Execution Note 12:Trust
•DCMT: Discover Card Master Trust I
•DFS: Discover Financial Services
•EPS: Earnings Per Share
•ESG: Environmental, Social and Governance
•EWI: Early Warning Indicator
•FASB: Financial Accounting Standards Board
•FCA: UK Financial Conduct Authority
•FDIC: Federal Deposit Insurance Corporation
•FHLB: Federal Home Loan Bank
•GAAP: Accounting Principles Generally Accepted in the United States
•IRS: Internal Revenue Service
•LIBOR: London Interbank Offered Rate
•OCI: Other Comprehensive Income (Loss)
•OIS: Overnight Index Swap
•RMBS: Residential Mortgage-Backed Securities
•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.
•VIE: Variable Interest Entity
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 13: Litigation and Regulatory Matters to our condensed consolidated financial statements.statements for a description of legal proceedings.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our annual reportAnnual Report on Form 10-K for the year ended December 31, 2016.2021.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table sets forth information regarding purchases of our common stock related to our share repurchase program and employee transactions made by us or on our behalf during the most recent quarter. | | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | | Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs |
July 1 - 31, 2022 | | | | | | | |
Repurchase program(1) | 2,099,205 | | | $ | 100.07 | | | 2,099,205 | | | $ | 3,389,926 | |
Employee transactions(3) | 1,142 | | | $ | 100.44 | | | N/A | | N/A |
August 1 - 31, 2022 | | | | | | | |
Repurchase program(1)(2) | — | | | $ | — | | | — | | | $ | 3,389,926 | |
Employee transactions(3) | 15,846 | | | $ | 102.13 | | | N/A | | N/A |
September 1 - 30, 2022 | | | | | | | |
Repurchase program(1)(2) | — | | | $ | — | | | — | | | $ | 3,389,926 | |
Employee transactions(3) | 422 | | | $ | 100.50 | | | N/A | | N/A |
| | | | | | | |
Total | | | | | | | |
Repurchase program(1)(2) | 2,099,205 | | | $ | 100.07 | | | 2,099,205 | | | $ | 3,389,926 | |
Employee transactions(3) | 17,410 | | | $ | 101.98 | | | N/A | | N/A |
| | | | | | | |
(1)In April 2022, our Board of Directors approved a new share repurchase program authorizing the purchase of up to $4.2 billion of our outstanding shares of common stock through June 30, 2023. This share repurchase authorization replaced our prior $2.4 billion share repurchase program that expired March 31, 2022.
(2)Share repurchases were suspended because of an internal investigation relating to our student loan servicing practices and related compliance matters. See "— Liquidity and Capital Resources — Capital" for additional information.
(3)Reflects shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock options.
The table below sets forth information regarding purchases of our common stock related to our share repurchase program and employee transactions that were made by us or on our behalf during the most recent quarter. |
| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program(1) | | Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs (1) |
July 1 - 31, 2017 | | | | | | | |
Repurchase program(1) | 2,983,406 |
| | $ | 61.77 |
| | 2,983,406 |
| | $ | 2,707,083,123 |
|
Employee transactions(2) | 1,562 |
| | $ | 62.19 |
| | N/A |
| | N/A |
|
August 1 - 31, 2017 | | | | | | | |
Repurchase program(1) | 3,252,466 |
| | $ | 60.53 |
| | 3,252,466 |
| | $ | 2,510,212,170 |
|
Employee transactions(2) | 1,911 |
| | $ | 60.61 |
| | N/A |
| | N/A |
|
September 1 - 30, 2017 | | | | | | | |
Repurchase program(1) | 2,914,936 |
| | $ | 59.64 |
| | 2,914,936 |
| | $ | 2,336,369,727 |
|
Employee transactions(2) | — |
| | $ | — |
| | N/A |
| | N/A |
|
| | | | | | | |
Total | | | | | | | |
Repurchase program(1) | 9,150,808 |
| | $ | 60.65 |
| | 9,150,808 |
| | $ | 2,336,369,727 |
|
Employee transactions(2) | 3,473 |
| | $ | 61.32 |
| | N/A |
| | N/A |
|
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(1) | On July 25, 2017, our board of directors approved a share repurchase program authorizing the purchase of up to $2.8 billion of our outstanding shares of common stock. This share repurchase program expires on October 31, 2018 and may be terminated at any time. |
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(2) | Reflects shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock options. |
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Item 3. | Defaults Upon Senior Securities |
Item 3. Defaults Upon Senior Securities
None.
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Item 4. | Mine Safety Disclosures |
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
See "Exhibit Index" for documents filed herewith and incorporated herein by reference.
Exhibit Index | | | | | | | | |
Exhibit Number | | Description |
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| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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| | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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101 | | Interactive Data File — the following financial statements from Discover Financial Services Quarterly Report on Form 10-Q formatted in inline XBRL: (1) Condensed Consolidated Statements of Financial Condition, (2) Condensed Consolidated Statements of Income, (3) Condensed Consolidated Statements of Comprehensive Income, (4) Condensed Consolidated Statements of Changes in Stockholders' Equity, (5) Condensed Consolidated Statements of Cash Flows and (6) Notes to the Condensed Consolidated Financial Statements. |
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104 | | Cover Page Interactive Data File — the cover page from Discover Financial Services Quarterly Report on Form 10-Q formatted in inline XBRL and contained in Exhibit 101. |
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Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Discover Financial Services (Registrant) |
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| By: | | Discover Financial Services
(Registrant)
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| By: | | /s/ R. MARKJOHN T. GRAFREENE |
| | | R. Mark Graf
Executive Vice President and Chief Financial Officer
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Date: November 2, 2017
Exhibit Index
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Exhibit
Number
| | Description |
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| | Statement regarding computation of ratio of earnings to fixed charges and computation of ratio of earnings to fixed charges and preferred stock dividends. |
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| | Certification of Chief John T. Greene Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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| | Certification ofVice President, Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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101.INS | | XBRL Instance Document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
Date: October 27, 2022