UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20202021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-33378
DISCOVER FINANCIAL SERVICES
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
36-2517428
(I.R.S. Employer Identification No.)
2500 Lake Cook Road, Riverwoods, Illinois 60015
(Address of principal executive offices, including zip code)
(224) 405-0900
(Registrant's telephone number, including area code) | | | | | | | | |
| Securities registered pursuant to Section 12(b) of the Act | | |
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | DFS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | |
| Large Accelerated Filer | ☒ | | Accelerated Filer | ☐ |
| Non-accelerated Filer | ☐ | | Smaller Reporting Company | ☐ |
| | | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 21, 2020,22, 2021, there were 306,496,332293,075,754 shares of the registrant's Common Stock, par value $0.01 per share, outstanding.
DISCOVER FINANCIAL SERVICES
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 20202021
Except as otherwise indicated or unless the context otherwise requires, "Discover Financial Services," "Discover," "DFS," "we," "us," "our," and "the Company" refer to Discover Financial Services and its subsidiaries. See Glossary of Acronyms, located after Part I — Item 4, for terms and abbreviations used throughout the quarterly report.
We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to:to Discover®, PULSE®, Cashback Bonus®, Discover Cashback Checking®, Discover it®, Freeze it®, College Covered® and Diners Club International®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
DISCOVER FINANCIAL SERVICES
Condensed Consolidated StatementsDISCOVER FINANCIAL SERVICES
(Exact name of Financial Conditionregistrant as specified in its charter)
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (unaudited)
(dollars in millions,
except share amounts) | | |
| Assets | | | |
| Cash and cash equivalents | $ | 9,513 | | | $ | 6,924 | |
| Restricted cash | 576 | | | 40 | |
Other short-term investments(1) | 8,048 | | | 0 | |
| | | |
Investment securities (includes available-for-sale securities of $20,573 and $10,323 reported at fair value with associated amortized cost of $20,148 and $10,173 at September 30, 2020 and December 31, 2019, respectively)(1) | 20,854 | | | 10,595 | |
| Loan receivables | | | |
| Loan receivables | 88,660 | | | 95,894 | |
Allowance for credit losses(2) | (8,226) | | | (3,383) | |
| Net loan receivables | 80,434 | | | 92,511 | |
| Premises and equipment, net | 1,121 | | | 1,057 | |
| Goodwill | 255 | | | 255 | |
| Intangible assets, net | 95 | | | 155 | |
| Other assets | 3,453 | | | 2,459 | |
| Total assets | $ | 124,349 | | | $ | 113,996 | |
| Liabilities and Stockholders' Equity | | | |
| Liabilities | | | |
| Deposits | | | |
| Interest-bearing deposit accounts | $ | 76,938 | | | $ | 71,955 | |
| Non-interest bearing deposit accounts | 1,077 | | | 791 | |
| Total deposits | 78,015 | | | 72,746 | |
Short-term borrowings(1) | 10,700 | | | 0 | |
| Long-term borrowings | 21,841 | | | 25,701 | |
| Accrued expenses and other liabilities | 3,541 | | | 3,690 | |
| Total liabilities | 114,097 | | | 102,137 | |
| Commitments, contingencies and guarantees (Notes 10, 13 and 14) | | | |
| Stockholders' Equity | | | |
| Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 567,743,876 and 566,653,650 shares issued at September 30, 2020 and December 31, 2019, respectively | 6 | | | 6 | |
| Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 and 5,700 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 1,056 | | | 563 | |
| Additional paid-in capital | 4,235 | | | 4,206 | |
| Retained earnings | 19,292 | | | 21,290 | |
| Accumulated other comprehensive income (loss) | 93 | | | (119) | |
| Treasury stock, at cost; 261,247,516 and 256,496,492 shares at September 30, 2020 and December 31, 2019, respectively | (14,430) | | | (14,087) | |
| Total stockholders' equity | 10,252 | | | 11,859 | |
| Total liabilities and stockholders' equity | $ | 124,349 | | | $ | 113,996 | |
| | | |
(State or other jurisdiction of incorporation or organization)
36-2517428
(I.R.S. Employer Identification No.)
2500 Lake Cook Road, Riverwoods, Illinois 60015
(Address of principal executive offices, including zip code)
(224) 405-0900
(Registrant's telephone number, including area code) | | | | | | | | |
| Securities registered pursuant to Section 12(b) of the Act |
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | DFS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Includes amounts related to a securities lending transaction in September 2020. See Note 2: Investments for additional information.☒ No ☐
(2)Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes Prior to adoption of Accounting Standards Update ("ASU") No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.☒ No ☐
The table below presentsIndicate by check mark whether the carrying amountsregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of certain assets"large accelerated filer," "accelerated filer," "smaller reporting company," and liabilities of Discover Financial Services' consolidated variable interest entities ("VIEs"), which are included"emerging growth company" 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 obligationsRule 12b-2 of the consolidated VIEs. The liabilitiesExchange Act. | | | | | | | | | | | | | | |
| Large Accelerated Filer | ☒ | | Accelerated Filer | ☐ |
| Non-accelerated Filer | ☐ | | Smaller Reporting Company | ☐ |
| | | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the table below include third-party liabilitiesExchange Act). Yes ☐ No ☒
As of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts for which creditors have recourse toOctober 22, 2021, there were 293,075,754 shares of the general credit of Discover Financial Services.registrant's Common Stock, par value $0.01 per share, outstanding.
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (unaudited) (dollars in millions) | | |
| Assets | | | |
| Restricted cash | $ | 576 | | | $ | 40 | |
| Loan receivables | $ | 27,287 | | | $ | 31,840 | |
Allowance for credit losses allocated to securitized loan receivables(1) | $ | (1,964) | | | $ | (1,179) | |
| Other assets | $ | 6 | | | $ | 5 | |
| Liabilities | | | |
| Long-term borrowings | $ | 11,425 | | | $ | 14,284 | |
| Accrued expenses and other liabilities | $ | 9 | | | $ | 15 | |
| | | |
(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
DISCOVER FINANCIAL SERVICES
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021
Except as otherwise indicated or unless the context otherwise requires, "Discover Financial Services," "Discover," "DFS," "we," "us," "our," and "the Company" refer to Discover Financial Services and its subsidiaries. See NotesGlossary of Acronyms, located after Part I — Item 4, for terms and abbreviations used throughout the quarterly report.
We own or have rights to use the Condensed Consolidated Financial Statements.trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to Discover®, PULSE®, Cashback Bonus®, Discover Cashback Checking®, Discover it®, Freeze it®, College Covered® and Diners Club International®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
DISCOVER FINANCIAL SERVICES
DISCOVER FINANCIAL SERVICES
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
36-2517428
(I.R.S. Employer Identification No.)
2500 Lake Cook Road, Riverwoods, Illinois 60015
(Address of principal executive offices, including zip code)
(224) 405-0900
(Registrant's telephone number, including area code) | | | | | | | | |
| Securities registered pursuant to Section 12(b) of the Act |
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | DFS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | |
| Large Accelerated Filer | ☒ | | Accelerated Filer | ☐ |
| Non-accelerated Filer | ☐ | | Smaller Reporting Company | ☐ |
| | | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 22, 2021, there were 293,075,754 shares of the registrant's Common Stock, par value $0.01 per share, outstanding.
DISCOVER FINANCIAL SERVICES
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021
Except as otherwise indicated or unless the context otherwise requires, "Discover Financial Services," "Discover," "DFS," "we," "us," "our," and "the Company" refer to Discover Financial Services and its subsidiaries. See Glossary of Acronyms, located after Part I — Item 4, for terms and abbreviations used throughout the quarterly report.
We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to Discover®, PULSE®, Cashback Bonus®, Discover Cashback Checking®, Discover it®, Freeze it®, College Covered® and Diners Club International®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Financial Condition
| | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| | (unaudited)
(dollars in millions,
except for share amounts) |
| Assets | | | |
| Cash and cash equivalents | $ | 12,716 | | | $ | 13,564 | |
| Restricted cash | 32 | | | 25 | |
| Other short-term investments | — | | | 2,200 | |
| Investment securities (includes available-for-sale securities of $7,791 and $9,654 reported at fair value with associated amortized cost of $7,566 and $9,277 at September 30, 2021 and December 31, 2020, respectively) | 8,014 | | | 9,914 | |
| Loan receivables | | | |
| Loan receivables | 89,542 | | | 90,449 | |
| Allowance for credit losses | (6,861) | | | (8,226) | |
| Net loan receivables | 82,681 | | | 82,223 | |
| Premises and equipment, net | 987 | | | 1,027 | |
| Goodwill | 255 | | | 255 | |
| Intangible assets, net | 1 | | | 95 | |
| Other assets | 3,858 | | | 3,586 | |
| Total assets | $ | 108,544 | | | $ | 112,889 | |
| Liabilities and Stockholders' Equity | | | |
| Liabilities | | | |
| Deposits | | | |
| Interest-bearing deposit accounts | $ | 71,126 | | | $ | 75,695 | |
| Non-interest bearing deposit accounts | 1,436 | | | 1,209 | |
| Total deposits | 72,562 | | | 76,904 | |
| | | |
| Long-term borrowings | 18,516 | | | 21,241 | |
| Accrued expenses and other liabilities | 4,203 | | | 3,860 | |
| Total liabilities | 95,281 | | | 102,005 | |
| Commitments, contingencies and guarantees (Notes 10, 13 and 14) | 0 | | 0 |
| Stockholders' Equity | | | |
| Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 568,761,125 and 567,898,063 shares issued at September 30, 2021 and December 31, 2020, respectively | 6 | | | 6 | |
| Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | 1,056 | | | 1,056 | |
| Additional paid-in capital | 4,345 | | | 4,257 | |
| Retained earnings | 23,846 | | | 19,955 | |
| Accumulated other comprehensive (loss) income | (68) | | | 45 | |
| Treasury stock, at cost; 274,001,084 and 261,300,765 shares at September 30, 2021 and December 31, 2020, respectively | (15,922) | | | (14,435) | |
| Total stockholders' equity | 13,263 | | | 10,884 | |
| Total liabilities and stockholders' equity | $ | 108,544 | | | $ | 112,889 | |
| | | |
The table below presents the carrying amounts of certain assets and liabilities of Discover Financial Services' consolidated variable interest entities ("VIEs"), which are included in the 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.
| | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| | (unaudited) (dollars in millions) |
| Assets | | | |
| Restricted cash | $ | 32 | | | $ | 25 | |
| Loan receivables | $ | 24,751 | | | $ | 27,546 | |
| Allowance for credit losses allocated to securitized loan receivables | $ | (1,436) | | | $ | (1,936) | |
| Other assets | $ | 4 | | | $ | 4 | |
| Liabilities | | | |
| Long-term borrowings | $ | 9,064 | | | $ | 10,840 | |
| Accrued expenses and other liabilities | $ | 5 | | | $ | 8 | |
| | | |
See Notes to the Condensed Consolidated Financial Statements.
1
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Income | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (unaudited)
(dollars in millions, except per share amounts) | | | | | | |
| Interest income | | | | | | | |
| Credit card loans | $ | 2,171 | | | $ | 2,465 | | | $ | 6,760 | | | $ | 7,223 | |
| Other loans | 446 | | | 472 | | | 1,369 | | | 1,389 | |
| Investment securities | 58 | | | 53 | | | 171 | | | 120 | |
| Other interest income | 6 | | | 50 | | | 35 | | | 222 | |
| Total interest income | 2,681 | | | 3,040 | | | 8,335 | | | 8,954 | |
| Interest expense | | | | | | | |
| Deposits | 287 | | | 407 | | | 1,000 | | | 1,194 | |
| Short-term borrowings | 3 | | | 0 | | | 3 | | | 0 | |
| Long-term borrowings | 126 | | | 231 | | | 479 | | | 721 | |
| Total interest expense | 416 | | | 638 | | | 1,482 | | | 1,915 | |
| Net interest income | 2,265 | | | 2,402 | | | 6,853 | | | 7,039 | |
Provision for credit losses(1) | 750 | | | 799 | | | 4,603 | | | 2,395 | |
| Net interest income after provision for credit losses | 1,515 | | | 1,603 | | | 2,250 | | | 4,644 | |
| Other income | | | | | | | |
| Discount and interchange revenue, net | 238 | | | 255 | | | 691 | | | 785 | |
| Protection products revenue | 44 | | | 48 | | | 135 | | | 146 | |
| Loan fee income | 100 | | | 120 | | | 304 | | | 326 | |
| Transaction processing revenue | 50 | | | 52 | | | 143 | | | 146 | |
| Gains on equity investments | 0 | | | 0 | | | 79 | | | 0 | |
| Other income | 17 | | | 23 | | | 59 | | | 73 | |
| Total other income | 449 | | | 498 | | | 1,411 | | | 1,476 | |
| Other expense | | | | | | | |
| Employee compensation and benefits | 471 | | | 439 | | | 1,390 | | | 1,291 | |
| Marketing and business development | 140 | | | 230 | | | 500 | | | 649 | |
| Information processing and communications | 111 | | | 96 | | | 342 | | | 296 | |
| Professional fees | 151 | | | 189 | | | 525 | | | 539 | |
| Premises and equipment | 26 | | | 26 | | | 83 | | | 80 | |
| Other expense | 106 | | | 127 | | | 401 | | | 354 | |
| Total other expense | 1,005 | | | 1,107 | | | 3,241 | | | 3,209 | |
| Income before income taxes | 959 | | | 994 | | | 420 | | | 2,911 | |
| Income tax expense | 188 | | | 224 | | | 78 | | | 662 | |
| Net income | $ | 771 | | | $ | 770 | | | $ | 342 | | | $ | 2,249 | |
| Net income allocated to common stockholders | $ | 751 | | | $ | 749 | | | $ | 309 | | | $ | 2,203 | |
| Basic earnings per common share | $ | 2.45 | | | $ | 2.36 | | | $ | 1.00 | | | $ | 6.83 | |
| Diluted earnings per common share | $ | 2.45 | | | $ | 2.36 | | | $ | 1.00 | | | $ | 6.82 | |
| | | | | | | |
(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach. | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (unaudited)
(dollars in millions, except per share amounts) |
| Interest income | | | | | | | |
| Credit card loans | $ | 2,193 | | | $ | 2,171 | | | $ | 6,452 | | | $ | 6,760 | |
| Other loans | 433 | | | 446 | | | 1,301 | | | 1,369 | |
| Investment securities | 45 | | | 58 | | | 142 | | | 171 | |
| Other interest income | 3 | | | 6 | | | 14 | | | 35 | |
| Total interest income | 2,674 | | | 2,681 | | | 7,909 | | | 8,335 | |
| Interest expense | | | | | | | |
| Deposits | 156 | | | 287 | | | 519 | | | 1,000 | |
| Short-term borrowings | — | | | 3 | | | — | | | 3 | |
| Long-term borrowings | 113 | | | 126 | | | 356 | | | 479 | |
| Total interest expense | 269 | | | 416 | | | 875 | | | 1,482 | |
| Net interest income | 2,405 | | | 2,265 | | | 7,034 | | | 6,853 | |
| Provision for credit losses | 185 | | | 750 | | | (45) | | | 4,603 | |
| Net interest income after provision for credit losses | 2,220 | | | 1,515 | | | 7,079 | | | 2,250 | |
| Other income | | | | | | | |
| Discount and interchange revenue, net | 299 | | | 238 | | | 879 | | | 691 | |
| Protection products revenue | 43 | | | 44 | | | 129 | | | 135 | |
| Loan fee income | 121 | | | 100 | | | 333 | | | 304 | |
| Transaction processing revenue | 58 | | | 50 | | | 167 | | | 143 | |
| Unrealized (losses) gains on equity investments | (167) | | | — | | | 562 | | | — | |
| Realized gains on equity investments | — | | | — | | | — | | | 79 | |
| Other income | 18 | | | 17 | | | 47 | | | 59 | |
| Total other income | 372 | | | 449 | | | 2,117 | | | 1,411 | |
| Other expense | | | | | | | |
| Employee compensation and benefits | 483 | | | 471 | | | 1,487 | | | 1,390 | |
| Marketing and business development | 210 | | | 140 | | | 539 | | | 500 | |
| Information processing and communications | 121 | | | 111 | | | 375 | | | 342 | |
| Professional fees | 198 | | | 151 | | | 567 | | | 525 | |
| Premises and equipment | 23 | | | 26 | | | 69 | | | 83 | |
| Other expense | 155 | | | 106 | | | 456 | | | 401 | |
| Total other expense | 1,190 | | | 1,005 | | | 3,493 | | | 3,241 | |
| Income before income taxes | 1,402 | | | 959 | | | 5,703 | | | 420 | |
| Income tax expense | 311 | | | 188 | | | 1,321 | | | 78 | |
| Net income | $ | 1,091 | | | $ | 771 | | | $ | 4,382 | | | $ | 342 | |
| Net income allocated to common stockholders | $ | 1,055 | | | $ | 751 | | | $ | 4,289 | | | $ | 309 | |
| Basic earnings per common share | $ | 3.54 | | | $ | 2.45 | | | $ | 14.17 | | | $ | 1.00 | |
| Diluted earnings per common share | $ | 3.54 | | | $ | 2.45 | | | $ | 14.16 | | | $ | 1.00 | |
| | | | | | | |
See Notes to the Condensed Consolidated Financial Statements.
2
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Comprehensive Income | | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | | (unaudited)
(dollars in millions) | | | (unaudited)
(dollars in millions) |
| Net income | Net income | $ | 771 | | | $ | 770 | | | $ | 342 | | | $ | 2,249 | | Net income | $ | 1,091 | | | $ | 771 | | | $ | 4,382 | | | $ | 342 | |
| Other comprehensive (loss) income, net of tax | Other comprehensive (loss) income, net of tax | | Other comprehensive (loss) income, net of tax | |
| Unrealized (losses) gains on available-for-sale investment securities, net of tax | Unrealized (losses) gains on available-for-sale investment securities, net of tax | (32) | | | 17 | | | 208 | | | 119 | | Unrealized (losses) gains on available-for-sale investment securities, net of tax | (29) | | | (32) | | | (115) | | | 208 | |
| Unrealized gains (losses) on cash flow hedges, net of tax | 3 | | | (8) | | | 4 | | | (38) | | |
| Unrealized pension and post-retirement plan gains, net of tax | 0 | | | 0 | | | 0 | | | 1 | | |
| Unrealized gains on cash flow hedges, net of tax | | Unrealized gains on cash flow hedges, net of tax | — | | | 3 | | | 2 | | | 4 | |
| | Other comprehensive (loss) income | Other comprehensive (loss) income | (29) | | | 9 | | | 212 | | | 82 | | Other comprehensive (loss) income | (29) | | | (29) | | | (113) | | | 212 | |
| Comprehensive income | Comprehensive income | $ | 742 | | | $ | 779 | | | $ | 554 | | | $ | 2,331 | | Comprehensive income | $ | 1,062 | | | $ | 742 | | | $ | 4,269 | | | $ | 554 | |
|
See Notes to the Condensed Consolidated Financial Statements.
3
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Changes in Stockholders' Equity | | | | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury
Stock | | Total
Stockholders'
Equity | | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury
Stock | | Total
Stockholders'
Equity |
| | Preferred Stock | | | Common Stock | | | | | | | | | | | | Preferred Stock | Common Stock | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury
Stock | | Total
Stockholders'
Equity |
| | | Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | Shares | | Amount | Shares | Amount | Additional
Paid-in
Capital | Retained
Earnings | |
| | | (unaudited)
(dollars in millions, shares in thousands) | | (unaudited)
(dollars in millions, shares in thousands) |
| For the Three Months Ended September 30, 2019 | | |
| Balance at June 30, 2019 | 6 | | | $ | 563 | | | 566,019 | | | $ | 6 | | | $ | 4,167 | | | $ | 20,107 | | | $ | (83) | | | $ | (13,267) | | | $ | 11,493 | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 770 | | | — | | | — | | | 770 | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 9 | | | — | | | 9 | | |
| Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (419) | | | (419) | | |
| Common stock issued under employee benefit plans | — | | | — | | | 25 | | | 0 | | | 3 | | | — | | | — | | | — | | | 3 | | |
| Common stock issued and stock-based compensation expense | — | | | — | | | 560 | | | 0 | | | 18 | | | — | | | — | | | — | | | 18 | | |
Dividends — common stock ($0.44 per share) | — | | | — | | | — | | | — | | | — | | | (142) | | | — | | | — | | | (142) | | |
Dividends — preferred stock ($2,750 per share) | — | | | — | | | — | | | — | | | — | | | (15) | | | — | | | — | | | (15) | | |
| Balance at September 30, 2019 | 6 | | | $ | 563 | | | 566,604 | | | $ | 6 | | | $ | 4,188 | | | $ | 20,720 | | | $ | (74) | | | $ | (13,686) | | | $ | 11,717 | | |
| | For the Three Months Ended September 30, 2020 | For the Three Months Ended September 30, 2020 | | For the Three Months Ended September 30, 2020 |
| Balance at June 30, 2020 | Balance at June 30, 2020 | 11 | | | $ | 1,056 | | | 567,653 | | | $ | 6 | | | $ | 4,216 | | | $ | 18,673 | | | $ | 122 | | | $ | (14,430) | | | $ | 9,643 | | Balance at June 30, 2020 | 11 | | | $ | 1,056 | | | 567,653 | | | $ | 6 | | | $ | 4,216 | | | $ | 18,673 | | | $ | 122 | | | $ | (14,430) | | | $ | 9,643 | |
| | Net income | Net income | — | | | — | | | — | | | — | | | — | | | 771 | | | — | | | — | | | 771 | | Net income | — | | | — | | | — | | | — | | | — | | | 771 | | | — | | | — | | | 771 | |
| Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (29) | | | — | | | (29) | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (29) | | | — | | | (29) | |
| | Common stock issued under employee benefit plans | Common stock issued under employee benefit plans | — | | | — | | | 50 | | | 0 | | | 3 | | | — | | | — | | | — | | | 3 | | Common stock issued under employee benefit plans | — | | | — | | | 50 | | | — | | | 3 | | | — | | | — | | | — | | | 3 | |
| Common stock issued and stock-based compensation expense | Common stock issued and stock-based compensation expense | — | | | — | | | 41 | | | 0 | | | 16 | | | — | | | — | | | — | | | 16 | | Common stock issued and stock-based compensation expense | — | | | — | | | 41 | | | — | | | 16 | | | — | | | — | | | — | | | 16 | |
| Preferred stock issued | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 0 | | |
| Dividends — common stock ($0.44 per share) | Dividends — common stock ($0.44 per share) | — | | | — | | | — | | | — | | | — | | | (137) | | | — | | | — | | | (137) | | Dividends — common stock ($0.44 per share) | — | | | — | | | — | | | — | | | — | | | (137) | | | — | | | — | | | (137) | |
Dividends — preferred stock ($2,750 per share) | — | | | — | | | — | | | — | | | — | | | (15) | | | — | | | — | | | (15) | | |
| Dividends — Series C preferred stock ($2,750 per share) | | Dividends — Series C preferred stock ($2,750 per share) | — | | | — | | | — | | | — | | | — | | | (15) | | | — | | | — | | | (15) | |
| Balance at September 30, 2020 | Balance at September 30, 2020 | 11 | | | $ | 1,056 | | | 567,744 | | | $ | 6 | | | $ | 4,235 | | | $ | 19,292 | | | $ | 93 | | | $ | (14,430) | | | $ | 10,252 | | Balance at September 30, 2020 | 11 | | | $ | 1,056 | | | 567,744 | | | $ | 6 | | | $ | 4,235 | | | $ | 19,292 | | | $ | 93 | | | $ | (14,430) | | | $ | 10,252 | |
| | For the Nine Months Ended September 30, 2019 | | |
| Balance at December 31, 2018 | 6 | | | $ | 563 | | | 564,852 | | | $ | 6 | | | $ | 4,130 | | | $ | 18,906 | | | $ | (156) | | | $ | (12,319) | | | $ | 11,130 | | |
| For the Three Months Ended September 30, 2021 | | For the Three Months Ended September 30, 2021 |
| Balance at June 30, 2021 | | Balance at June 30, 2021 | 11 | | | $ | 1,056 | | | 568,693�� | | | $ | 6 | | | $ | 4,319 | | | $ | 22,936 | | | $ | (39) | | | $ | (15,107) | | | $ | 13,171 | |
| Net income | Net income | — | | | — | | | — | | | — | | | — | | | 2,249 | | | — | | | — | | | 2,249 | | Net income | — | | | — | | | — | | | — | | | — | | | 1,091 | | | — | | | — | | | 1,091 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 82 | | | — | | | 82 | | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (29) | | | — | | | (29) | |
| Purchases of treasury stock | Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,367) | | | (1,367) | | Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (815) | | | (815) | |
| Common stock issued under employee benefit plans | Common stock issued under employee benefit plans | — | | | — | | | 76 | | | 0 | | | 6 | | | — | | | — | | | — | | | 6 | | Common stock issued under employee benefit plans | — | | | — | | | 21 | | | — | | | 2 | | | — | | | — | | | — | | | 2 | |
| Common stock issued and stock-based compensation expense | Common stock issued and stock-based compensation expense | — | | | — | | | 1,676 | | | 0 | | | 52 | | | — | | | — | | | — | | | 52 | | Common stock issued and stock-based compensation expense | — | | | — | | | 47 | | | — | | | 24 | | | — | | | — | | | — | | | 24 | |
Dividends — common stock ($1.24 per share) | — | | | — | | | — | | | — | | | — | | | (404) | | | — | | | — | | | (404) | | |
| Dividends — Series C preferred stock ($5,500 per share) | — | | | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | | |
| Balance at September 30, 2019 | 6 | | | $ | 563 | | | 566,604 | | | $ | 6 | | | $ | 4,188 | | | $ | 20,720 | | | $ | (74) | | | $ | (13,686) | | | $ | 11,717 | | |
| | Dividends — common stock ($0.50 per share) | | Dividends — common stock ($0.50 per share) | — | | | — | | | — | | | — | | | — | | | (151) | | | — | | | — | | | (151) | |
| Dividends — Series C preferred stock ($2,750 per share) | | Dividends — Series C preferred stock ($2,750 per share) | — | | | — | | | — | | | — | | | — | | | (15) | | | — | | | — | | | (15) | |
| Dividends — Series D preferred stock ($3,063 per share) | | Dividends — Series D preferred stock ($3,063 per share) | — | | | — | | | — | | | — | | | — | | | (15) | | | — | | | — | | | (15) | |
| Balance at September 30, 2021 | | Balance at September 30, 2021 | 11 | | | $ | 1,056 | | | 568,761 | | | $ | 6 | | | $ | 4,345 | | | $ | 23,846 | | | $ | (68) | | | $ | (15,922) | | | $ | 13,263 | |
| | For the Nine Months Ended September 30, 2020 | For the Nine Months Ended September 30, 2020 | | For the Nine Months Ended September 30, 2020 |
| Balance at December 31, 2019 | Balance at December 31, 2019 | 6 | | | $ | 563 | | | 566,654 | | | $ | 6 | | | $ | 4,206 | | | $ | 21,290 | | | $ | (119) | | | $ | (14,087) | | | $ | 11,859 | | Balance at December 31, 2019 | 6 | | | $ | 563 | | | 566,654 | | | $ | 6 | | | $ | 4,206 | | | $ | 21,290 | | | $ | (119) | | | $ | (14,087) | | | $ | 11,859 | |
| Cumulative effect of ASU No. 2016-13 adoption | Cumulative effect of ASU No. 2016-13 adoption | — | | | — | | | — | | | — | | | — | | | (1,902) | | | — | | | — | | | (1,902) | | Cumulative effect of ASU No. 2016-13 adoption | — | | | — | | | — | | | — | | | — | | | (1,902) | | | — | | | — | | | (1,902) | |
| Net income | Net income | — | | | — | | | — | | | — | | | — | | | 342 | | | — | | | — | | | 342 | | Net income | — | | | — | | | — | | | — | | | — | | | 342 | | | — | | | — | | | 342 | |
| Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 212 | | | — | | | 212 | | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 212 | | | — | | | 212 | |
| Purchases of treasury stock | Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (343) | | | (343) | | Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (343) | | | (343) | |
| Common stock issued under employee benefit plans | Common stock issued under employee benefit plans | — | | | — | | | 163 | | | 0 | | | 7 | | | — | | | — | | | — | | | 7 | | Common stock issued under employee benefit plans | — | | | — | | | 163 | | | — | | | 7 | | | — | | | — | | | — | | | 7 | |
| Common stock issued and stock-based compensation expense | Common stock issued and stock-based compensation expense | — | | | — | | | 927 | | | 0 | | | 22 | | | — | | | — | | | — | | | 22 | | Common stock issued and stock-based compensation expense | — | | | — | | | 927 | | | — | | | 22 | | | — | | | — | | | — | | | 22 | |
| Preferred stock issued | Preferred stock issued | 5 | | | 493 | | | — | | | — | | | — | | | — | | | — | | | — | | | 493 | | Preferred stock issued | 5 | | | 493 | | | — | | | — | | | — | | | — | | | — | | | — | | | 493 | |
Dividends — common stock ($1.32 per share) | Dividends — common stock ($1.32 per share) | — | | | — | | | — | | | — | | | — | | | (407) | | | — | | | — | | | (407) | | Dividends — common stock ($1.32 per share) | — | | | — | | | — | | | — | | | — | | | (407) | | | — | | | — | | | (407) | |
| Dividends — preferred stock ($5,500 per share) | — | | | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | | |
| Dividends — Series C preferred stock ($5,500 per share) | | Dividends — Series C preferred stock ($5,500 per share) | — | | | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | |
| Balance at September 30, 2020 | Balance at September 30, 2020 | 11 | | | $ | 1,056 | | | 567,744 | | | $ | 6 | | | $ | 4,235 | | | $ | 19,292 | | | $ | 93 | | | $ | (14,430) | | | $ | 10,252 | | Balance at September 30, 2020 | 11 | | | $ | 1,056 | | | 567,744 | | | $ | 6 | | | $ | 4,235 | | | $ | 19,292 | | | $ | 93 | | | $ | (14,430) | | | $ | 10,252 | |
| | For the Nine Months Ended September 30, 2021 | | For the Nine Months Ended September 30, 2021 |
| Balance at December 31, 2020 | | Balance at December 31, 2020 | 11 | | | $ | 1,056 | | | 567,898 | | | $ | 6 | | | $ | 4,257 | | | $ | 19,955 | | | $ | 45 | | | $ | (14,435) | | | $ | 10,884 | |
| Net income | | Net income | — | | | — | | | — | | | — | | | — | | | 4,382 | | | — | | | — | | | 4,382 | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (113) | | | — | | | (113) | |
| Purchases of treasury stock | | Purchases of treasury stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,487) | | | (1,487) | |
| Common stock issued under employee benefit plans | | Common stock issued under employee benefit plans | — | | | — | | | 67 | | | — | | | 7 | | | — | | | — | | | — | | | 7 | |
| Common stock issued and stock-based compensation expense | | Common stock issued and stock-based compensation expense | — | | | — | | | 796 | | | — | | | 81 | | | — | | | — | | | — | | | 81 | |
| | Dividends — common stock ($1.38 per share) | | Dividends — common stock ($1.38 per share) | — | | | — | | | — | | | — | | | — | | | (422) | | | — | | | — | | | (422) | |
| Dividends — Series C preferred stock ($5,500 per share) | | Dividends — Series C preferred stock ($5,500 per share) | — | | | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | |
| Dividends — Series D preferred stock ($7,674 per share) | | Dividends — Series D preferred stock ($7,674 per share) | — | | | — | | | — | | | — | | | — | | | (38) | | | — | | | — | | | (38) | |
| Balance at September 30, 2021 | | Balance at September 30, 2021 | 11 | | | $ | 1,056 | | | 568,761 | | | $ | 6 | | | $ | 4,345 | | | $ | 23,846 | | | $ | (68) | | | $ | (15,922) | | | $ | 13,263 | |
|
See Notes to the Condensed Consolidated Financial Statements.
4
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Cash Flows | | | | For the Nine Months Ended September 30, | | | For the Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| | (unaudited)
(dollars in millions) | | | (unaudited)
(dollars in millions) |
| Cash flows provided by operating activities | Cash flows provided by operating activities | | Cash flows provided by operating activities | |
| Net income | Net income | $ | 342 | | | $ | 2,249 | | Net income | $ | 4,382 | | | $ | 342 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Provision for credit losses(1) | Provision for credit losses(1) | 4,603 | | | 2,395 | | Provision for credit losses(1) | (45) | | | 4,603 | |
| Deferred income taxes | Deferred income taxes | (600) | | | (95) | | Deferred income taxes | 388 | | | (600) | |
| Depreciation and amortization | Depreciation and amortization | 362 | | | 315 | | Depreciation and amortization | 387 | | | 362 | |
| Amortization of deferred revenues and accretion of accretable yield on acquired loans | (245) | | | (311) | | |
| Net (gain) loss on investments and other assets | (40) | | | 30 | | |
| Amortization of deferred revenues | | Amortization of deferred revenues | (217) | | | (245) | |
| Net unrealized and realized gains on investments and other assets | | Net unrealized and realized gains on investments and other assets | (531) | | | (40) | |
| Other, net | Other, net | 87 | | | 59 | | Other, net | 227 | | | 87 | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
| Decrease (increase) in other assets | 212 | | | (33) | | |
| (Decrease) increase in accrued expenses and other liabilities | (158) | | | 123 | | |
| (Increase) decrease in other assets | | (Increase) decrease in other assets | (273) | | | 212 | |
| Increase (decrease) in accrued expenses and other liabilities | | Increase (decrease) in accrued expenses and other liabilities | 359 | | | (158) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 4,563 | | | 4,732 | | Net cash provided by operating activities | 4,677 | | | 4,563 | |
| | Cash flows used for investing activities | | |
| | Cash flows provided by (used for) investing activities | | Cash flows provided by (used for) investing activities | |
| Maturities of other short-term investments | | Maturities of other short-term investments | 2,200 | | | — | |
| Purchases of other short-term investments | Purchases of other short-term investments | (8,046) | | | (1,000) | | Purchases of other short-term investments | — | | | (8,046) | |
| Maturities of available-for-sale investment securities | Maturities of available-for-sale investment securities | 724 | | | 106 | | Maturities of available-for-sale investment securities | 1,709 | | | 724 | |
| Purchases of available-for-sale investment securities | Purchases of available-for-sale investment securities | 0 | | | (7,183) | | Purchases of available-for-sale investment securities | (9) | | | — | |
| Maturities of held-to-maturity investment securities | Maturities of held-to-maturity investment securities | 34 | | | 21 | | Maturities of held-to-maturity investment securities | 63 | | | 34 | |
| Purchases of held-to-maturity investment securities | Purchases of held-to-maturity investment securities | (44) | | | (54) | | Purchases of held-to-maturity investment securities | (28) | | | (44) | |
| Net principal repaid (disbursed) on loans originated for investment | 5,316 | | | (3,848) | | |
| Proceeds from sale of other investments | 94 | | | 0 | | |
| Net principal (disbursed) repaid on loans originated for investment | | Net principal (disbursed) repaid on loans originated for investment | (255) | | | 5,316 | |
| Proceeds from the sale of available-for-sale securities | | Proceeds from the sale of available-for-sale securities | 5 | | | — | |
| Proceeds from the sale of other investments | | Proceeds from the sale of other investments | — | | | 94 | |
| Purchases of other investments | Purchases of other investments | (54) | | | (49) | | Purchases of other investments | (108) | | | (54) | |
| | Purchases of premises and equipment | Purchases of premises and equipment | (206) | | | (212) | | Purchases of premises and equipment | (146) | | | (206) | |
| Net cash used for investing activities | (2,182) | | | (12,219) | | |
| Net cash provided by (used for) investing activities | | Net cash provided by (used for) investing activities | 3,431 | | | (2,182) | |
| | Cash flows provided by (used for) financing activities | | |
| Cash flows (used for) provided by financing activities | | Cash flows (used for) provided by financing activities | |
| Proceeds from issuance of securitized debt | Proceeds from issuance of securitized debt | 0 | | | 2,027 | | Proceeds from issuance of securitized debt | 1,731 | | | — | |
| Maturities and repayment of securitized debt | Maturities and repayment of securitized debt | (2,974) | | | (6,278) | | Maturities and repayment of securitized debt | (3,445) | | | (2,974) | |
| Proceeds from issuance of other long-term borrowings | Proceeds from issuance of other long-term borrowings | 494 | | | 1,341 | | Proceeds from issuance of other long-term borrowings | — | | | 494 | |
| Maturities and repayment of other long-term borrowings | Maturities and repayment of other long-term borrowings | (1,754) | | | (86) | | Maturities and repayment of other long-term borrowings | (922) | | | (1,754) | |
| Proceeds from issuance of common stock | Proceeds from issuance of common stock | 7 | | | 6 | | Proceeds from issuance of common stock | 7 | | | 7 | |
| Purchases of treasury stock | Purchases of treasury stock | (343) | | | (1,367) | | Purchases of treasury stock | (1,487) | | | (343) | |
| Net increase in deposits | 5,245 | | | 3,231 | | |
| Proceeds from issuance of preferred stock | 493 | | | 0 | | |
| Net (decrease) increase in deposits | | Net (decrease) increase in deposits | (4,359) | | | 5,245 | |
| Proceeds from issuance of preferred stock, net | | Proceeds from issuance of preferred stock, net | — | | | 493 | |
| Dividends paid on common and preferred stock | Dividends paid on common and preferred stock | (424) | | | (420) | | Dividends paid on common and preferred stock | (474) | | | (424) | |
| Net cash provided by (used for) financing activities | 744 | | | (1,546) | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 3,125 | | | (9,033) | | |
| Cash, cash equivalents and restricted cash, at beginning of period | 6,964 | | | 15,145 | | |
| Cash, cash equivalents and restricted cash, at end of period | $ | 10,089 | | | $ | 6,112 | | |
| Net cash (used for) provided by financing activities | | Net cash (used for) provided by financing activities | (8,949) | | | 744 | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | Net (decrease) increase in cash, cash equivalents and restricted cash | (841) | | | 3,125 | |
| Cash, cash equivalents and restricted cash, at the beginning of the period | | Cash, cash equivalents and restricted cash, at the beginning of the period | 13,589 | | | 6,964 | |
| Cash, cash equivalents and restricted cash, at the end of the period | | Cash, cash equivalents and restricted cash, at the end of the period | $ | 12,748 | | | $ | 10,089 | |
| | Reconciliation of cash, cash equivalents and restricted cash | Reconciliation of cash, cash equivalents and restricted cash | | Reconciliation of cash, cash equivalents and restricted cash | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 9,513 | | | $ | 6,075 | | Cash and cash equivalents | $ | 12,716 | | | $ | 9,513 | |
| Restricted cash | Restricted cash | 576 | | | 37 | | Restricted cash | 32 | | | 576 | |
| Cash, cash equivalents and restricted cash, at end of period | $ | 10,089 | | | $ | 6,112 | | |
| Cash, cash equivalents and restricted cash, at the end of the period | | Cash, cash equivalents and restricted cash, at the end of the period | $ | 12,748 | | | $ | 10,089 | |
| |
(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
See Notes to the Condensed Consolidated Financial Statements.
5
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. Background and Basis of Presentation
Description of Business
Discover Financial Services ("DFS" or the "Company") is a directdigital banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 as well asand a financial holding company under the Gramm-Leach-Bliley Act and thereforeAct. Therefore, the Company is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Company provides directdigital banking products and services and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home equity loans and deposit products.products to its customers. The Company also operates the Discover Network, the PULSE network ("PULSE") and Diners Club International ("Diners Club")., collectively known as the Discover Global Network. The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally as well asand merchant acceptance throughout the U.S.United States for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded credit and charge cards and/or provide card acceptance services.
The Company'sCompany manages its business activities are managed in 2 segments, DirectDigital Banking and Payment Services, based on the products and services provided. ForSee Note 17: Segment Disclosures for a detailed description of theeach segment's operations of each segment, as well asand the allocation conventions used in business segment reporting, see Note 17: Segment Disclosures.reporting.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("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 necessary for the fair presentation of 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 20192020 audited consolidated financial statements filed with the Company's annual report on Form 10-K for the year ended December 31, 2019.2020.
Recently Issued Accounting Pronouncements (Not Yet Adopted)
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU addresses operational challenges resulting from the discontinuation of the London Interbank Offered Rate (“LIBOR”) and other reference rates at the end of 2021. By providing optional practical expedients and exceptions to applying certain GAAP requirements, ASU No. 2020-04 provides temporary relief designed to ease the operational cost and burden of accounting for contract modifications, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. In general, the optional expedients and exceptions allow eligible contracts that are modified due to reference rate reform to be accounted for prospectively as a continuation of those contracts, permit companies to preserve hedge accounting for hedging relationships affected by reference rate reform and enable companies to make a one-time election to transfer or sell certain held-to-maturity debt securities indexed to LIBOR or another reference rate that is expected to be discontinued. The temporary expedients and exceptions are elective and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, with the exception of hedging relationships existing as of that date for which certain optional expedients have been elected and are expected to be retained through the end of the hedging relationships. The ASU is effective upon issuance and management expects to apply the practical expedients provided by the ASU. As part of its overall evaluation of reference rate reform, management is still evaluating the impact that LIBOR replacement will have on the Company’s financial statements. Any
such impacts will be prospective in nature, affecting net interest income and fair value estimates after the effective date of such rate replacement.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued several additional ASUs that clarify the scope and application of the new credit loss guidance. Topic 326 replaced the incurred loss model with the current expected credit loss ("CECL") approach. For loans carried at amortized cost, the allowance for credit losses is now based on management's current estimate of all anticipated credit losses over the remaining expected life of the loans. Upon the origination of a loan, the Company records its estimate of all expected credit losses on that loan through an immediate charge to earnings. Updates to that estimate each period are recorded through provision expense. The CECL estimate is based on historical experience, current conditions and reasonable and supportable forecasts.
As compared to prior GAAP, the CECL approach increases the Company's allowance for credit losses on loan receivables as a result of: (1) recording reserves for expected losses, not simply those deemed to be already incurred, (2) extending the loss estimate period over the entire life of the loan and (3) presenting the credit loss component of the purchased credit-impaired ("PCI") loan portfolio in the allowance for credit losses rather than embedding it within the loan carrying value. The allowance for credit losses on all loans carried at amortized cost, including loans previously referred to as PCI loans and loans modified in a troubled debt restructuring ("TDR") are measured under the CECL approach. Previous specialized measurement guidance for PCI loans, which are now referred to as purchased credit-deteriorated ("PCD"), and TDRs was eliminated, although certain separate disclosure guidance was retained.
Measurement of credit impairment of available-for-sale debt securities generally remains unchanged under the new rules, but any credit impairment is recorded through an allowance, rather than a direct write-down of the security. The Company invests in U.S. Treasury and residential mortgage-backed securities issued by government agencies, which have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments.
The ASU became effective for the Company on January 1, 2020, and required modified-retrospective application, meaning a cumulative-effect adjustment was recorded as of the effective date without adjusting comparative prior periods. This cumulative-effect adjustment did not reflect the economic disruption resulting from the coronavirus disease 2019 ("COVID-19") since the global disruption occurred subsequent to January 1, 2020. As a result of adoption, the Company recorded:
•A $2.5 billion increase to the allowance for credit losses on loan receivables primarily representing the adjustment for recording reserves for expected losses, not simply those deemed to be already incurred, and extending the loss estimate period over the entire life of the loan;
•A $0.6 billion increase to other assets related to deferred tax assets on the larger allowance for credit losses;
•An offsetting $1.9 billion decrease, net of tax, to the opening balance of retained earnings; and
•Immaterial adjustments to the following:
◦The carrying value of PCD loans and related accrued interest reflected in other assets; and
◦Accrued expenses and other liabilities to record reserves for unfunded commitments.
As required by the ASU, financial statement results and balances prior to January 1, 2020, have not been retrospectively adjusted to reflect the amendments in ASU No. 2016-13. Therefore, current period results and balances are not comparable to prior period amounts, particularly with regard to the provision and allowance for credit losses (and their related subtotals).
2. Investments
The Company's other short-term investments and investment securities consist of the following (dollars in millions): | | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
U.S. Treasury bills(1) | $ | 2,139 | | | $ | 0 | |
| U.S. Treasury bills - Pledged | 5,909 | | | 0 | |
| Total other short-term investments | $ | 8,048 | | | $ | 0 | |
| | | |
| U.S. Treasury securities | $ | 3,930 | | | $ | 9,785 | |
U.S. Treasury securities - Pledged(2) | 5,618 | | | 121 | |
| Total U.S. Treasury securities | 9,548 | | | 9,906 | |
Residential mortgage-backed securities - Agency(3) | 11,306 | | | 689 | |
| Total investment securities | $ | 20,854 | | | $ | 10,595 | |
| | | |
| | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
United States Treasury bills(1) | $ | — | | | $ | 2,200 | |
| | | |
| Total other short-term investments | $ | — | | | $ | 2,200 | |
| | | |
United States Treasury(2) and U.S. GSE(3) securities | $ | 7,580 | | | $ | 9,354 | |
Residential mortgage-backed securities - Agency(3) | 434 | | | 560 | |
| Total investment securities | $ | 8,014 | | | $ | 9,914 | |
| | | |
(1)Includes U.S.United States Treasury bills with maturity dates greater than 90 days but less than one year at the time of acquisition.
(2)As of September 30, 2020 and December 31, 2019, includes $135Includes $56 million and $121$117 million respectively, of U.S.United States Treasury securities pledged as swap collateral other than amounts associated with theas of September 30, 2021 and December 31, 2020, securities lending transaction.respectively.
(3)Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae.
In September 2020,Mae, or the Company, in an initiative for one of Discover Bank's lending businesses, entered into a short-term securities lending transaction with a counterparty. Discover Bank lent $11.4 billion of U.S. Treasury bills and securities and received agency pass-through residential mortgage-backed securities (“RMBS”) as collateral from the borrower. Throughout the term of the transaction, the counterparty is required to adjust the RMBS collateral daily to ensure it is maintained at a fair value equal to $11.6 billion, which is 102% of the value of the U.S. Treasury bills and securities lent.
Of the $11.6 billion of RMBS, the Company has the right to sell or repledge $10.7 billion. As these investments are not held for trading purposes, they are designated as available-for-sale and recorded in investment securities on the condensed consolidated statements of financial position. As of September 30, 2020, the RMBS had a carrying value and fair value of $10.7 billion. NaN portion of the collateral was sold or repledged as of September 30, 2020.
To reflect the obligation to return the RMBS collateral, the Company recognized $10.7 billion in short-term borrowings, which are recorded within the condensed consolidated statements of financial condition as of September 30, 2020. The Company will release the $11.6 billion of RMBS, and receive the U.S. Treasury bills and securities lent, when the transaction matures in November 2020. The U.S. Treasury bills and securities are recorded as other short-term investments and investment securities on the Company's condensed consolidated statement of financial position, respectively.
As the lender in the transaction, the Company earns a securities lending fee. This securities lending fee, as well as the interest income and interest expense associated with the transaction, were immaterial for the three and nine months ended September 30, 2020.Federal Home Loan Bank.
The amortized cost, gross unrealized gains and losses and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| At September 30, 2020 | | | | | | | |
Available-for-Sale Investment Securities(1) | | | | | | | |
| U.S. Treasury securities | $ | 9,134 | | | $ | 414 | | | $ | 0 | | | $ | 9,548 | |
| Residential mortgage-backed securities - Agency | 11,014 | | | 11 | | | 0 | | | 11,025 | |
| Total available-for-sale investment securities | $ | 20,148 | | | $ | 425 | | | $ | 0 | | | $ | 20,573 | |
Held-to-Maturity Investment Securities(2) | | | | | | | |
Residential mortgage-backed securities - Agency(3) | $ | 281 | | | $ | 9 | | | $ | 0 | | | $ | 290 | |
| Total held-to-maturity investment securities | $ | 281 | | | $ | 9 | | | $ | 0 | | | $ | 290 | |
| | | | | | | |
| At December 31, 2019 | | | | | | | |
Available-for-Sale Investment Securities(1) | | | | | | | |
| U.S. Treasury securities | $ | 9,759 | | | $ | 155 | | | $ | (8) | | | $ | 9,906 | |
| Residential mortgage-backed securities - Agency | 414 | | | 3 | | | 0 | | | 417 | |
| Total available-for-sale investment securities | $ | 10,173 | | | $ | 158 | | | $ | (8) | | | $ | 10,323 | |
Held-to-Maturity Investment Securities(2) | | | | | | | |
Residential mortgage-backed securities - Agency(3) | $ | 272 | | | $ | 3 | | | $ | (1) | | | $ | 274 | |
| Total held-to-maturity investment securities | $ | 272 | | | $ | 3 | | | $ | (1) | | | $ | 274 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| At September 30, 2021 | | | | | | | |
Available-for-Sale Investment Securities(1) | | | | | | | |
| United States Treasury and U.S. GSE securities | $ | 7,362 | | | $ | 218 | | | $ | — | | | $ | 7,580 | |
| Residential mortgage-backed securities - Agency | 204 | | | 7 | | | — | | | 211 | |
| Total available-for-sale investment securities | $ | 7,566 | | | $ | 225 | | | $ | — | | | $ | 7,791 | |
Held-to-Maturity Investment Securities(2) | | | | | | | |
Residential mortgage-backed securities - Agency(3) | $ | 223 | | | $ | 5 | | | $ | (1) | | | $ | 227 | |
| Total held-to-maturity investment securities | $ | 223 | | | $ | 5 | | | $ | (1) | | | $ | 227 | |
| | | | | | | |
| At December 31, 2020 | | | | | | | |
Available-for-Sale Investment Securities(1) | | | | | | | |
| United States Treasury securities | $ | 8,987 | | | $ | 367 | | | $ | — | | | $ | 9,354 | |
| Residential mortgage-backed securities - Agency | 290 | | | 10 | | | — | | | 300 | |
| Total available-for-sale investment securities | $ | 9,277 | | | $ | 377 | | | $ | — | | | $ | 9,654 | |
Held-to-Maturity Investment Securities(2) | | | | | | | |
Residential mortgage-backed securities - Agency(3) | $ | 260 | | | $ | 9 | | | $ | — | | | $ | 269 | |
| Total held-to-maturity investment securities | $ | 260 | | | $ | 9 | | | $ | — | | | $ | 269 | |
| | | | | | | |
(1)Available-for-sale investment securities are reported at fair value.
(2)Held-to-maturity investment securities are reported at amortized cost.
(3)Amounts represent residential mortgage-backed securities ("RMBS") that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.
The Company invests in U.S.United States Treasury obligations and residential mortgage-backed securities issued by government agencies and government-sponsored enterprises of the United States of America ("U.S. GSEs"), which have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S.United States government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments.
The following table provides information about available-for-saleAt September 30, 2021, there were 3 investment securities with an aggregate fair value of $118 million that had an immaterial aggregate gross unrealized loss for less than 12 months and no securities in an unrealized loss position for more than 12 months. As of December 31, 2020, there were no investment securities with aggregate gross unrealized losseslosses.
During the three and
nine months ended September 30, 2021, the
lengthCompany received $5 million of
time that individual investment securities have been inproceeds from the sale of available-for-sale securities. As a
continuous unrealized loss position (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Securities in a Loss Position | | Less than 12 months | | | | More than 12 months | | |
| | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| At December 31, 2019 | | | | | | | | | |
| Available-for-Sale Investment Securities | | | | | | | | | |
| U.S. Treasury securities | 11 | | | $ | 1,402 | | | $ | (8) | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | |
| | | | | | | | | |
result of the sale, the Company recognized an immaterial gain during the three and nine months ended September 30, 2021. There were 0no proceeds from sales or recognized gains and losses on available-for-sale securities during the three orand nine months ended September 30, 2020 and 2019.2020. See Note 9: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three and nine months ended September 30, 20202021 and 2019.2020.
Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the following table (dollars in millions): | | At September 30, 2020 | One Year
or
Less | | After One
Year
Through
Five Years | | After Five
Years
Through
Ten Years | | After Ten
Years | | Total | |
| At September 30, 2021 | | At September 30, 2021 | One Year
or
Less | | After One
Year
Through
Five Years | | After Five
Years
Through
Ten Years | | After Ten
Years | | Total |
| Available-for-Sale Investment Securities—Amortized Cost | Available-for-Sale Investment Securities—Amortized Cost | | | | | | | | | | Available-for-Sale Investment Securities—Amortized Cost | | | | | | | | | |
| U.S. Treasury securities | $ | 1,880 | | | $ | 7,254 | | | $ | 0 | | | $ | 0 | | | $ | 9,134 | | |
| United States Treasury and U.S. GSE securities | | United States Treasury and U.S. GSE securities | $ | 2,616 | | | $ | 4,737 | | | $ | 9 | | | $ | — | | | $ | 7,362 | |
Residential mortgage-backed securities - Agency(1) | Residential mortgage-backed securities - Agency(1) | 0 | | | 54 | | | 291 | | | 10,669 | | | 11,014 | | Residential mortgage-backed securities - Agency(1) | 2 | | | 21 | | | 174 | | | 7 | | | 204 | |
| Total available-for-sale investment securities | Total available-for-sale investment securities | $ | 1,880 | | | $ | 7,308 | | | $ | 291 | | | $ | 10,669 | | | $ | 20,148 | | Total available-for-sale investment securities | $ | 2,618 | | | $ | 4,758 | | | $ | 183 | | | $ | 7 | | | $ | 7,566 | |
| Held-to-Maturity Investment Securities—Amortized Cost | Held-to-Maturity Investment Securities—Amortized Cost | | | | | | | | | | Held-to-Maturity Investment Securities—Amortized Cost | | | | | | | | | |
Residential mortgage-backed securities - Agency(1) | Residential mortgage-backed securities - Agency(1) | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 281 | | | $ | 281 | | Residential mortgage-backed securities - Agency(1) | $ | — | | | $ | — | | | $ | — | | | $ | 223 | | | $ | 223 | |
| Total held-to-maturity investment securities | Total held-to-maturity investment securities | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 281 | | | $ | 281 | | Total held-to-maturity investment securities | $ | — | | | $ | — | | | $ | — | | | $ | 223 | | | $ | 223 | |
| Available-for-Sale Investment Securities—Fair Values | Available-for-Sale Investment Securities—Fair Values | | | | | | | | | | Available-for-Sale Investment Securities—Fair Values | | | | | | | | | |
| U.S. Treasury securities | $ | 1,900 | | | $ | 7,648 | | | $ | 0 | | | $ | 0 | | | $ | 9,548 | | |
| United States Treasury and U.S. GSE securities | | United States Treasury and U.S. GSE securities | $ | 2,641 | | | $ | 4,931 | | | $ | 8 | | | $ | — | | | $ | 7,580 | |
Residential mortgage-backed securities - Agency(1) | Residential mortgage-backed securities - Agency(1) | 0 | | | 56 | | | 300 | | | 10,669 | | | 11,025 | | Residential mortgage-backed securities - Agency(1) | 2 | | | 21 | | | 180 | | | 8 | | | 211 | |
| Total available-for-sale investment securities | Total available-for-sale investment securities | $ | 1,900 | | | $ | 7,704 | | | $ | 300 | | | $ | 10,669 | | | $ | 20,573 | | Total available-for-sale investment securities | $ | 2,643 | | | $ | 4,952 | | | $ | 188 | | | $ | 8 | | | $ | 7,791 | |
| Held-to-Maturity Investment Securities—Fair Values | Held-to-Maturity Investment Securities—Fair Values | | | | | | | | | | Held-to-Maturity Investment Securities—Fair Values | | | | | | | | | |
Residential mortgage-backed securities - Agency(1) | Residential mortgage-backed securities - Agency(1) | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 290 | | | $ | 290 | | Residential mortgage-backed securities - Agency(1) | $ | — | | | $ | — | | | $ | — | | | $ | 227 | | | $ | 227 | |
| Total held-to-maturity investment securities | Total held-to-maturity investment securities | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 290 | | | $ | 290 | | Total held-to-maturity investment securities | $ | — | | | $ | — | | | $ | — | | | $ | 227 | | | $ | 227 | |
|
(1)Maturities of residential mortgage-backed securitiesRMBS are reflective of the contractual maturities of the investment.
Other Investments
As a part of the Company's community reinvestment initiatives, the Company has made equity investments in certain limited partnerships and limited liability companies that finance the construction and rehabilitation of affordable rental housing as well asand stimulate economic development in lowlow- to moderate incomemoderate-income communities. These investments are accounted for using the equity method of accounting and are recorded within other assets. The related commitment for future investments is recorded in accrued expenses and other liabilities within the 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. The Company earns a return primarily through the receipt of tax credits allocated to the affordable housing projects and the community revitalization projects. TheseThe Company does not consolidate these investments are not consolidated as the Company does not have a controlling financial interest in the investee entities. As of September 30, 20202021 and December 31, 2019,2020, the Company had outstanding investments in these entities of $323$366 million and $336$353 million, respectively, and related contingent liabilities for unconditional and legally binding delayed equity contributions of $61$64 million and $74$93 million, respectively. Of the above outstanding equity investments, the Company had $292 million and $298$324 million of investments related to affordable housing projects as of September 30, 20202021 and December 31, 2019, respectively,2020, which had $45$52 million and $59$79 million of related contingent liabilities for unconditional and legally binding delayed equity contributions, respectively.
The Company holds non-controlling equity positions in several payment services entities. Most of these investments are not subject to equity method accounting because the Company does not have significant influence over the investee. The common or preferred equity securities that the Company holds typically do not have readily determinable fair values. As a result, the majority of these investments are carried at cost minus impairment, if any. As of September 30, 20202021 and December 31, 2019,2020, the carrying value of these investments, which isare recorded within other assets on the Company's condensed consolidated statements of financial condition, was $31 million and $35 million, respectively.
The Company also holds non-controlling equity positions in payment service entities that have actively traded stock and $42therefore have readily determinable fair values. As a result, these investments are carried at fair value based on the quoted share prices. As of September 30, 2021 and December 31, 2020, the carrying value of these investments, which are recorded within other assets on the Company's condensed consolidated statements of financial condition, was $600 million and $8 million, respectively. During the three and nine months ended September 30, 2021, the Company recognized unrealized losses of approximately $167 million and unrealized gains of approximately $562 million, respectively, on the condensed consolidated statements of income related to these investments. The Company recognized no unrealized losses or gains during the three and nine months ended September 30, 2020.
3. Loan Receivables
The Company has 2 loan portfolio segments: credit card loans and other loans.
The Company's classes of receivables within the 2 portfolio segments are depicted in the following table (dollars in millions): | | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
Credit card loans(1)(2) | Credit card loans(1)(2) | $ | 69,656 | | | $ | 77,181 | | Credit card loans(1)(2) | $ | 70,320 | | | $ | 71,472 | |
Other loans(3) | Other loans(3) | | Other loans(3) | |
Private student loans(4) | Private student loans(4) | 10,016 | | | 9,653 | | Private student loans(4) | 10,184 | | | 9,954 | |
| Personal loans | Personal loans | 7,211 | | | 7,687 | | Personal loans | 6,890 | | | 7,177 | |
| Other | 1,777 | | | 1,373 | | |
| Other loans | | Other loans | 2,148 | | | 1,846 | |
| Total other loans | Total other loans | 19,004 | | | 18,713 | | Total other loans | 19,222 | | | 18,977 | |
| Total loan receivables | Total loan receivables | 88,660 | | | 95,894 | | Total loan receivables | 89,542 | | | 90,449 | |
Allowance for credit losses(5) | Allowance for credit losses(5) | (8,226) | | | (3,383) | | Allowance for credit losses(5) | (6,861) | | | (8,226) | |
| Net loan receivables | Net loan receivables | $ | 80,434 | | | $ | 92,511 | | Net loan receivables | $ | 82,681 | | | $ | 82,223 | |
|
(1)Amounts include carrying values of $15.4$12.9 billion and $18.9$16.7 billion underlying investors' interest in trust debt at September 30, 20202021 and December 31, 2019,2020, respectively, and $11.6 billion and $12.7$10.6 billion in seller's interest at September 30, 20202021 and December 31, 2019,2020, respectively. See Note 4: Credit Card and Private Student Loan Securitization Activities for additional information.
(2)Unbilled accrued interest receivable on credit card loans, which is presented as part of other assets in the Company's condensed consolidated statements of financial condition, was $380$379 million and $471$420 million at September 30, 20202021 and December 31, 2019,2020, respectively.
(3)Accrued interest receivable on private student, personal and other loans, which is presented as part of other assets in the Company's condensed consolidated statements of financial condition, was $527$503 million, $47$41 million and $6 million, respectively, at September 30, 20202021 and $461$469 million, $53$49 million and $4$6 million, respectively, at December 31, 2019.2020.
(4)Amounts include carrying values of $261$215 million and $292$250 million in loans pledged as collateral against the notenotes issued from a private student loan securitization trust at September 30, 20202021 and December 31, 2019,2020, respectively. See Note 4: Credit Card and Private Student Loan Securitization Activities for additional information.
(5)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
Credit Quality Indicators
As part of credit risk management activities, on an ongoing basis, the Company reviews information related to the performance of a customer's account with the Company as well asand information from credit bureaus, such as FICO or other credit scores, relating to the customer's broader credit performance. KeyThe Company actively monitors key credit quality indicators, that are actively monitoredincluding FICO scores and delinquency status, for credit card, private student and personal loans include FICO scores and delinquency status.loans. These indicators are important to understand the overall credit performance of the Company's customers and their ability to repay.
FICO scores are generally obtained at the origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that accounts with FICO scores below 660 have larger delinquencies and credit losses than those with higher credit scores.
The following table provides the distribution of the amortized cost basis (excluding accrued interest receivable presented in other assets) by the most recent FICO scores available for the Company's customers for credit card, private student and personal loan receivables (dollars in millions): | | | Credit Risk Profile by FICO Score | | | Credit Risk Profile by FICO Score |
| | September 30, 2020 | | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 |
| | | 660 and Above | | | Less than 660
or No Score | | | 660 and Above | | | Less than 660
or No Score | | | 660 and Above | | Less than 660
or No Score | | 660 and Above | | Less than 660
or No Score |
| | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % |
Credit card loans(1) | Credit card loans(1) | $ | 57,148 | | | 82 | % | | $ | 12,508 | | | 18 | % | | $ | 61,997 | | | 80 | % | | $ | 15,184 | | | 20 | % | Credit card loans(1) | $ | 59,005 | | | 84 | % | | $ | 11,315 | | | 16 | % | | $ | 58,950 | | | 82 | % | | $ | 12,522 | | | 18 | % |
Private student loans by origination year(2)(3) | Private student loans by origination year(2)(3) | | Private student loans by origination year(2)(3) | |
| 2021 | | 2021 | $ | 1,011 | | | 94 | % | | $ | 70 | | | 6 | % | |
| 2020 | 2020 | $ | 983 | | | 97 | % | | $ | 29 | | | 3 | % | | 2020 | 1,593 | | | 97 | % | | 54 | | | 3 | % | | $ | 1,173 | | | 95 | % | | $ | 60 | | | 5 | % |
| 2019 | 2019 | 1,690 | | | 97 | % | | 57 | | | 3 | % | | $ | 1,176 | | | 93 | % | | $ | 92 | | | 7 | % | 2019 | 1,485 | | | 96 | % | | 56 | | | 4 | % | | 1,659 | | | 96 | % | | 61 | | | 4 | % |
| 2018 | 2018 | 1,399 | | | 96 | % | | 60 | | | 4 | % | | 1,518 | | | 95 | % | | 79 | | | 5 | % | 2018 | 1,185 | | | 95 | % | | 58 | | | 5 | % | | 1,365 | | | 96 | % | | 61 | | | 4 | % |
| 2017 | 2017 | 1,076 | | | 95 | % | | 57 | | | 5 | % | | 1,198 | | | 95 | % | | 69 | | | 5 | % | 2017 | 898 | | | 95 | % | | 52 | | | 5 | % | | 1,052 | | | 95 | % | | 57 | | | 5 | % |
| 2016 | 817 | | | 94 | % | | 48 | | | 6 | % | | 934 | | | 94 | % | | 58 | | | 6 | % | |
| Prior | Prior | 3,586 | | | 94 | % | | 214 | | | 6 | % | | 4,229 | | | 93 | % | | 300 | | | 7 | % | Prior | 3,521 | | | 95 | % | | 201 | | | 5 | % | | 4,219 | | | 94 | % | | 247 | | | 6 | % |
| Total private student loans | Total private student loans | $ | 9,551 | | | 95 | % | | $ | 465 | | | 5 | % | | $ | 9,055 | | | 94 | % | | $ | 598 | | | 6 | % | Total private student loans | $ | 9,693 | | | 95 | % | | $ | 491 | | | 5 | % | | $ | 9,468 | | | 95 | % | | $ | 486 | | | 5 | % |
| Personal loans by origination year | Personal loans by origination year | | | | | | | | | Personal loans by origination year | | | | | | | | |
| 2021 | | 2021 | $ | 2,541 | | | 99 | % | | $ | 18 | | | 1 | % | |
| 2020 | 2020 | $ | 2,175 | | | 99 | % | | $ | 15 | | | 1 | % | | 2020 | 1,921 | | | 98 | % | | 37 | | | 2 | % | | $ | 2,880 | | | 99 | % | | $ | 25 | | | 1 | % |
| 2019 | 2019 | 2,506 | | | 97 | % | | 89 | | | 3 | % | | $ | 3,529 | | | 98 | % | | $ | 62 | | | 2 | % | 2019 | 1,291 | | | 95 | % | | 66 | | | 5 | % | | 2,183 | | | 96 | % | | 90 | | | 4 | % |
| 2018 | 2018 | 1,221 | | | 92 | % | | 101 | | | 8 | % | | 1,941 | | | 93 | % | | 140 | | | 7 | % | 2018 | 550 | | | 92 | % | | 51 | | | 8 | % | | 1,018 | | | 92 | % | | 90 | | | 8 | % |
| 2017 | 2017 | 680 | | | 89 | % | | 81 | | | 11 | % | | 1,167 | | | 90 | % | | 136 | | | 10 | % | 2017 | 276 | | | 88 | % | | 36 | | | 12 | % | | 558 | | | 89 | % | | 69 | | | 11 | % |
| 2016 | 242 | | | 88 | % | | 34 | | | 12 | % | | 475 | | | 88 | % | | 65 | | | 12 | % | |
| Prior | Prior | 55 | | | 82 | % | | 12 | | | 18 | % | | 145 | | | 84 | % | | 27 | | | 16 | % | Prior | 87 | | | 84 | % | | 16 | | | 16 | % | | 227 | | | 86 | % | | 37 | | | 14 | % |
| Total personal loans | Total personal loans | $ | 6,879 | | | 95 | % | | $ | 332 | | | 5 | % | | $ | 7,257 | | | 94 | % | | $ | 430 | | | 6 | % | Total personal loans | $ | 6,666 | | | 97 | % | | $ | 224 | | | 3 | % | | $ | 6,866 | | | 96 | % | | $ | 311 | | | 4 | % |
|
(1)Amounts include $881 million and $1.0 billion and $956 million of revolving line-of-credit arrangements that were converted to term loans as a result of a TDRtroubled debt restructuring ("TDR") program as of September 30, 20202021 and December 31, 2019,2020, respectively.
(2)A majority of private student loansloan originations occur in the third quarter and disbursements can span multiple calendar years.
(3)FICO score represents the higher credit score of the cosigner or borrower.
Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.
The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent loans in the Company's loan portfolio is shown below for credit card, private student and personal loan receivables (dollars in millions): | | | September 30, 2020 | | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 |
| | 30-89 Days
Delinquent | | 90 or
More Days
Delinquent | | Total Past
Due | | 30-89 Days
Delinquent | | 90 or
More Days
Delinquent | | Total Past
Due | | 30-89 Days
Delinquent | | 90 or
More Days
Delinquent | | Total Past
Due | | 30-89 Days
Delinquent | | 90 or
More Days
Delinquent | | Total Past
Due |
| Credit card loans | Credit card loans | $ | 678 | | | $ | 650 | | | $ | 1,328 | | | $ | 999 | | | $ | 1,020 | | | $ | 2,019 | | Credit card loans | $ | 573 | | | $ | 467 | | | $ | 1,040 | | | $ | 739 | | | $ | 739 | | | $ | 1,478 | |
Private student loans by origination year(2)(1) | Private student loans by origination year(2)(1) | | Private student loans by origination year(2)(1) | |
| 2021 | | 2021 | $ | — | | | $ | — | | | $ | — | | |
| 2020 | 2020 | $ | 0 | | | $ | 0 | | | $ | 0 | | | 2020 | 4 | | | 1 | | | 5 | | | $ | — | | | $ | — | | | $ | — | |
| 2019 | 2019 | 3 | | | 0 | | | 3 | | | $ | 1 | | | $ | 0 | | | $ | 1 | | 2019 | 11 | | | 2 | | | 13 | | | 3 | | | 1 | | | 4 | |
| 2018 | 2018 | 11 | | | 3 | | | 14 | | | 4 | | | 1 | | | 5 | | 2018 | 14 | | | 4 | | | 18 | | | 9 | | | 3 | | | 12 | |
| 2017 | 2017 | 13 | | | 4 | | | 17 | | | 11 | | | 2 | | | 13 | | 2017 | 15 | | | 5 | | | 20 | | | 12 | | | 4 | | | 16 | |
| 2016 | 14 | | | 4 | | | 18 | | | 14 | | | 5 | | | 19 | | |
| Prior | Prior | 76 | | | 21 | | | 97 | | | 106 | | | 37 | | | 143 | | Prior | 78 | | | 24 | | | 102 | | | 86 | | | 20 | | | 106 | |
| Total private student loans | Total private student loans | $ | 117 | | | $ | 32 | | | $ | 149 | | | $ | 136 | | | $ | 45 | | | $ | 181 | | Total private student loans | $ | 122 | | | $ | 36 | | | $ | 158 | | | $ | 110 | | | $ | 28 | | | $ | 138 | |
| Personal loans by origination year | Personal loans by origination year | | | | | | | | | | | | Personal loans by origination year | | | | | | | | | | | |
| 2021 | | 2021 | $ | 2 | | | $ | — | | | $ | 2 | | |
| 2020 | 2020 | $ | 4 | | | $ | 1 | | | $ | 5 | | | 2020 | 7 | | | 2 | | | 9 | | | $ | 5 | | | $ | 2 | | | $ | 7 | |
| 2019 | 2019 | 19 | | | 7 | | | 26 | | | $ | 11 | | | $ | 3 | | | $ | 14 | | 2019 | 12 | | | 5 | | | 17 | | | 18 | | | 9 | | | 27 | |
| 2018 | 2018 | 17 | | | 7 | | | 24 | | | 27 | | | 11 | | | 38 | | 2018 | 8 | | | 3 | | | 11 | | | 15 | | | 7 | | | 22 | |
| 2017 | 2017 | 11 | | | 5 | | | 16 | | | 22 | | | 10 | | | 32 | | 2017 | 5 | | | 2 | | | 7 | | | 10 | | | 5 | | | 15 | |
| 2016 | 4 | | | 2 | | | 6 | | | 10 | | | 5 | | | 15 | | |
| Prior | Prior | 1 | | | 1 | | | 2 | | | 4 | | | 2 | | | 6 | | Prior | 2 | | | 1 | | | 3 | | | 5 | | | 2 | | | 7 | |
| Total personal loans | Total personal loans | $ | 56 | | | $ | 23 | | | $ | 79 | | | $ | 74 | | | $ | 31 | | | $ | 105 | | Total personal loans | $ | 36 | | | $ | 13 | | | $ | 49 | | | $ | 53 | | | $ | 25 | | | $ | 78 | |
|
(1)StudentPrivate student loans may include a deferment period, during which customers are not required to make payments while enrolled in school at least half time as determined by the school. During a deferment period, these loans do not advance into delinquency.
(2)Includes PCD loans for all periods presented.
In response to the pandemic, the Company expanded borrower relief offerings to include Skip-a-Pay (payment deferral) programs in addition to other modification programs already available. While the Company continues to support and provide assistance to all customers impacted by COVID-19, the Company is no longer offering new enrollments in the Skip-a-Pay (payment deferral) programs as of August 31, 2020.
The Skip-a-Pay program allowed customers on a monthly or other periodic basis to request approval to skip their payment(s) for that month or period. The current accounts that used these modifications did not advance to delinquency and delinquent accounts enrolled in these programs did not advance to the next delinquency cycle or to charge-off. These accounts were generally excluded from TDR status either because the concessions were insignificant or they qualified for exemption pursuant to the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").
In addition to the Skip-a-Pay (payment deferral) programs, the Company has other modification programs that customers have utilized during the period. Due to provisions in the CARES Act, some accounts in these programs do not constitute TDRs.
Allowance for Credit Losses
A detailed description of the Company's allowance for credit losses policy can be found under the sub-heading "— Significant Loan Receivables Accounting Policies — Allowance for Credit Losses" below.
The following tables provide changes in the Company's allowance for credit losses (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2020 | | | | | | | | |
| | Credit Card Loans | | Student Loans | | Personal Loans | | Other Loans | | Total |
| Balance at June 30, 2020 | $ | 6,491 | | | $ | 799 | | | $ | 857 | | | $ | 37 | | | $ | 8,184 | |
| Additions | | | | | | | | | |
Provision for credit losses(1) | 604 | | | 55 | | | 49 | | | 2 | | | 710 | |
| Deductions | | | | | | | | | |
| Charge-offs | (759) | | | (20) | | | (62) | | | (1) | | | (842) | |
| Recoveries | 155 | | | 6 | | | 13 | | | 0 | | | 174 | |
| Net charge-offs | (604) | | | (14) | | | (49) | | | (1) | | | (668) | |
| | | | | | | | | |
| Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| | | | | | | | | |
| For the Three Months Ended September 30, 2019 | | | | | | | | |
| | Credit Card Loans | | Student Loans | | Personal Loans | | Other Loans | | Total |
Balance at June 30, 2019(2) | $ | 2,691 | | | $ | 167 | | | $ | 338 | | | $ | 6 | | | $ | 3,202 | |
| Additions | | | | | | | | | |
Provision for credit losses(2) | 719 | | | (6) | | | 86 | | | 0 | | | 799 | |
| Deductions | | | | | | | | | |
| Charge-offs | (784) | | | (17) | | | (89) | | | (1) | | | (891) | |
| Recoveries | 173 | | | 3 | | | 13 | | | 0 | | | 189 | |
Net charge-offs(3) | (611) | | | (14) | | | (76) | | | (1) | | | (702) | |
| | | | | | | | | |
Balance at September 30, 2019(2) | $ | 2,799 | | | $ | 147 | | | $ | 348 | | | $ | 5 | | | $ | 3,299 | |
| | | | | | | | | |
| | | | | | | | | |
| | | For the Nine Months Ended September 30, 2020 | | | For the Three Months Ended September 30, 2021 |
| | | Credit Card Loans | | Student Loans | | Personal Loans | | Other Loans | | Total | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
Balance at December 31, 2019(2) | $ | 2,883 | | | $ | 148 | | | $ | 348 | | | $ | 4 | | | $ | 3,383 | | |
Cumulative effect of ASU No. 2016-13 adoption(4) | 1,667 | | | 505 | | | 265 | | | 24 | | | 2,461 | | |
| Balance at January 1, 2020 | 4,550 | | | 653 | | | 613 | | | 28 | | | 5,844 | | |
| Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | 5,409 | | | $ | 828 | | | $ | 745 | | | $ | 44 | | | $ | 7,026 | |
| Additions | | Additions | |
Provision for credit losses(1) | | Provision for credit losses(1) | 178 | | | 46 | | | (64) | | | — | | | 160 | |
| Deductions | | Deductions | |
| Charge-offs | | Charge-offs | (495) | | | (23) | | | (38) | | | — | | | (556) | |
| Recoveries | | Recoveries | 206 | | | 6 | | | 19 | | | — | | | 231 | |
| Net charge-offs | | Net charge-offs | (289) | | | (17) | | | (19) | | | — | | | (325) | |
| | Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | 5,298 | | | $ | 857 | | | $ | 662 | | | $ | 44 | | | $ | 6,861 | |
| | | | For the Three Months Ended September 30, 2020 |
| | | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
| Balance at June 30, 2020 | | Balance at June 30, 2020 | $ | 6,491 | | | $ | 799 | | | $ | 857 | | | $ | 37 | | | $ | 8,184 | |
| Additions | Additions | | Additions | |
Provision for credit losses(1) | Provision for credit losses(1) | 3,916 | | | 233 | | | 426 | | | 11 | | | 4,586 | | Provision for credit losses(1) | 604 | | | 55 | | | 49 | | | 2 | | | 710 | |
| Deductions | Deductions | | Deductions | |
| Charge-offs | Charge-offs | (2,480) | | | (62) | | | (224) | | | (1) | | | (2,767) | | Charge-offs | (759) | | | (20) | | | (62) | | | (1) | | | (842) | |
| Recoveries | Recoveries | 505 | | | 16 | | | 42 | | | 0 | | | 563 | | Recoveries | 155 | | | 6 | | | 13 | | | — | | | 174 | |
| Net charge-offs | Net charge-offs | (1,975) | | | (46) | | | (182) | | | (1) | | | (2,204) | | Net charge-offs | (604) | | | (14) | | | (49) | | | (1) | | | (668) | |
| | Balance at September 30, 2020 | Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | | Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| | | For the Nine Months Ended September 30, 2019 | | | For the Nine Months Ended September 30, 2021 |
| | | Credit Card Loans | | Student Loans | | Personal Loans | | Other Loans | | Total | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
Balance at December 31, 2018(2) | $ | 2,528 | | | $ | 169 | | | $ | 338 | | | $ | 6 | | | $ | 3,041 | | |
| Balance at December 31, 2020 | | Balance at December 31, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| Additions | Additions | | Additions | |
Provision for credit losses(2) | 2,121 | | | 24 | | | 250 | | | 0 | | | 2,395 | | |
Provision for credit losses(1) | | Provision for credit losses(1) | (18) | | | 61 | | | (96) | | | 6 | | | (47) | |
| Deductions | Deductions | | Deductions | |
| Charge-offs | Charge-offs | (2,347) | | | (54) | | | (274) | | | (1) | | | (2,676) | | Charge-offs | (1,778) | | | (63) | | | (150) | | | — | | | (1,991) | |
| Recoveries | Recoveries | 497 | | | 10 | | | 34 | | | 0 | | | 541 | | Recoveries | 603 | | | 19 | | | 51 | | | — | | | 673 | |
Net charge-offs(3) | (1,850) | | | (44) | | | (240) | | | (1) | | | (2,135) | | |
Other(5) | 0 | | | (2) | | | 0 | | | 0 | | | (2) | | |
Balance at September 30, 2019(2) | $ | 2,799 | | | $ | 147 | | | $ | 348 | | | $ | 5 | | | $ | 3,299 | | |
| Net charge-offs | | Net charge-offs | (1,175) | | | (44) | | | (99) | | | — | | | (1,318) | |
| | Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | 5,298 | | | $ | 857 | | | $ | 662 | | | $ | 44 | | | $ | 6,861 | |
| | | | For the Nine Months Ended September 30, 2020 |
| | | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
Balance at December 31, 2019(2) | | Balance at December 31, 2019(2) | $ | 2,883 | | | $ | 148 | | | $ | 348 | | | $ | 4 | | | $ | 3,383 | |
Cumulative effect of ASU No. 2016-13 adoption(3) | | Cumulative effect of ASU No. 2016-13 adoption(3) | 1,667 | | | 505 | | | 265 | | | 24 | | | 2,461 | |
| Balance at January 1, 2020 | | Balance at January 1, 2020 | 4,550 | | | 653 | | | 613 | | | 28 | | | 5,844 | |
| Additions | | Additions | |
Provision for credit losses(1) | | Provision for credit losses(1) | 3,916 | | | 233 | | | 426 | | | 11 | | | 4,586 | |
| Deductions | | Deductions | |
| Charge-offs | | Charge-offs | (2,480) | | | (62) | | | (224) | | | (1) | | | (2,767) | |
| Recoveries | | Recoveries | 505 | | | 16 | | | 42 | | | — | | | 563 | |
| Net charge-offs | | Net charge-offs | (1,975) | | | (46) | | | (182) | | | (1) | | | (2,204) | |
| | Balance at September 30, 2020 | | Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
|
(1)Excludes a $25 million and $40 million build and $17 million buildreclassification of the liability for expected credit losses on unfunded commitments for the three months ended September 30, 2021 and 2020, respectively, and $2 million and $17 million for the nine months ended September 30, 2021 and 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition.
(2)Prior to the adoption of ASUAccounting Standards Update ("ASU") No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
(3)Prior to adoption of ASU No. 2016-13 on January 1, 2020, net charge-offs on PCD loans generally did not result in a charge to earnings.
(4)Represents the adjustment to the allowance for credit losses as a result ofdue to the adoption of ASU No. 2016-13 on January 1, 2020.
The allowance for credit losses was $8.2approximately $6.9 billion at September 30, 2020,2021, which is essentially flat compared toreflects a $165 millionrelease from the amount of the allowance for credit losses at June 30, 2021 and a $1.4 billionrelease from the amount of the allowance for credit losses at December 31, 2020.
Therelease in the allowance for credit losses between September 30, 2021 and June 30, 2021, was primarily driven by improving macroeconomic forecasts and continued stable credit performance, partially offset by modest loan growth during the period. The modest growth in loan receivables during the three months ended September 30, 2021, was driven by the robust credit card sales trends as coronavirus disease 2019 ("COVID-19") restrictions continue to ease and the United States economy continues to more fully reopen. Additionally, credit card sales from new accounts and seasonality in private student loan originations contributed to an increase in ending outstanding loan receivables. The loan receivables growth was partially offset by elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows.
The releasein the allowance for credit losses between September 30, 2021 and December 31, 2020, was primarily driven by improvements in the macroeconomic forecast and continued stable credit performance. The release was also partially driven by a moderate reduction in loan receivables outstanding during the period. The decrease in outstanding loan receivables, particularly credit card and personal loan receivables, and the stable credit performance, were driven by elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows. The decrease in outstanding loan receivables was partially offset by the robust credit card sales trends during the period and seasonality in private student loan originations in the third quarter of 2021.
In estimating the allowance at September 30, 2020,2021, the Company used a macroeconomic forecast that projected slight improvement from the prior quarter, including(i) a peak unemployment rate of 11%6.1%, which remained flatdecreasing to 5.5% and 4.0% through the end of 20202021 and recovers slowly over2022, respectively; and (ii) a 6.4% and 3.5% annualized growth in the next few years. Thereal gross domestic product for 2021 and 2022, respectively. Labor market conditions, which historically have been an important determinant of credit loss trends, continue to improve despite the spread of the COVID-19 delta variant. However, the unemployment rate and initial and continuing jobless claims remain moderately elevated relative to pre-pandemic levels. In estimating expected credit losses, the Company also considered the uncertainties associated with someborrower behavior, payment trends and credit performance subsequent to the expiration of the assumptions used in that macroeconomic forecast, including the amount and timing of additional government stimulus. Furthermore, the estimate contemplated the impact of previous government stimulus programs, and other company-initiated loan modification programs on borrower payment trends. The impact of COVID-19 on the economy has continued to cause uncertainty in assumptions surrounding factors such as lengththe Coronavirus Aid, Relief, and depthEconomic Security Act ("CARES Act") and the American Rescue Plan Act of economic stresses2021 ("ARPA"), and longer term impacts on borrower behavior, whichdisaster relief programs, such as foreclosure moratoriums and federal student loan and mortgage payment forbearance. During the third quarter of 2021, several disaster relief programs expired or were rescinded entirely. As the government's response to the pandemic wanes, there is uncertainty regarding the sustainability of the recent credit quality trends in the Company's loan receivables portfolio. Accordingly, the estimation of the allowance for credit losses has required significant management judgment in estimating the allowance for credit losses.judgment.
Company-initiated loan modification programs include those specifically offered specifically in response to the COVID-19 pandemic as well as existing programs also offered to customers experiencing difficulty making their payments. In addition to the Skip-a-Pay (payment deferral) ("SaP") programs, which ended on August 31, 2020, the Company has other modification programs that customers have utilized during the period related to the pandemic. The Company evaluated the accounts using these modifications are generally excludedas a result of the COVID-19 pandemic for potential exclusion from the TDR statusdesignation either due to the insignificance of the concession or because the concessions are insignificant or they qualifyqualified for an exemption underpursuant to the CARES Act. AllThe effects of all modifications, including TDRs, loan modifications exempt from the TDR designation pursuant to the CARES Act and SaP programs, are considered as part of the process for determining the allowance for credit losses.
The allowance for credit losses was $8.2 billion at September 30, 2020, which reflects a $4.8 billion build over the amount of the allowance for credit losses at December 31, 2019. The allowance build across all loan products was due to (I) a
$2.5 billion cumulative-effect adjustment for the adoption of CECL on January 1, 2020, and (II) a $2.3 billion build that primarily reflects an economic outlook that included the COVID-19 pandemic and resulting economic stress.
The forecast period managementthe Company deemed to be reasonable and supportable was 18 months for all periods since the adoption of CECLpresented except for the estimate as of March 31, 2020. The decrease to 12 months as of March 31, 2020, where the forecast period was 12 months due to the uncertainty caused by the rapidly changing economic environment resulting fromexperienced at the onset of the COVID-19 pandemic. The return to an 18-month reasonable and supportable forecast period was deemed appropriate based on the viewobserved economic phase transition from recovery to expansion and the associated stabilization of macroeconomic forecasts. For all periods presented, the Company determined that the present macroeconomic conditions will last for a longer period than previously expected. The reversion period wasof 12 months was appropriate for similar reasons. Due to the uncertainties associated with borrower behavior resulting from government stimulus and disaster relief programs, the Company applied a weighted reversion method to provide a more reasonable transition to historical losses for all quarters sinceloan products for all periods presented with the adoption of CECL. Duringfollowing exceptions: at March 31, 2020 and December 31, 2019, the first quarter of 2020,Company applied a straight-line method was used to revert to appropriate historical information. In the second quarter offor all loan products. At June 30, 2020, the high degree of economic stress led the Company to applyapplied a weighted reversion method for credit card loans that puts more emphasis on the loss forecast model rather than lower historical losses. For similar reasons, the Company determined it was appropriate to applyand a weighted reversionstraight-line method for all loans in the third quarter.other loan products.
The decrease in net charge-offs onfor credit card and personal loans for the three months ended September 30, 2020, was relatively flat when compared to same period in 2019. The increase in net charge-offs on credit card loans for theand nine months ended September 30, 2021, when compared to the same periods in 2020, was primarily due to the impacts of government stimulus and disaster relief programs and to a lesser extent improved collection and recovery strategies. Additionally, the decrease in net charge-
offs of personal loans for the three and nine months ended September 30, 2021, were favorably impacted by tighter underwriting standards that were implemented in early 2020. Net charge-offs for private student loans remained relatively flat for the three and nine months ended September 30, 2021, when compared to the same period in 2019 was2020, due to the seasoningimpacts of recent years' loan growth.government stimulus and disaster relief programs.
Net charge-offs of principal are recorded against the allowance for credit losses, as shown in the preceding table. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income) | $ | 114 | | | $ | 127 | | | $ | 393 | | | $ | 382 | |
| Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income) | $ | 27 | | | $ | 29 | | | $ | 95 | | | $ | 90 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Interest and fees accrued subsequently charged-off, net of recoveries (recorded as a reduction of interest income) | $ | 57 | | | $ | 114 | | | $ | 232 | | | $ | 393 | |
| Fees accrued subsequently charged-off, net of recoveries (recorded as a reduction to other income) | $ | 15 | | | $ | 27 | | | $ | 59 | | | $ | 95 | |
| | | | | | | |
Delinquent and Non-Accruing Loans
The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent and non-accruing loans in the Company's loan portfolio is shown below byfor each class of loan receivables (dollars in millions): | | | 30-89 Days
Delinquent | | 90 or
More Days
Delinquent | | Total Past
Due | | 90 or
More Days
Delinquent
and
Accruing | | Total Non-accruing(1) | | 30-89 Days
Delinquent | | 90 or
More Days
Delinquent | | Total Past
Due | | 90 or
More Days
Delinquent
and
Accruing | | Total Non-accruing(1) |
| At September 30, 2020 | | | | | | | | | | |
| At September 30, 2021 | | At September 30, 2021 | | | | | | | | | |
| Credit card loans | Credit card loans | $ | 678 | | | $ | 650 | | | $ | 1,328 | | | $ | 604 | | | $ | 196 | | Credit card loans | $ | 573 | | | $ | 467 | | | $ | 1,040 | | | $ | 430 | | | $ | 201 | |
| Other loans | Other loans | | Other loans | |
Private student loans(2) | Private student loans(2) | 117 | | | 32 | | | 149 | | | 31 | | | 12 | | Private student loans(2) | 122 | | | 36 | | | 158 | | | 35 | | | 8 | |
| Personal loans | Personal loans | 56 | | | 23 | | | 79 | | | 22 | | | 9 | | Personal loans | 36 | | | 13 | | | 49 | | | 12 | | | 9 | |
| Other | 8 | | | 3 | | | 11 | | | 0 | | | 11 | | |
| Other loans | | Other loans | 5 | | | 6 | | | 11 | | | 2 | | | 14 | |
| Total other loans | Total other loans | 181 | | | 58 | | | 239 | | | 53 | | | 32 | | Total other loans | 163 | | | 55 | | | 218 | | | 49 | | | 31 | |
| Total loan receivables | Total loan receivables | $ | 859 | | | $ | 708 | | | $ | 1,567 | | | $ | 657 | | | $ | 228 | | Total loan receivables | $ | 736 | | | $ | 522 | | | $ | 1,258 | | | $ | 479 | | | $ | 232 | |
| | At December 31, 2019 | | |
| At December 31, 2020 | | At December 31, 2020 | |
| Credit card loans | Credit card loans | $ | 999 | | | $ | 1,020 | | | $ | 2,019 | | | $ | 940 | | | $ | 237 | | Credit card loans | $ | 739 | | | $ | 739 | | | $ | 1,478 | | | $ | 687 | | | $ | 209 | |
| Other loans | Other loans | | Other loans | |
Private student loans(2) | Private student loans(2) | 136 | | | 45 | | | 181 | | | 45 | | | 11 | | Private student loans(2) | 110 | | | 28 | | | 138 | | | 27 | | | 12 | |
| Personal loans | Personal loans | 74 | | | 31 | | | 105 | | | 29 | | | 12 | | Personal loans | 53 | | | 25 | | | 78 | | | 23 | | | 12 | |
| Other | 5 | | | 2 | | | 7 | | | 0 | | | 6 | | |
| Other loans | | Other loans | 8 | | | 3 | | | 11 | | | — | | | 10 | |
| Total other loans | Total other loans | 215 | | | 78 | | | 293 | | | 74 | | | 29 | | Total other loans | 171 | | | 56 | | | 227 | | | 50 | | | 34 | |
| Total loan receivables | Total loan receivables | $ | 1,214 | | | $ | 1,098 | | | $ | 2,312 | | | $ | 1,014 | | | $ | 266 | | Total loan receivables | $ | 910 | | | $ | 795 | | | $ | 1,705 | | | $ | 737 | | | $ | 243 | |
|
(1)The Company estimates that the gross interest income that would have been recorded in accordance withunder the original terms of non-accruing credit card loans was $7$6 million and $12$7 million for the three months ended September 30, 20202021 and 2019,2020, respectively, and $25$21 million and $34$25 million for the nine months ended September 30, 20202021 and 2019,2020, respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance withunder the original terms of loans. ThisInstead, the Company estimated this amount was estimated based on customers' current balances and most recent interest rates.
(2)Includes PCD loans for all periods presented.
Troubled Debt RestructuringsAllowance for Credit Losses
The Company has internal loan modification programs thatfollowing tables provide relief tochanges in the Company's allowance for credit card, studentlosses (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 Three Months Ended September 30, 2020 |
| | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
| Balance at June 30, 2020 | $ | 6,491 | | | $ | 799 | | | $ | 857 | | | $ | 37 | | | $ | 8,184 | |
| Additions | | | | | | | | | |
Provision for credit losses(1) | 604 | | | 55 | | | 49 | | | 2 | | | 710 | |
| Deductions | | | | | | | | | |
| Charge-offs | (759) | | | (20) | | | (62) | | | (1) | | | (842) | |
| Recoveries | 155 | | | 6 | | | 13 | | | — | | | 174 | |
| Net charge-offs | (604) | | | (14) | | | (49) | | | (1) | | | (668) | |
| | | | | | | | | |
| Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| | | | | | | | | |
| 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 | |
| | | | | | | | | |
| For the Nine Months Ended September 30, 2020 |
| | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
Balance at December 31, 2019(2) | $ | 2,883 | | | $ | 148 | | | $ | 348 | | | $ | 4 | | | $ | 3,383 | |
Cumulative effect of ASU No. 2016-13 adoption(3) | 1,667 | | | 505 | | | 265 | | | 24 | | | 2,461 | |
| Balance at January 1, 2020 | 4,550 | | | 653 | | | 613 | | | 28 | | | 5,844 | |
| Additions | | | | | | | | | |
Provision for credit losses(1) | 3,916 | | | 233 | | | 426 | | | 11 | | | 4,586 | |
| Deductions | | | | | | | | | |
| Charge-offs | (2,480) | | | (62) | | | (224) | | | (1) | | | (2,767) | |
| Recoveries | 505 | | | 16 | | | 42 | | | — | | | 563 | |
| Net charge-offs | (1,975) | | | (46) | | | (182) | | | (1) | | | (2,204) | |
| | | | | | | | | |
| Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| | | | | | | | | |
(1)Excludes a $25 million and personal loan borrowers who may be experiencing financial hardship. The Company considers a modified loan in which a concession has been granted to the borrower to be a TDR based on the cumulative length$40 million reclassification of the concession period andliability for expected credit quality of the borrower. New programs are continually evaluated to determine which of them meet the definition of a TDR, including programs provided to customerslosses on unfunded commitments for temporary relief due to the economic impacts of the COVID-19 outbreak that may be subject to regulatory exclusion from TDR status. The internal loan modification programs include both temporary and permanent programs, which vary by product. External loan modification programs are also available for credit card and personal loans. For all temporary modification programs, including those created specifically in response to COVID-19, the accounts are reviewed for exclusion from being reported as a TDR in accordance with the CARES Act. To the extent the accounts do not meet the requirements for exclusion, temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on student loans and certain grants of student loan forbearance, result in the loans being classified as TDRs. In addition, loans that defaulted (see table on loans that defaulted from a TDR program that follows) or graduated from modification programs or forbearance continue to be classified as TDRs, except as noted below.
For credit card customers, the Company offers both temporary and permanent hardship programs. The temporary hardship programs consist of an interest rate reduction and in some cases a reduced minimum payment, both lasting for a period no longer than 12 months. Charging privileges on these loans are generally suspended while in the program and if certain criteria are met, may be reinstated following completion of the program. Beginning in 2020, credit card accounts of borrowers that have previously participated in a temporary interest rate reduction program and that have both demonstrated financial stability and had their charging privileges reinstated at a market-based interest rate, are excluded from the balance of TDRs.
The permanent modification program involves closing the account, changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate 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. The Company also makes permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans typically receive a reduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. These loans remain in the population of TDRs until they are paid off or charged off.
At September 30, 2020 and December 31, 2019, there were $5.3 billion and $5.6 billion, respectively, of private student loans in repayment and $64 million and $46 million, respectively, in forbearance. To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company 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 TDR based on the cumulative length of the concession period and a determination of financial distress based on an evaluation of the credit quality of the borrower using FICO scores.
For personal loan customers, in certain situations the Company offers 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 in certain circumstances reducing the interest rate on the loan. Similar to the temporary programs, the total term may not exceed nine years. The Company also allows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are classified as TDRs.
Borrower performance after using payment programs or forbearance is monitored and the Company believes the programs are useful in assisting customers experiencing financial difficulties and allowing them to make timely payments. In addition to helping customers with their credit needs, these programs are designed to maximize collections and ultimately the Company’s profitability. The Company plans to continue to use payment programs and forbearance as a means to provide relief to customers experiencing temporary financial difficulties and, as a result, expects to have additional loans classified as TDRs in the future.
In order to evaluate the primary financial effects that resulted from credit card loans entering into a TDR program during the three and nine months ended September 30, 2020 and 2019, the Company quantified the amount by which interest and fees were reduced during the periods. During the three months ended September 30, 2021 and 2020, respectively, and 2019, the Company forgave approximately $13$2 million and $19 million, respectively, of interest and fees as a result of accounts entering into a credit card loan TDR program. During the nine months ended September 30, 2020 and 2019, the Company forgave approximately $52 million and $53 million, respectively, of interest and fees as a result of accounts entering into a credit card loan TDR program. For all loan products, interest income on modified loans is recognized based on the modified contractual terms.
TDR program balances and number of accounts have been favorably impacted by customer usage of modifications that were subject to TDR exclusion in accordance with the CARES Act and are lower than comparative periods as a result.
The following table provides information on loans that entered a TDR program during the period (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | | | | | |
| 2020 | | | | 2019 | | |
| Number of Accounts | | Balances | | Number of Accounts | | Balances |
| Accounts that entered a TDR program during the period | | | | | | | |
Credit card loans(1) | 20,779 | | | $ | 150 | | | 97,046 | | | $ | 623 | |
| Private student loans | 118 | | | $ | 2 | | | 1,692 | | | $ | 31 | |
| Personal loans | 2,505 | | | $ | 33 | | | 2,859 | | | $ | 39 | |
| | | | | | | |
| For the Nine Months Ended September 30, | | | | | | |
| 2020 | | | | 2019 | | |
| Number of Accounts | | Balances | | Number of Accounts | | Balances |
| Accounts that entered a TDR program during the period | | | | | | | |
Credit card loans(1) | 130,869 | | | $ | 875 | | | 273,970 | | | $ | 1,766 | |
| Private student loans | 1,767 | | | $ | 32 | | | 4,978 | | | $ | 92 | |
| Personal loans | 6,315 | | | $ | 83 | | | 8,129 | | | $ | 110 | |
| | | | | | | |
(1)Accounts that entered a credit card TDR program include $143 million and $173 million that were converted from revolving line-of-credit arrangements to term loans during the three months ended September 30, 2020 and 2019, respectively, and $529 million and $336$17 million for the nine months ended September 30, 2021 and 2020, respectively, as the liability is recorded in accrued expenses and 2019, respectively.
The following table presents the carrying value of loans that experienced a payment default during the period that had been modified in a TDR during the 15 months preceding the end of each period (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | | | | | |
| 2020 | | | | 2019 | | |
| Number of Accounts | | Aggregated Outstanding Balances Upon Default | | Number of Accounts | | Aggregated Outstanding Balances Upon Default |
| TDRs that subsequently defaulted | | | | | | | |
Credit card loans(1)(2) | 8,983 | | | $ | 52 | | | 19,108 | | | $ | 109 | |
Private student loans(3) | 272 | | | $ | 6 | | | 396 | | | $ | 8 | |
Personal loans(2) | 624 | | | $ | 9 | | | 1,131 | | | $ | 15 | |
| | | | | | | |
| For the Nine Months Ended September 30, | | | | | | |
| 2020 | | | | 2019 | | |
| Number of Accounts | | Aggregated Outstanding Balances Upon Default | | Number of Accounts | | Aggregated Outstanding Balances Upon Default |
| TDRs that subsequently defaulted | | | | | | | |
Credit card loans(1)(2) | 41,285 | | | $ | 235 | | | 50,980 | | | $ | 294 | |
Private student loans(3) | 876 | | | $ | 18 | | | 966 | | | $ | 19 | |
Personal loans(2) | 2,446 | | | $ | 36 | | | 2,925 | | | $ | 42 | |
| | | | | | | |
(1)Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain suspended in most cases.financial condition.
(2)ForPrior to the adoption of Accounting Standards Update ("ASU") No. 2016-13 on January 1, 2020, credit card loans and personal loans, a customer defaults from a TDR program after 2 consecutive missed payments. The outstanding balance upon default is generallylosses were estimated using the loan balance at the end of the month prior to default.incurred loss approach.
(3)For student loans, defaults have been defined as loans that are 60 or more days delinquent. The outstanding balance upon default is generallyRepresents the loan balance atadjustment to the end of the month priorallowance for credit losses due to default.
Of the account balances that defaulted as shown above for the three months ended September 30, 2020 and 2019, approximately 65% and 37%, respectively, and for the nine months ended September 30, 2020 and 2019, approximately 52% and 38%, respectively, of the total balances were charged off at the end of the month in which they defaulted from a TDR program.
Significant Loan Receivables Accounting Policies
With the adoption of ASU No. 2016-13 on January 1, 2020, certain significant accounting policies have changed since disclosed in Note 2: Summary of Significant Accounting Policies to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, 2019. Refer to Note 1: Background and Basis of Presentation for details on adoption of the standard. Impacts on all significant loan receivables accounting policies are summarized as follows:
•The loan receivables policy was updated to reflect the removal of PCI loans as a separate loan portfolio segment.
•The relevance of the PCI loan policy was eliminated by CECL and therefore it was removed as a significant accounting policy.
•The delinquent loans and charge-offs policy did not change.
•The allowance for credit losses policy was updated to reflect the CECL approach for estimating credit losses.
•The loan interest and fee income policy, which includes certain accounting policy elections related to accrued interest, did not materially change.2020.
The policies below represent those with significant updatesallowance for credit losses was approximately $6.9 billion at September 30, 2021, which reflects a $165 millionrelease from the amount of the allowance for credit losses at June 30, 2021 and a $1.4 billionrelease from the amount of the allowance for credit losses at December 31, 2020.
Therelease in the allowance for credit losses between September 30, 2021 and June 30, 2021, was primarily driven by improving macroeconomic forecasts and continued stable credit performance, partially offset by modest loan growth during the period. The modest growth in loan receivables during the three months ended September 30, 2021, was driven by the robust credit card sales trends as coronavirus disease 2019 ("COVID-19") restrictions continue to ease and the United States economy continues to more fully reopen. Additionally, credit card sales from new accounts and seasonality in private student loan originations contributed to an increase in ending outstanding loan receivables. The loan receivables growth was partially offset by elevated payment rates resulting from adoptionthe several rounds of ASU 2016-13government stimulus and are reflectiveassociated improvement in household cash flows.
The releasein the allowance for credit losses between September 30, 2021 and December 31, 2020, was primarily driven by improvements in the macroeconomic forecast and continued stable credit performance. The release was also partially driven by a moderate reduction in loan receivables outstanding during the period. The decrease in outstanding loan receivables, particularly credit card and personal loan receivables, and the stable credit performance, were driven by elevated payment rates resulting from the several rounds of those updates. Policiesgovernment stimulus and associated improvement in household cash flows. The decrease in outstanding loan receivables was partially offset by the robust credit card sales trends during the period and seasonality in private student loan originations in the third quarter of 2021.
In estimating the allowance at September 30, 2021, the Company used a macroeconomic forecast that did not materially change can be found at Note 2: Summaryprojected (i) a peak unemployment rate of Significant Accounting Policies6.1%, decreasing to 5.5% and 4.0% through the end of 2021 and 2022, respectively; and (ii) a 6.4% and 3.5% annualized growth in the real gross domestic product for 2021 and 2022, respectively. Labor market conditions, which historically have been an important determinant of credit loss trends, continue to improve despite the spread of the COVID-19 delta variant. However, the unemployment rate and initial and continuing jobless claims remain moderately elevated relative to pre-pandemic levels. In estimating expected credit losses, the Company considered the uncertainties associated with borrower behavior, payment trends and credit performance subsequent to the consolidated financial statementsexpiration of government stimulus programs, such as the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and the American Rescue Plan Act of 2021 ("ARPA"), and disaster relief programs, such as foreclosure moratoriums and federal student loan and mortgage payment forbearance. During the third quarter of 2021, several disaster relief programs expired or were rescinded entirely. As the government's response to the pandemic wanes, there is uncertainty regarding the sustainability of the recent credit quality trends in the Company's annual reportloan receivables portfolio. Accordingly, the estimation of the allowance for credit losses has required significant management judgment.
Company-initiated loan modification programs include those specifically offered in response to the COVID-19 pandemic as well as existing programs offered to customers experiencing difficulty making their payments. In addition to the Skip-a-Pay (payment deferral) ("SaP") programs, which ended on Form 10-KAugust 31, 2020, the Company has other modification programs that customers have utilized during the period related to the pandemic. The Company evaluated the accounts using these modifications as a result of the COVID-19 pandemic for potential exclusion from the TDR designation either due to the insignificance of the concession or because they qualified for an exemption pursuant to the CARES Act. The effects of all modifications, including TDRs, loan modifications exempt from the TDR designation pursuant to the CARES Act and SaP programs, are considered as part of the process for determining the allowance for credit losses.
The forecast period the Company deemed reasonable and supportable was 18 months for all periods presented except March 31, 2020, where the forecast period was 12 months due to the uncertainty caused by the rapidly changing economic environment experienced at the onset of the COVID-19 pandemic. The 18-month reasonable and supportable forecast period was deemed appropriate based on the observed economic phase transition from recovery to expansion and the associated stabilization of macroeconomic forecasts. For all periods presented, the Company determined that a reversion period of 12 months was appropriate for similar reasons. Due to the uncertainties associated with borrower behavior resulting from government stimulus and disaster relief programs, the Company applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented with the following exceptions: at March 31, 2020 and December 31, 2019, the Company applied a straight-line method for all loan products. At June 30, 2020, the Company applied a weighted reversion method for credit card loans and a straight-line method for all other loan products.
The decrease in net charge-offs for credit card and personal loans for the yearthree and nine months ended December 31, 2019.September 30, 2021, when compared to the same periods in 2020, was primarily due to the impacts of government stimulus and disaster relief programs and to a lesser extent improved collection and recovery strategies. Additionally, the decrease in net charge-
Loan receivables consistoffs of personal loans for the three and nine months ended September 30, 2021, were favorably impacted by tighter underwriting standards that were implemented in early 2020. Net charge-offs for private student loans remained relatively flat for the three and nine months ended September 30, 2021, when compared to the same period in 2020, due to the impacts of government stimulus and disaster relief programs.
Net charge-offs of principal are recorded against the allowance for credit card receivables and other loan receivables. Loan receivables also include unamortizedlosses, as shown in the preceding table. Information regarding net deferred loan origination fees and costs. Credit card loan receivables are reported at their principal amounts outstanding and include uncollected billedcharge-offs of interest and fees and are reduced for unearned revenue related to balance transfer fees. Other loan receivables consist of student loans, personal loansfee revenues on credit card and other loans is as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Interest and fees accrued subsequently charged-off, net of recoveries (recorded as a reduction of interest income) | $ | 57 | | | $ | 114 | | | $ | 232 | | | $ | 393 | |
| Fees accrued subsequently charged-off, net of recoveries (recorded as a reduction to other income) | $ | 15 | | | $ | 27 | | | $ | 59 | | | $ | 95 | |
| | | | | | | |
Delinquent and are reported at their principal amounts outstanding. For student loans, principal amounts outstanding also includeNon-Accruing Loans
The amortized cost basis (excluding accrued interest that has been capitalized. Thereceivable presented in other assets) of delinquent and non-accruing loans in the Company's loan portfolio is shown below for each class of loan receivables are deemed to be held for investment at origination or acquisition because management has(dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-89 Days
Delinquent | | 90 or
More Days
Delinquent | | Total Past
Due | | 90 or
More Days
Delinquent
and
Accruing | | Total Non-accruing(1) |
| At September 30, 2021 | | | | | | | | | |
| Credit card loans | $ | 573 | | | $ | 467 | | | $ | 1,040 | | | $ | 430 | | | $ | 201 | |
| Other loans | | | | | | | | | |
| Private student loans | 122 | | | 36 | | | 158 | | | 35 | | | 8 | |
| Personal loans | 36 | | | 13 | | | 49 | | | 12 | | | 9 | |
| Other loans | 5 | | | 6 | | | 11 | | | 2 | | | 14 | |
| Total other loans | 163 | | | 55 | | | 218 | | | 49 | | | 31 | |
| Total loan receivables | $ | 736 | | | $ | 522 | | | $ | 1,258 | | | $ | 479 | | | $ | 232 | |
| | | | | | | | | |
| At December 31, 2020 | | | | | | | | | |
| Credit card loans | $ | 739 | | | $ | 739 | | | $ | 1,478 | | | $ | 687 | | | $ | 209 | |
| Other loans | | | | | | | | | |
| Private student loans | 110 | | | 28 | | | 138 | | | 27 | | | 12 | |
| Personal loans | 53 | | | 25 | | | 78 | | | 23 | | | 12 | |
| Other loans | 8 | | | 3 | | | 11 | | | — | | | 10 | |
| Total other loans | 171 | | | 56 | | | 227 | | | 50 | | | 34 | |
| Total loan receivables | $ | 910 | | | $ | 795 | | | $ | 1,705 | | | $ | 737 | | | $ | 243 | |
| | | | | | | | | |
(1)The Company estimates that the intentgross interest income that would have been recorded under the original terms of non-accruing credit card loans was $6 million and ability to hold them$7 million for the foreseeable future. Cash flows associated with loans originated or acquiredthree months ended September 30, 2021 and 2020, respectively, and $21 million and $25 million for investment are classified as cash flows from investing activities, regardlessthe nine months ended September 30, 2021 and 2020, respectively. The Company does not separately track the amount of a subsequent change in intent.gross interest income that would have been recorded under the original terms of loans. Instead, the Company estimated this amount based on customers' current balances and most recent interest rates.
Allowance for Credit Losses
The Company maintains anfollowing tables provide changes in the Company's allowance for credit losses at(dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 Three Months Ended September 30, 2020 |
| | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
| Balance at June 30, 2020 | $ | 6,491 | | | $ | 799 | | | $ | 857 | | | $ | 37 | | | $ | 8,184 | |
| Additions | | | | | | | | | |
Provision for credit losses(1) | 604 | | | 55 | | | 49 | | | 2 | | | 710 | |
| Deductions | | | | | | | | | |
| Charge-offs | (759) | | | (20) | | | (62) | | | (1) | | | (842) | |
| Recoveries | 155 | | | 6 | | | 13 | | | — | | | 174 | |
| Net charge-offs | (604) | | | (14) | | | (49) | | | (1) | | | (668) | |
| | | | | | | | | |
| Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| | | | | | | | | |
| 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 | |
| | | | | | | | | |
| For the Nine Months Ended September 30, 2020 |
| | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
Balance at December 31, 2019(2) | $ | 2,883 | | | $ | 148 | | | $ | 348 | | | $ | 4 | | | $ | 3,383 | |
Cumulative effect of ASU No. 2016-13 adoption(3) | 1,667 | | | 505 | | | 265 | | | 24 | | | 2,461 | |
| Balance at January 1, 2020 | 4,550 | | | 653 | | | 613 | | | 28 | | | 5,844 | |
| Additions | | | | | | | | | |
Provision for credit losses(1) | 3,916 | | | 233 | | | 426 | | | 11 | | | 4,586 | |
| Deductions | | | | | | | | | |
| Charge-offs | (2,480) | | | (62) | | | (224) | | | (1) | | | (2,767) | |
| Recoveries | 505 | | | 16 | | | 42 | | | — | | | 563 | |
| Net charge-offs | (1,975) | | | (46) | | | (182) | | | (1) | | | (2,204) | |
| | | | | | | | | |
| Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| | | | | | | | | |
(1)Excludes a level that is appropriate to absorb credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. The estimate of expected credit losses considers uncollectible principal, interest$25 million and fees associated with the Company's loan receivables existing as of the balance sheet date. Additionally, the estimate includes expected recoveries of amounts that were either previously charged off or are expected to be charged off. The allowance is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for credit losses. Charge-offs of principal amounts of loans outstanding are deducted from the allowance and subsequent recoveries of such amounts increase the allowance. Charge-offs of loan balances representing unpaid interest and fees result in a reversal of interest and fee income, respectively, which is effectively a$40 million reclassification of the provision for credit losses.
The Company calculates its allowance for credit losses by estimating expected credit losses separately for classes of the loan portfolio with similar risk characteristics, which results in segmenting the portfolio by loan product type. The allowance for credit losses for each loan product type is based on: 1) a reasonable and supportable forecast period, 2) a reversion period and 3) a post-reversion period based on historical information covering the remaining life of the loan, all of which is netted with expected recoveries. The lengths of the reasonable and supportable forecast and reversion periods can vary and are subject to a quarterly assessment that considers the economic outlook and level of variability among macroeconomic forecasts. Generally, a straight-line method is used to revert from the reasonable and supportable forecast period to the post-reversion period, but in certain stressed scenarios, a weighted approach may be deemed more appropriate.
Several analyses are used to help estimate credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. The Company's estimation process includes models that predict customer losses based on risk characteristics and portfolio attributes, macroeconomic variables, and historical data and analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance.
For credit card loans, the Company uses a modeling framework that includes the following components for estimating expected credit losses:
•Probability of default: this model estimates the probability of charge-off at different points in time over the life of each loan.
•Exposure at default: this model estimates the portion of the balance sheet date balance remaining at any given time of charge-off for each loan. Given that there is no stated life of a receivable balance on a revolving credit card account, the Company applies a percentage of expected payments to estimate the portion of the balance that would remain at the time of charge-off.
•Loss given default: this model estimates the percentage of exposure (i.e. net loss) at time of charge-off that cannot be recovered, with the offsetting forecast recoveries being the driver of this estimate.
•Recoveries from previously charged-off accounts are estimated separately and are netted as part of the aggregation of all of the components of the card loss modeling framework.
For student loans and personal loans, the Company uses vintage-based models that estimate expected credit losses over the life of the loan, net of recovery estimates, impacted mainly by time elapsed since origination, credit quality of origination vintages and macroeconomic forecasts.
The models described above for credit card, student and personal loans are developed utilizing historical data and applicable macroeconomic variable inputs based on statistical analysis and behavioral relationships with credit performance. Expected recoveries from loans charged off as of the balance sheet date are modeled separately and included in the allowance estimate. The Company leverages these models and recent macroeconomic forecasts for the portion of the estimate associated with the reasonable and supportable forecast period. To estimate expected credit losses for the remainder of the life of the credit card loans, the Company reverts to historical experience of credit card loans with characteristics similar to those as of the balance sheet date and observed over various phases of a credit cycle. To estimate expected credit losses for the remainder of the life of student and personal loans, the Company reverts to use of average macroeconomic variables over an appropriate historical period.
The considerations in these models include past and current loan performance, loan growth and seasoning, risk management practices, account collection strategies, economic conditions, bankruptcy filings, policy changes and forecasting uncertainties. Consideration of past and current loan performance includes the post-modification performance of loans modified in a TDR. For the credit card loan portfolio, the Company estimates its credit losses on a loan-level basis, which includes loans that are delinquent and/or no longer accruing interest and/or loans that have been modified under a TDR. For the remainder of its portfolio, including student, personal and other loans, the Company estimates its credit losses on a pooled basis. For all loan types, recoveries are estimated at a pooled level based on estimates of future cash flows derived using historical experience.
Interest on credit card loans is included in the estimate of expected credit losses once billed to the customer (i.e., once the interest becomes part of the loan balance). An allowance for credit losses is measured for accrued interest on all other loans and is presented as part of allowance for credit losses in the consolidated statements of financial condition.
The Company records a liability for expected credit losses foron unfunded commitments on all other loans, whichfor the three months ended September 30, 2021 and 2020, respectively, and $2 million and $17 million for the nine months ended September 30, 2021 and 2020, respectively, as the liability is presented as part ofrecorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition. This liability is evaluated quarterly for appropriateness and is maintained through an
(2)Prior to the adoption of Accounting Standards Update ("ASU") No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
(3)Represents the adjustment to the provisionallowance for credit losses. No liabilitylosses due to the adoption of ASU No. 2016-13 on January 1, 2020.
The allowance for credit losses was approximately $6.9 billion at September 30, 2021, which reflects a $165 millionrelease from the amount of the allowance for credit losses at June 30, 2021 and a $1.4 billionrelease from the amount of the allowance for credit losses at December 31, 2020.
Therelease in the allowance for credit losses between September 30, 2021 and June 30, 2021, was primarily driven by improving macroeconomic forecasts and continued stable credit performance, partially offset by modest loan growth during the period. The modest growth in loan receivables during the three months ended September 30, 2021, was driven by the robust credit card sales trends as coronavirus disease 2019 ("COVID-19") restrictions continue to ease and the United States economy continues to more fully reopen. Additionally, credit card sales from new accounts and seasonality in private student loan originations contributed to an increase in ending outstanding loan receivables. The loan receivables growth was partially offset by elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows.
The releasein the allowance for credit losses between September 30, 2021 and December 31, 2020, was primarily driven by improvements in the macroeconomic forecast and continued stable credit performance. The release was also partially driven by a moderate reduction in loan receivables outstanding during the period. The decrease in outstanding loan receivables, particularly credit card and personal loan receivables, and the stable credit performance, were driven by elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows. The decrease in outstanding loan receivables was partially offset by the robust credit card sales trends during the period and seasonality in private student loan originations in the third quarter of 2021.
In estimating the allowance at September 30, 2021, the Company used a macroeconomic forecast that projected (i) a peak unemployment rate of 6.1%, decreasing to 5.5% and 4.0% through the end of 2021 and 2022, respectively; and (ii) a 6.4% and 3.5% annualized growth in the real gross domestic product for 2021 and 2022, respectively. Labor market conditions, which historically have been an important determinant of credit loss trends, continue to improve despite the spread of the COVID-19 delta variant. However, the unemployment rate and initial and continuing jobless claims remain moderately elevated relative to pre-pandemic levels. In estimating expected credit losses, the Company considered the uncertainties associated with borrower behavior, payment trends and credit performance subsequent to the expiration of government stimulus programs, such as the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and the American Rescue Plan Act of 2021 ("ARPA"), and disaster relief programs, such as foreclosure moratoriums and federal student loan and mortgage payment forbearance. During the third quarter of 2021, several disaster relief programs expired or were rescinded entirely. As the government's response to the pandemic wanes, there is uncertainty regarding the sustainability of the recent credit quality trends in the Company's loan receivables portfolio. Accordingly, the estimation of the allowance for credit losses has required significant management judgment.
Company-initiated loan modification programs include those specifically offered in response to the COVID-19 pandemic as well as existing programs offered to customers experiencing difficulty making their payments. In addition to the Skip-a-Pay (payment deferral) ("SaP") programs, which ended on August 31, 2020, the Company has other modification programs that customers have utilized during the period related to the pandemic. The Company evaluated the accounts using these modifications as a result of the COVID-19 pandemic for unused linespotential exclusion from the TDR designation either due to the insignificance of the concession or because they qualified for an exemption pursuant to the CARES Act. The effects of all modifications, including TDRs, loan modifications exempt from the TDR designation pursuant to the CARES Act and SaP programs, are considered as part of the process for determining the allowance for credit losses.
The forecast period the Company deemed reasonable and supportable was 18 months for all periods presented except March 31, 2020, where the forecast period was 12 months due to the uncertainty caused by the rapidly changing economic environment experienced at the onset of the COVID-19 pandemic. The 18-month reasonable and supportable forecast period was deemed appropriate based on the Company’sobserved economic phase transition from recovery to expansion and the associated stabilization of macroeconomic forecasts. For all periods presented, the Company determined that a reversion period of 12 months was appropriate for similar reasons. Due to the uncertainties associated with borrower behavior resulting from government stimulus and disaster relief programs, the Company applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented with the following exceptions: at March 31, 2020 and December 31, 2019, the Company applied a straight-line method for all loan products. At June 30, 2020, the Company applied a weighted reversion method for credit card loans and a straight-line method for all other loan products.
The decrease in net charge-offs for credit card and personal loans for the three and nine months ended September 30, 2021, when compared to the same periods in 2020, was primarily due to the impacts of government stimulus and disaster relief programs and to a lesser extent improved collection and recovery strategies. Additionally, the decrease in net charge-
offs of personal loans for the three and nine months ended September 30, 2021, were favorably impacted by tighter underwriting standards that were implemented in early 2020. Net charge-offs for private student loans remained relatively flat for the three and nine months ended September 30, 2021, when compared to the same period in 2020, due to the impacts of government stimulus and disaster relief programs.
Net charge-offs of principal are recorded against the allowance for credit losses, as shown in the preceding table. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Interest and fees accrued subsequently charged-off, net of recoveries (recorded as a reduction of interest income) | $ | 57 | | | $ | 114 | | | $ | 232 | | | $ | 393 | |
| Fees accrued subsequently charged-off, net of recoveries (recorded as a reduction to other income) | $ | 15 | | | $ | 27 | | | $ | 59 | | | $ | 95 | |
| | | | | | | |
Delinquent and Non-Accruing Loans
The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent and non-accruing loans in the Company's loan portfolio is shown below for each class of loan receivables (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-89 Days
Delinquent | | 90 or
More Days
Delinquent | | Total Past
Due | | 90 or
More Days
Delinquent
and
Accruing | | Total Non-accruing(1) |
| At September 30, 2021 | | | | | | | | | |
| Credit card loans | $ | 573 | | | $ | 467 | | | $ | 1,040 | | | $ | 430 | | | $ | 201 | |
| Other loans | | | | | | | | | |
| Private student loans | 122 | | | 36 | | | 158 | | | 35 | | | 8 | |
| Personal loans | 36 | | | 13 | | | 49 | | | 12 | | | 9 | |
| Other loans | 5 | | | 6 | | | 11 | | | 2 | | | 14 | |
| Total other loans | 163 | | | 55 | | | 218 | | | 49 | | | 31 | |
| Total loan receivables | $ | 736 | | | $ | 522 | | | $ | 1,258 | | | $ | 479 | | | $ | 232 | |
| | | | | | | | | |
| At December 31, 2020 | | | | | | | | | |
| Credit card loans | $ | 739 | | | $ | 739 | | | $ | 1,478 | | | $ | 687 | | | $ | 209 | |
| Other loans | | | | | | | | | |
| Private student loans | 110 | | | 28 | | | 138 | | | 27 | | | 12 | |
| Personal loans | 53 | | | 25 | | | 78 | | | 23 | | | 12 | |
| Other loans | 8 | | | 3 | | | 11 | | | — | | | 10 | |
| Total other loans | 171 | | | 56 | | | 227 | | | 50 | | | 34 | |
| Total loan receivables | $ | 910 | | | $ | 795 | | | $ | 1,705 | | | $ | 737 | | | $ | 243 | |
| | | | | | | | | |
(1)The Company estimates that the gross interest income that would have been recorded under the original terms of non-accruing credit card loans was $6 million and $7 million for the three months ended September 30, 2021 and 2020, respectively, and $21 million and $25 million for the nine months ended September 30, 2021 and 2020, respectively. The Company does not separately track the amount of gross interest income that would have been recorded under the original terms of loans. Instead, the Company estimated this amount based on customers' current balances and most recent interest rates.
Troubled Debt Restructurings
The Company has internal loan modification programs that provide relief to credit card, private student and personal loan borrowers who may be experiencing financial hardship. The Company considers a modified loan in which a concession has been granted to the borrower to be a TDR based on the cumulative length of the concession period and credit quality of the borrower. The Company evaluates new programs to determine which of them meet the definition of a TDR, including modification programs provided to customers for temporary relief due to the economic impacts of the COVID-19 pandemic. The internal loan modification programs include both temporary and permanent programs, which vary by product. External loan modification programs are also available for credit card and personal loans. All loans modified in a temporary modification program, including those specifically created in response to the COVID-19 pandemic, are evaluated for
exclusion from the TDR designation either due to the insignificance of the concession or because they qualify for exemption pursuant to the CARES Act. To the extent the loan accounts do not meet the requirements for exclusion, temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on private student loans and certain grants of private student loan forbearance, result in the loans being classified as TDRs. In addition, loans that defaulted from, or successfully completed a loan modification program or forbearance, continue to be classified as TDRs, except as noted below. See the table below that presents the carrying value of loans that experienced a payment default during the period for more information.
For credit card customers, the Company offers both temporary and permanent hardship programs. The temporary hardship programs consist of an interest rate reduction and, in some cases, a reduced minimum payment, both lasting for a period no longer than 12 months. Charging privileges on these accounts are unconditionally cancellable.generally suspended while in the program. However, if the customer meets certain criteria, charging privileges may be reinstated following completion of the program. Credit card accounts of borrowers who have previously participated in a temporary interest rate reduction program and have both demonstrated financial stability and had their charging privileges reinstated at a market-based interest rate, are excluded from the balance of TDRs.
The permanent modification program involves closing the account, changing the loan structure to a fixed payment loan with a maturity no longer than 72 months and reducing the interest rate on the loan. The permanent modification program does not typically provide for the forgiveness of unpaid principal but may allow for the reversal of certain unpaid interest or fee assessments. The Company also makes permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans typically receive a reduced interest rate, typically continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. These permanent loan modifications remain in the population of TDRs until they are paid off or charged off.
At September 30, 2021 and December 31, 2020, there were $5.3 billion and $5.7 billion, respectively, of private student loans in repayment and $63 million and $117 million, respectively, in forbearance. To assist private student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance, payment deferral, a temporary payment reduction, a temporary interest rate reduction or extended terms. A modified loan typically meets the definition of a TDR based on the cumulative length of the concession period and a determination of financial distress based on an evaluation of the borrower's credit quality using FICO scores.
For personal loan customers, the Company offers various payment programs, including temporary and permanent programs, in certain situations. The temporary programs normally consist of reducing the minimum payment for no longer than 12 months. Further, the interest rate on the loan is reduced in certain circumstances. The permanent programs involve extending the loan term and, in certain circumstances, reducing the interest rate on the loan. The total term of the loan, including modification, may not exceed nine years. The Company also allows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are classified as TDRs.
The Company monitors borrower performance after using payment programs or forbearance. The Company believes the programs are useful in assisting customers experiencing financial difficulties and allowing them to make timely payments. In addition to helping customers with their credit needs, these programs are designed to maximize collections and ultimately the Company’s profitability. The Company plans to continue to use payment programs and forbearance to provide relief to customers experiencing temporary financial difficulties and expects to have additional loans classified as TDRs in the future as a result.
To evaluate the primary financial effects that resulted from credit card loans entering into a TDR program during the three and nine months ended September 30, 2021 and 2020, the Company quantified the amount by which interest and fees were reduced during the periods. During the three months ended September 30, 2021 and 2020, the Company forgave approximately $7 million and $13 million, respectively, of interest and fees resulting from accounts entering into a credit card loan TDR program. During the nine months ended September 30, 2021 and 2020, the Company forgave approximately $28 million and $52 million, respectively, of interest and fees resulting from accounts entering into a credit card loan TDR program. For all loan products, interest income on modified loans is recognized based on the modified contractual terms.
Section 4013 of the CARES Act provides certain financial institutions with the option to suspend the application of accounting and reporting guidance for TDRs for a limited period of time for loan modifications made to address the effects of
the COVID-19 pandemic. Section 541 of the Omnibus and COVID Relief and Response Act extended the loan modification relief provided by the CARES Act through the earlier of January 1, 2022, or the date that is 60 days after the termination of the presidentially-declared national emergency. The Company has elected to apply the option to suspend the application of accounting guidance for TDRs as provided under Section 4013 of the CARES Act and as subsequently extended. As such, TDR program balances and the number of accounts have been favorably impacted by the exclusion of certain modifications from the TDR designation pursuant to these exemptions and are expected to remain lower than they otherwise would have been.
The following table provides information on loans that entered a TDR program during the period (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, |
| 2021 | | 2020 |
| Number of Accounts | | Balances | | Number of Accounts | | Balances |
| Accounts that entered a TDR program during the period | | | | | | | |
Credit card loans(1) | 13,964 | | | $ | 86 | | | 20,779 | | | $ | 150 | |
| Private student loans | 102 | | | $ | 2 | | | 118 | | | $ | 2 | |
| Personal loans | 888 | | | $ | 10 | | | 2,505 | | | $ | 33 | |
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2021 | | 2020 |
| Number of Accounts | | Balances | | Number of Accounts | | Balances |
| Accounts that entered a TDR program during the period | | | | | | | |
Credit card loans(1) | 48,887 | | | $ | 315 | | | 130,869 | | | $ | 875 | |
| Private student loans | 355 | | | $ | 7 | | | 1,767 | | | $ | 32 | |
| Personal loans | 3,102 | | | $ | 38 | | | 6,315 | | | $ | 83 | |
| | | | | | | |
(1)Accounts that entered a credit card TDR program include $72 million and $143 million that were converted from revolving line-of-credit arrangements to term loans during the three months ended September 30, 2021 and 2020, respectively, and $288 million and $529 million for the nine months ended September 30, 2021 and 2020, respectively.
The number and balance of new credit card and personal loan modifications, including the combined total of those identified as TDRs and those exempt from the TDR designation, decreased during the three and nine months ended September 30, 2021, when compared to the same periods in 2020. The decrease in both periods is primarily due to the impacts of several rounds of government stimulus and disaster relief programs, which reduced the need for customers to enroll in a loan modification program. The number and balance of loan modifications across all products, including the combined total of those identified as TDRs and those exempt from the TDR designation, during the three and nine months ended September 30, 2020, were favorably impacted by the utilization of SaP programs in lieu of traditional loan modification programs. Additionally, enrollments in personal loan modification programs were favorably impacted by tighter underwriting standards that were implemented in early 2020.
The following table presents the carrying value of loans that experienced a default during the period that had been modified in a TDR during the 15 months preceding the end of each period (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, |
| 2021 | | 2020 |
| Number of Accounts | | Aggregated Outstanding Balances Upon Default | | Number of Accounts | | Aggregated Outstanding Balances Upon Default |
| TDRs that subsequently defaulted | | | | | | | |
Credit card loans(1)(2) | 3,679 | | | $ | 21 | | | 8,983 | | | $ | 52 | |
Private student loans(3) | 83 | | | $ | 2 | | | 272 | | | $ | 6 | |
Personal loans(2) | 399 | | | $ | 6 | | | 624 | | | $ | 9 | |
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2021 | | 2020 |
| Number of Accounts | | Aggregated Outstanding Balances Upon Default | | Number of Accounts | | Aggregated Outstanding Balances Upon Default |
| TDRs that subsequently defaulted | | | | | | | |
Credit card loans(1)(2) | 14,205 | | | $ | 84 | | | 41,285 | | | $ | 235 | |
Private student loans(3) | 214 | | | $ | 5 | | | 876 | | | $ | 18 | |
Personal loans(2) | 1,287 | | | $ | 18 | | | 2,446 | | | $ | 36 | |
| | | | | | | |
(1)For credit card loans that default from a temporary program, accounts revert to the pre-modification terms and charging privileges remain suspended in most cases.
(2)For credit card loans and personal loans, a customer defaults from a loan modification program after either 2 consecutive missed payments or at charge-off, depending on the program. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.
(3)For student loans, a customer defaults from a loan modification after they are 60 or more days delinquent. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.
Of the account balances that defaulted as shown above for the three months ended September 30, 2021 and 2020, approximately 62% and 65%, respectively, and for the nine months ended September 30, 2021 and 2020, approximately 66% and 52%, respectively, of the total balances were charged off at the end of the month in which they defaulted from a TDR program. For accounts that have defaulted from a TDR program and have not been subsequently charged off, the balances are included in the allowance for credit loss analysis discussed above under “— Allowance for Credit Losses.”
4. Credit Card and Private Student Loan Securitization Activities
The Company's securitizations are accounted for as secured borrowings and the related trusts are treated as consolidated subsidiaries of the Company. For a description of the Company's principles of consolidation with respect to VIEs, see Note 1: Background and Basis of Presentation to the consolidated financial statements ofin the Company's annual report on Form 10-K for the year ended December 31, 2019.2020.
Credit Card Securitization Activities
The Company accesses the term asset securitization market through the Discover Card Master Trust I ("DCMT") and the Discover Card Execution Note Trust ("DCENT"). Credit card loan receivables are transferred into DCMT and beneficial interests in DCMT are transferred into DCENT. DCENT issues debt securities to investors that are reported in long-term borrowings.
The DCENT debt structure consists of 4 classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. In order toTo issue senior, higher ratedhigher-rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower ratedlower-rated or more highly subordinated classes of notes. The subordinated classes are held by wholly-ownedWholly-owned subsidiaries of Discover Bank.Bank hold the subordinated classes of notes. The Company is exposed to credit-relatedcredit risk of loss associated with trust assetsreceivables as of the balance sheet date through the retention of these subordinated interests. The estimatedcurrent expected credit loss ("CECL") on trust receivables is included in the allowance for credit losses estimate.
The Company's retained interests in the trust's assets, of the trusts, consisting of investments in DCENT notes held by subsidiaries of Discover Bank, constitute intercompany positions whichthat are eliminated in the preparation of the Company's condensed consolidated statements of financial condition.
Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the trusts'trust's creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to the Company's third-party creditors of the Company.creditors. The trusts have ownership of cash balances, the amounts of which are reported in restricted cash. Withcash within the exceptionCompany's condensed consolidated statements of financial condition. Except for the seller's interest in trust receivables, the Company's interests in trust assets are generally subordinate to the interests of third-party investors in trust debt and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts' debt.those investors. Apart from the restricted assets related to securitization activities, the investors and the securitization trusts have no recourse to the Company's other assets or the Company's general credit for a shortage in cash flows.
The carrying values of these restricted assets, which are presented on the Company's condensed consolidated statements of financial condition as relating to securitization activities, are shown in the following table (dollars in millions): | | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Restricted cash | Restricted cash | $ | 567 | | | $ | 28 | | Restricted cash | $ | 23 | | | $ | 16 | |
| | Investors' interests held by third-party investors | Investors' interests held by third-party investors | 11,150 | | | 14,100 | | Investors' interests held by third-party investors | 8,925 | | | 10,600 | |
| Investors' interests held by wholly-owned subsidiaries of Discover Bank | Investors' interests held by wholly-owned subsidiaries of Discover Bank | 4,249 | | | 4,796 | | Investors' interests held by wholly-owned subsidiaries of Discover Bank | 3,971 | | | 6,121 | |
| Seller's interest | Seller's interest | 11,627 | | | 12,652 | | Seller's interest | 11,640 | | | 10,575 | |
Loan receivables(1) | Loan receivables(1) | 27,026 | | | 31,548 | | Loan receivables(1) | 24,536 | | | 27,296 | |
Allowance for credit losses allocated to securitized loan receivables(2)(1) | Allowance for credit losses allocated to securitized loan receivables(2)(1) | (1,964) | | | (1,179) | | Allowance for credit losses allocated to securitized loan receivables(2)(1) | (1,436) | | | (1,936) | |
| Net loan receivables | Net loan receivables | 25,062 | | | 30,369 | | Net loan receivables | 23,100 | | | 25,360 | |
| Other | Other | 4 | | | 5 | | Other | 3 | | | 3 | |
| Carrying value of assets of consolidated variable interest entities | Carrying value of assets of consolidated variable interest entities | $ | 25,633 | | | $ | 30,402 | | Carrying value of assets of consolidated variable interest entities | $ | 23,126 | | | $ | 25,379 | |
|
(1)The Company maintains its allowance for credit losses at an amount sufficientequal to absorblifetime expected credit losses inherent inassociated with all loan receivables, which includes all loan receivables in the trusts. Therefore, the credit risk associated with the transferred receivables is fully reflected on the Company's balance sheetstatements of financial condition in accordance with GAAP.
(2)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
The debt securities issued by the consolidated trusts are subject to credit, payment and interest rate risks on the transferred credit card loan receivables. To protect investors in the securities, there are certain features or triggering events that couldwill cause an early amortization of the debt securities, including triggers related to the impact of the performance of the trust receivables on the availability and adequacy of cash flows to meet contractual requirements. As of September 30, 2020,2021, no economic or other early amortization events have occurred.
The Company continues to own and service the accounts that generate the loan receivables held by the trusts. Discover Bank receives servicing fees from the trusts based on a percentage of the monthly investor principal balance outstanding. Although the fee income to Discover Bank offsets the fee expense to the trusts and thus is eliminated in consolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead to a termination of the servicing rights and the loss of future servicing income, net of related expenses.
Private Student Loan Securitization Activities
StudentPrivate student loan trust receivables are reported in loan receivables and the related debt issued by the truststrust is reported in long-term borrowings. The trust assets of the trusts are restricted from being sold or pledged as collateral for other borrowings and the cash flows from these restricted assets may be used only to pay obligations of the trusts. WithExcept for the exception of the trusts'trust's restricted assets, the truststrust and investors have no recourse to the Company's other assets or the Company's general credit for a shortage in cash flows.
Securities issued to investors are outstanding from only 1 of the 2 remaining student loan securitization trusts. Principal payments on the long-term secured borrowings are made as cash is collected on the underlying loans that are used as collateral on the secured borrowings. The Company does not have access to cash collected by the securitization trust until cash is released in accordance with the trust indenture agreement. Similar to the credit card securitizations, the Company continues to own and service the accounts that generate theprivate student loan receivables held by the trust and receives servicing fees from the trust based on a percentage of the principal balance outstanding. Although the servicing fee income offsets the fee expense related to the trust
and thus is eliminated in consolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead to a termination of the servicing rights and the loss of future servicing income, net of related expenses.
Under terms of the trust arrangement, the Company has the option, but not the obligation, to provide financial support to the trust, but has never provided such support. A substantial portion of the credit risk associated with the securitized loans has been transferred to a third party under an indemnification arrangement.
The carrying values of these restricted assets, which are presented on the Company's condensed consolidated statements of financial condition as relating to securitization activities, are shown in the following table (dollars in millions): | | | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Restricted cash | Restricted cash | $ | 9 | | | $ | 12 | | Restricted cash | $ | 9 | | | $ | 9 | |
| Student loan receivables | 261 | | | 292 | | |
| Private student loan receivables | | Private student loan receivables | 215 | | | 250 | |
| Carrying value of assets of consolidated variable interest entities | Carrying value of assets of consolidated variable interest entities | $ | 270 | | | $ | 304 | | Carrying value of assets of consolidated variable interest entities | $ | 224 | | | $ | 259 | |
|
5. Intangible Assets
In connection with the preparation of the financial statements for the second quarter report on Form 10-Q,of 2020, the Company identified a triggering eventconducted an interim impairment test on its non-amortizable intangible assets, both the Diners Club trade names and international transaction processing rights, due to changes in the international travel and entertainment businesses and a declining revenue outlook for the foreseeable future resulting from COVID-19. As a result, during the second quarter the Company conducted an interim impairment test on its Diners Club trade names and international transaction processing rights non-amortizable intangible assets.
COVID-19 pandemic. The valuation ofmethodology used to value the trade names and international transaction processing rights was based on a discounted cash flow method, consistent with the methodologymethods used for annual impairment testing. As a result of this analysis, the Company made the determinationdetermined that the trade names and international transaction processing rights were impaired and recognized a charge, duringcharges, in the second quarter of 2020, in its Payment Services segment of $36 million and $23 million, respectively. The impairments were recorded in other expense.
In the second quarter of 2021, global travel and entertainment spending continued to trend lower than pre-pandemic levels. As a result, the Company re-evaluated that impact on the value of the Diners Club trade names by conducting an interim impairment test on the asset in conjunction with the preparation of the financial statements. The valuation methodology used to value the trade names was based on a discounted cash flow method, consistent with the methods used for annual impairment testing. As a result of this analysis, the Company determined that the trade names were fully impaired and recognized a charge, in the second quarter of 2021, in its Payment Services segment of $92 million. The impairment was recorded in other expense. As of
At September 30, 2020, 0 additional material impairments have been recorded and annual impairment testing will resume on October 1, 2020.
As of September 30, 2020,2021, the trade names have a remaining net book value of $92 million and the international transaction processing rights have 0no remaining net book value.
6. Deposits
The Company offers its deposit products to customers through 2 channels: (i) through direct marketing, internet origination and affinity relationships ("direct-to-consumer deposits"); and (ii) indirectly through contractual arrangements with securities brokerage firms ("brokered deposits"). Direct-to-consumer deposits include online savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts, while brokeredchecking/debit accounts. Brokered deposits include certificates of deposit and sweep accounts.
The following table provides a summary of interest-bearing deposit accounts (dollars in millions): | | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Certificates of deposit in amounts less than $100,000 | Certificates of deposit in amounts less than $100,000 | $ | 21,071 | | | $ | 25,113 | | Certificates of deposit in amounts less than $100,000 | $ | 14,592 | | | $ | 19,105 | |
Certificates of deposit in amounts $100,000 or greater(1) | Certificates of deposit in amounts $100,000 or greater(1) | 9,771 | | | 9,268 | | Certificates of deposit in amounts $100,000 or greater(1) | 7,239 | | | 9,164 | |
| Savings deposits, including money market deposit accounts | Savings deposits, including money market deposit accounts | 46,096 | | | 37,574 | | Savings deposits, including money market deposit accounts | 49,295 | | | 47,426 | |
| Total interest-bearing deposits | Total interest-bearing deposits | $ | 76,938 | | | $ | 71,955 | | Total interest-bearing deposits | $ | 71,126 | | | $ | 75,695 | |
|
(1)Includes $2.8$2.0 billion and $2.6 billion in certificates of deposit equal to or greater than $250,000, the Federal Deposit Insurance Corporation ("FDIC") insurance limit, as of September 30, 20202021 and December 31, 2019,2020, respectively.
The following table summarizes certificates of deposit in amounts of $100,000 or greater by contractual maturity (dollars in millions): | | | | | |
| September 30,
20202021 |
| Three months or less | $ | 1,7341,458 | |
| Over three months through six months | 2,3751,640 | |
| Over six months through twelve months | 3,1662,711 | |
| Over twelve months | 2,4961,430 | |
| Total | $ | 9,7717,239 | |
| |
The following table summarizes certificates of deposit maturing over the remainder of this year, over each of the next four years and thereafter (dollars in millions): | | | September 30,
2020 | | September 30,
2021 |
| 2020 | $ | 4,861 | | |
| 2021 | 2021 | 15,825 | | 2021 | $ | 4,171 | |
| 2022 | 2022 | 4,353 | | 2022 | 11,133 | |
| 2023 | 2023 | 2,214 | | 2023 | 2,663 | |
| 2024 | 2024 | 1,357 | | 2024 | 1,451 | |
| 2025 | | 2025 | 870 | |
| Thereafter | Thereafter | 2,232 | | Thereafter | 1,543 | |
| Total | Total | $ | 30,842 | | Total | $ | 21,831 | |
|
7. Long-Term Borrowings
Long-term borrowings consist of borrowings having original maturities of one year or more. The following table provides a summary of the Company's long-term borrowings and weighted-average interest rates on outstanding balances (dollars in millions): | | | September 30, 2020 | | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
| | Maturity | | Interest
Rate | | Weighted-Average Interest Rate | | Outstanding Amount | | Outstanding Amount | | Maturity | | Interest
Rate | | Weighted-Average Interest Rate | | Outstanding Amount | | Outstanding Amount |
| Securitized Debt | Securitized Debt | | | | | | | | | | Securitized Debt | | | | | | | | | |
Fixed-rate asset-backed securities(1) | Fixed-rate asset-backed securities(1) | 2020-2024 | | 1.85%-3.32% | | 2.70% | | $ | 6,621 | | | $ | 8,609 | | Fixed-rate asset-backed securities(1) | 2022-2026 | | 0.58% - 3.04% | | 2.01% | | $ | 5,607 | | | $ | 6,041 | |
Floating-rate asset-backed securities(2) | Floating-rate asset-backed securities(2) | 2021-2024 | | 0.38%-0.75% | | 0.55% | | 4,668 | | | 5,515 | | Floating-rate asset-backed securities(2) | 2022-2024 | | 0.41% - 0.68% | | 0.54% | | 3,347 | | | 4,669 | |
| Total Discover Card Master Trust I and Discover Card Execution Note Trust | Total Discover Card Master Trust I and Discover Card Execution Note Trust | | 11,289 | | | 14,124 | | Total Discover Card Master Trust I and Discover Card Execution Note Trust | | 8,954 | | | 10,710 | |
| Floating-rate asset-backed security(3)(4) | Floating-rate asset-backed security(3)(4) | 2031 | | 4.25% | | 4.25% | | 136 | | | 160 | | Floating-rate asset-backed security(3)(4) | 2031 | | 4.25% | | 4.25% | | 110 | | | 130 | |
| Total student loan securitization trust | | 136 | | | 160 | | |
| Total private student loan securitization trust | | Total private student loan securitization trust | | 110 | | | 130 | |
| Total long-term borrowings - owed to securitization investors | Total long-term borrowings - owed to securitization investors | | 11,425 | | | 14,284 | | Total long-term borrowings - owed to securitization investors | | 9,064 | | | 10,840 | |
| | Discover Financial Services (Parent Company) | Discover Financial Services (Parent Company) | | Discover Financial Services (Parent Company) | |
| Fixed-rate senior notes | Fixed-rate senior notes | 2022-2027 | | 3.75%-5.20% | | 4.16% | | 3,327 | | | 3,296 | | Fixed-rate senior notes | 2022-2027 | | 3.75% - 5.20% | | 4.16% | | 3,370 | | | 3,337 | |
| Fixed-rate retail notes | Fixed-rate retail notes | 2021-2031 | | 2.85%-4.60% | | 3.73% | | 336 | | | 340 | | Fixed-rate retail notes | 2022-2031 | | 2.85% - 4.40% | | 3.75% | | 166 | | | 336 | |
| | Discover Bank | Discover Bank | | Discover Bank | |
Fixed-rate senior bank notes(1) | Fixed-rate senior bank notes(1) | 2021-2030 | | 2.45%-4.65% | | 3.89% | | 6,236 | | | 6,785 | | Fixed-rate senior bank notes(1) | 2023-2030 | | 2.45% - 4.65% | | 3.63% | | 5,406 | | | 6,213 | |
Fixed-rate subordinated bank notes | Fixed-rate subordinated bank notes | 2028-2028 | | 4.68%-4.68% | | 4.68% | | 517 | | | 996 | | Fixed-rate subordinated bank notes | 2028 | | 4.68% | | 4.68% | | 510 | | | 515 | |
| Total long-term borrowings | Total long-term borrowings | | $ | 21,841 | | | $ | 25,701 | | Total long-term borrowings | | $ | 18,516 | | | $ | 21,241 | |
|
(1)The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in LIBORthe London Interbank Offered Rate ("LIBOR") or Overnight Index Swap ("OIS") Rate. UseThe use of these interest rate swaps impacts the carrying value of the debt. See Note 16: Derivatives and Hedging Activities.
(2)Discover Card Execution Note TrustDCENT floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 2333 to 60 basis points as of September 30, 2020.2021.
(3)The private student loan securitization trust floating-rate asset-backed security includes an issuance with the following interest rate term: Prime rate + 100 basis points as of September 30, 2020.2021.
(4)Repayment of this debt is dependent upondepends on the timing of principal and interest payments on the underlying private student loans. The date shown represents the final maturity date.
The following table summarizes long-term borrowings maturing over the remainder of this year, over each of the next four years and thereafter (dollars in millions): | | | September 30, 2020 | | September 30, 2021 |
| 2020 | $ | 550 | | |
| 2021 | 2021 | 4,232 | | 2021 | $ | — | |
| 2022 | 2022 | 5,204 | | 2022 | 5,188 | |
| 2023 | 2023 | 3,411 | | 2023 | 3,324 | |
| 2024 | 2024 | 2,630 | | 2024 | 3,738 | |
| 2025 | | 2025 | 529 | |
| Thereafter | Thereafter | 5,814 | | Thereafter | 5,737 | |
| Total | Total | $ | 21,841 | | Total | $ | 18,516 | |
|
The Company has access to committed borrowing capacity through private securitizations to support the funding of its credit card loan receivables. As of September 30, 2020,2021, the total commitment of secured credit facilities through private providers was $6.0$4.0 billion, NaNnone of which was drawn as of September 30, 2020.2021. Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers, whichproviders. The secured credit facilities have various expirations in calendar year 2022.2023. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each individual conduit provider. The terms of each agreement provide for a commitment fee to be paid on the unused capacity and include various affirmative and negative covenants, including performance metrics and legal requirements similar to those required to issue any term securitization transaction.
8. Preferred Stock
On June 22, 2020,The table below presents a summary of the Company issuedCompany's non-cumulative perpetual preferred stock that is outstanding at September 30, 2021 (dollars in millions, except per depositary share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series | | Description | | Initial Issuance Date | | Liquidation Preference and Redemption Price per Depositary Share(1) | | Per Annum Dividend Rate in effect at September 30, 2021 | | Total Depositary Shares Authorized, Issued and Outstanding | | Carrying Value |
| | | | | September 30, 2021 | | December 31, 2020 | | September 30, 2021 | | December 31, 2020 |
C(2)(3)(4) | | Fixed-to-Floating Rate | | 10/31/2017 | | $ | 1,000 | | | 5.500 | % | | 570,000 | | | 570,000 | | | $ | 563 | | | $ | 563 | |
D(2)(5)(6) | | Fixed-Rate Reset | | 6/22/2020 | | $ | 1,000 | | | 6.125 | % | | 500,000 | | | 500,000 | | | 493 | | | 493 | |
| Total Preferred Stock | | 1,070,000 | | | 1,070,000 | | | $ | 1,056 | | | $ | 1,056 | |
| | | | | | | | | | | | | | | | |
(1)Redeemable at the redemption price plus declared and sold 5,000unpaid dividends.
(2)Issued as depositary shares, each representing 1/100th interest in a share of 6.125% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (the “preferred stock”), withthe corresponding series of preferred stock. Each preferred share has a par value of $0.01 per share. Each share of preferred stock has a liquidation preference of $1,000 and is represented by 100 depositary shares. Proceeds received from the preferred stock issuance, net of underwriting discount and expenses, totaled approximately $493 million. The preferred stock is redeemable$0.01.
(3)Redeemable at the Company’s option, subject to regulatory approval, either (1)(i) in whole or in part on any dividend payment date on or after October 30, 2027, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series C preferred stock).
(4)Any dividends declared are payable semi-annually in arrears at a rate of 5.50% per annum until October 30, 2027. Thereafter, dividends declared will be payable quarterly in arrears at a floating rate equal to 3-month LIBOR plus a spread of 3.076% per annum.
(5)Redeemable at the Company’s option, subject to regulatory approval, either (i) in whole or in part during the three-month period prior to, and including, each reset date (as defined in the certificate of designations for the Series D preferred stock) or (2)(ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the preferred stock), in each case at a redemption price equal to $1,000 per share of preferred stock plus declared and unpaid dividends. Series D Preferred Stock).
(6)Any dividends declared on the preferred stock will beare payable semi-annually in arrears at a rate of 6.125% per annum until September 23, 2025, after which the dividend rate will reset every five years to a fixed annual rate equal to the 5-year Treasury rate plus a spread of 5.783%. For more information on the other outstanding preferred stock issued by the Company, see Note 12: Common and Preferred Stock to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, 2019.
9. Accumulated Other Comprehensive Income
Changes in each component of accumulated other comprehensive income (loss) ("AOCI") were as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains on Available-for-Sale Investment Securities, Net of Tax | | (Losses) Gains on Cash Flow Hedges, Net of Tax | | Losses on Pension Plan, Net of Tax | | AOCI |
| For the Three Months Ended September 30, 2020 | | | | | | | |
| Balance at June 30, 2020 | $ | 352 | | | $ | (16) | | | $ | (214) | | | $ | 122 | |
| Net change | (32) | | | 3 | | | 0 | | | (29) | |
| Balance at September 30, 2020 | $ | 320 | | | $ | (13) | | | $ | (214) | | | $ | 93 | |
| | | | | | | |
| For the Three Months Ended September 30, 2019 | | | | | | | |
| Balance at June 30, 2019 | $ | 112 | | | $ | (8) | | | $ | (187) | | | $ | (83) | |
| Net change | 17 | | | (8) | | | 0 | | | 9 | |
| Balance at September 30, 2019 | $ | 129 | | | $ | (16) | | | $ | (187) | | | $ | (74) | |
| | | | | | | |
| For the Nine Months Ended September 30, 2020 | | | | | | | |
| Balance at December 31, 2019 | $ | 112 | | | $ | (17) | | | $ | (214) | | | $ | (119) | |
| Net change | 208 | | | 4 | | | 0 | | | 212 | |
| Balance at September 30, 2020 | $ | 320 | | | $ | (13) | | | $ | (214) | | | $ | 93 | |
| | | | | | | |
| For the Nine Months Ended September 30, 2019 | | | | | | | |
| Balance at December 31, 2018 | $ | 10 | | | $ | 22 | | | $ | (188) | | | $ | (156) | |
| Net change | 119 | | | (38) | | | 1 | | | 82 | |
| Balance at September 30, 2019 | $ | 129 | | | $ | (16) | | | $ | (187) | | | $ | (74) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains on Available-for-Sale Investment Securities, Net of Tax | | Losses on Cash Flow Hedges, Net of Tax | | Losses on Pension Plan, Net of Tax | | AOCI |
| For the Three Months Ended September 30, 2021 | | | | | | | |
| Balance at June 30, 2021 | $ | 198 | | | $ | (10) | | | $ | (227) | | | $ | (39) | |
| Net change | (29) | | | — | | | — | | | (29) | |
| Balance at September 30, 2021 | $ | 169 | | | $ | (10) | | | $ | (227) | | | $ | (68) | |
| | | | | | | |
| For the Three Months Ended September 30, 2020 | | | | | | | |
| Balance at June 30, 2020 | $ | 352 | | | $ | (16) | | | $ | (214) | | | $ | 122 | |
| Net change | (32) | | | 3 | | | — | | | (29) | |
| Balance at September 30, 2020 | $ | 320 | | | $ | (13) | | | $ | (214) | | | $ | 93 | |
| | | | | | | |
| For the Nine Months Ended September 30, 2021 | | | | | | | |
| Balance at December 31, 2020 | $ | 284 | | | $ | (12) | | | $ | (227) | | | $ | 45 | |
| Net change | (115) | | | 2 | | | — | | | (113) | |
| Balance at September 30, 2021 | $ | 169 | | | $ | (10) | | | $ | (227) | | | $ | (68) | |
| | | | | | | |
| For the Nine Months Ended September 30, 2020 | | | | | | | |
| Balance at December 31, 2019 | $ | 112 | | | $ | (17) | | | $ | (214) | | | $ | (119) | |
| Net change | 208 | | | 4 | | | — | | | 212 | |
| Balance at September 30, 2020 | $ | 320 | | | $ | (13) | | | $ | (214) | | | $ | 93 | |
| | | | | | | |
The following table presents each component of other comprehensive income (loss) ("OCI") before reclassifications and amounts reclassified from AOCI for each component of OCI before- and after-tax (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Before Tax | | Tax Benefit (Expense) | | Net of Tax |
| For the Three Months Ended September 30, 2020 | | | | | |
| Available-for-Sale Investment Securities | | | | | |
| Net unrealized holding losses arising during the period | $ | (42) | | | $ | 10 | | | $ | (32) | |
| | | | | |
| Net change | $ | (42) | | | $ | 10 | | | $ | (32) | |
| Cash Flow Hedges | | | | | |
| Net unrealized gains arising during the period | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Amounts reclassified from AOCI | 4 | | | (1) | | | 3 | |
| Net change | $ | 4 | | | $ | (1) | | | $ | 3 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| For the Three Months Ended September 30, 2019 | | | | | |
| Available-for-Sale Investment Securities | | | | | |
| Net unrealized holding gains arising during the period | $ | 24 | | | $ | (7) | | | $ | 17 | |
| | | | | |
| Net change | $ | 24 | | | $ | (7) | | | $ | 17 | |
| Cash Flow Hedges | | | | | |
| Net unrealized losses arising during the period | $ | (9) | | | $ | 2 | | | $ | (7) | |
| Amounts reclassified from AOCI | (2) | | | 1 | | | (1) | |
| Net change | $ | (11) | | | $ | 3 | | | $ | (8) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| For the Nine Months Ended September 30, 2020 | | | | | |
| Available-for-Sale Investment Securities | | | | | |
| Net unrealized holding gains arising during the period | $ | 275 | | | $ | (67) | | | $ | 208 | |
| | | | | |
| Net change | $ | 275 | | | $ | (67) | | | $ | 208 | |
| Cash Flow Hedges | | | | | |
| Net unrealized losses arising during the period | $ | (7) | | | $ | 3 | | | $ | (4) | |
| Amounts reclassified from AOCI | 11 | | | (3) | | | 8 | |
| Net change | $ | 4 | | | $ | 0 | | | $ | 4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| For the Nine Months Ended September 30, 2019 | | | | | |
| Available-for-Sale Investment Securities | | | | | |
| Net unrealized holding gains arising during the period | $ | 158 | | | $ | (39) | | | $ | 119 | |
| | | | | |
| Net change | $ | 158 | | | $ | (39) | | | $ | 119 | |
| Cash Flow Hedges | | | | | |
| Net unrealized losses arising during the period | $ | (44) | | | $ | 11 | | | $ | (33) | |
| Amounts reclassified from AOCI | (7) | | | 2 | | | (5) | |
| Net change | $ | (51) | | | $ | 13 | | | $ | (38) | |
| Pension Plan | | | | | |
| Unrealized gains arising during the period | $ | 1 | | | $ | 0 | | | $ | 1 | |
| Net change | $ | 1 | | | $ | 0 | | | $ | 1 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Before Tax | | Tax Benefit (Expense) | | Net of Tax |
| For the Three Months Ended September 30, 2021 | | | | | |
| Available-for-Sale Investment Securities | | | | | |
| Net unrealized holding losses arising during the period | $ | (38) | | | $ | 9 | | | $ | (29) | |
| | | | | |
| Net change | $ | (38) | | | $ | 9 | | | $ | (29) | |
| Cash Flow Hedges | | | | | |
| Net unrealized gains arising during the period | $ | — | | | $ | 1 | | | $ | 1 | |
| Amounts reclassified from AOCI | — | | | (1) | | | (1) | |
| Net change | $ | — | | | $ | — | | | $ | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| For the Three Months Ended September 30, 2020 | | | | | |
| Available-for-Sale Investment Securities | | | | | |
| Net unrealized holding losses arising during the period | $ | (42) | | | $ | 10 | | | $ | (32) | |
| | | | | |
| Net change | $ | (42) | | | $ | 10 | | | $ | (32) | |
| Cash Flow Hedges | | | | | |
| | | | | |
| Amounts reclassified from AOCI | $ | 4 | | | $ | (1) | | | $ | 3 | |
| Net change | $ | 4 | | | $ | (1) | | | $ | 3 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| For the Nine Months Ended September 30, 2021 | | | | | |
| Available-for-Sale Investment Securities | | | | | |
| Net unrealized holding losses arising during the period | $ | (152) | | | $ | 37 | | | $ | (115) | |
| | | | | |
| Net change | $ | (152) | | | $ | 37 | | | $ | (115) | |
| Cash Flow Hedges | | | | | |
| Net unrealized gains arising during the period | $ | — | | | $ | 1 | | | $ | 1 | |
| Amounts reclassified from AOCI | 2 | | | (1) | | | 1 | |
| Net change | $ | 2 | | | $ | — | | | $ | 2 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| For the Nine Months Ended September 30, 2020 | |
| Available-for-Sale Investment Securities | | | | | |
| Net unrealized holding gains arising during the period | $ | 275 | | | $ | (67) | | | $ | 208 | |
| | | | | |
| Net change | $ | 275 | | | $ | (67) | | | $ | 208 | |
| Cash Flow Hedges | | | | | |
| Net unrealized losses arising during the period | $ | (7) | | | $ | 3 | | | $ | (4) | |
| Amounts reclassified from AOCI | 11 | | | (3) | | | 8 | |
| Net change | $ | 4 | | | $ | — | | | $ | 4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
10. Income Taxes
The following table presents the calculation of the Company's effective income tax rate (dollars in millions, except effective income tax rate)millions): | | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Income before income taxes | Income before income taxes | $ | 959 | | | $ | 994 | | | $ | 420 | | | $ | 2,911 | | Income before income taxes | $ | 1,402 | | | $ | 959 | | | $ | 5,703 | | | $ | 420 | |
| Income tax expense | Income tax expense | $ | 188 | | | $ | 224 | | | $ | 78 | | | $ | 662 | | Income tax expense | $ | 311 | | | $ | 188 | | | $ | 1,321 | | | $ | 78 | |
| Effective income tax rate | Effective income tax rate | 19.6 | % | | 22.5 | % | | 18.6 | % | | 22.7 | % | Effective income tax rate | 22.2 | % | | 19.6 | % | | 23.2 | % | | 18.6 | % |
|
Income tax expense decreased $36increased $123 million and $584 million$1.2 billion for the three and nine months ended September 30, 2020,2021, respectively, as compared to the same periods in 2019. Income2020. The increase in income tax expense and thewas primarily driven by an increase in pretax income. The effective tax rate increased for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020, are lowerprimarily due to lower projected pretax income for the full year. The Company calculates its provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year to pretax income or loss excluding unusual or infrequently occurring discrete items. As the Company is projecting lower pretax income for the full year, the impact of certain favorable items, such as tax credits having a lower rate benefit on the effective tax rate is amplified, thereby resulting in a full-year effective tax rate that is lower than the historical annual effective tax rate. For the three and nine months ended September 30, 2020 and 2019, respectively, the effective tax rate was favorably impacted by the resolution of certain tax matters.higher pretax income.
The Company is subject to examination by the Internal Revenue Service ("IRS") and tax authorities in various state, local and foreign tax jurisdictions. The IRS is examining the Company's 2018 federal income tax filings. The Company regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions. The years 2011-2015 are currently under review by the IRS Office of Appeals. At this time, the potential change in unrecognized tax benefits is not expected to be significantimmaterial over the next 12 months. The Company believes that its reserves are sufficient to cover any tax, penalties and interest that would result from such examinations.
11. Earnings Per Share
The following table presents the calculation of basic and diluted earnings per share ("EPS") (dollars and shares in millions, except per share amounts): | | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Numerator | Numerator | | | | | | | | Numerator | | | | | | | |
| Net income | Net income | $ | 771 | | | $ | 770 | | | $ | 342 | | | $ | 2,249 | | Net income | $ | 1,091 | | | $ | 771 | | | $ | 4,382 | | | $ | 342 | |
| Preferred stock dividends | Preferred stock dividends | (15) | | | (15) | | | (31) | | | (31) | | Preferred stock dividends | (30) | | | (15) | | | (69) | | | (31) | |
| Net income available to common stockholders | Net income available to common stockholders | 756 | | | 755 | | | 311 | | | 2,218 | | Net income available to common stockholders | 1,061 | | | 756 | | | 4,313 | | | 311 | |
| Income allocated to participating securities | Income allocated to participating securities | (5) | | | (6) | | | (2) | | | (15) | | Income allocated to participating securities | (6) | | | (5) | | | (24) | | | (2) | |
| Net income allocated to common stockholders | Net income allocated to common stockholders | $ | 751 | | | $ | 749 | | | $ | 309 | | | $ | 2,203 | | Net income allocated to common stockholders | $ | 1,055 | | | $ | 751 | | | $ | 4,289 | | | $ | 309 | |
| Denominator | Denominator | | | | | | | | Denominator | | | | | | | |
| Weighted-average shares of common stock outstanding | Weighted-average shares of common stock outstanding | 306 | | | 317 | | | 307 | | | 323 | | Weighted-average shares of common stock outstanding | 298 | | | 306 | | | 303 | | | 307 | |
| Effect of dilutive common stock equivalents | Effect of dilutive common stock equivalents | 0 | | | 0 | | | 0 | | | 0 | | Effect of dilutive common stock equivalents | — | | | — | | | — | | | — | |
| Weighted-average shares of common stock outstanding and common stock equivalents | Weighted-average shares of common stock outstanding and common stock equivalents | 306 | | | 317 | | | 307 | | | 323 | | Weighted-average shares of common stock outstanding and common stock equivalents | 298 | | | 306 | | | 303 | | | 307 | |
| | Basic earnings per common share | Basic earnings per common share | $ | 2.45 | | | $ | 2.36 | | | $ | 1.00 | | | $ | 6.83 | | Basic earnings per common share | $ | 3.54 | | | $ | 2.45 | | | $ | 14.17 | | | $ | 1.00 | |
| Diluted earnings per common share | Diluted earnings per common share | $ | 2.45 | | | $ | 2.36 | | | $ | 1.00 | | | $ | 6.82 | | Diluted earnings per common share | $ | 3.54 | | | $ | 2.45 | | | $ | 14.16 | | | $ | 1.00 | |
|
Anti-dilutive securities were not material and had no impact on the computation of diluted EPS for the three or nine months ended September 30, 20202021 and 2019.2020.
12. Capital Adequacy
The CompanyDFS is subject to the capital adequacy guidelines of the Federal Reserve andReserve. Discover Bank, the Company's banking subsidiary, is subject to various regulatory capital requirements as administered by the FDIC. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit the Company's business activities and have a direct material effect on the financial positioncondition and operating results of the CompanyDFS and Discover Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the CompanyDFS and Discover Bank must meet specific risk-based capital guidelinesrequirements and leverage ratios that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidelines. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The CompanyDFS and Discover Bank are subject to regulatory and capital rules issued by the Federal Reserve and FDIC, respectively, under the Basel Committee's December 2010 framework ("Basel III rules"). The Basel III rules, which became effective for the Company January 2015, were subject to phase-in periods through the end of 2018, based on the Company being classified as a "Standardized Approach" entity. As of January 1, 2019,Under the Basel III rules, subject to transition have all been fully phased inDFS and Discover Bank are classified as "standardized approach" entities. Standardized approach entities are defined as United States banking organizations with the exception of certain transition provisions that were frozen pursuant to regulation issued in November 2017. Pursuant to a final rule issued in July 2019, the transition provisions that were previously frozen have been replaced with new permanent rules effective in April 2020. Additionally, onconsolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposures less than $10 billion.
On March 27, 2020, federal bank regulatory agencies announced an interim final rule, which has since been adopted as aand now final rule that allows banks that have implemented the CECL the optionaccounting model to delay for two years the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, the Company has elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the federal bank regulatory agencies final rule published on September 30, 2020. Pursuant to the final rule,rule; after that period of deferral, the estimated impact of CECL on regulatory capital will be phased in over a three-year periodthree years beginning in 2022. Accordingly, the Company's Common Equity Tier 1 ("CET1") capital ratios in 2020 and 2021 are higher than they otherwise would have been.
As of September 30, 2021 and December 31, 2020, the CompanyDFS and Discover Bank met all Basel III minimum capital ratio requirements to which they were subject. The CompanyDFS and Discover Bank also met the requirements to be considered "well-capitalized" under Regulation Y and prompt corrective action regulations, respectively, and thererules, respectively. There have been no conditions or events that management believes have changed the Company'sDFS' or Discover Bank's category. To be categorized as "well-capitalized," the CompanyDFS and Discover Bank must maintain minimum capital ratios as set forthoutlined in the table below.
The following table shows the actual capital amounts and ratios of the CompanyDFS and Discover Bank and comparisons of each to the regulatory minimum and "well-capitalized" requirements (dollars in millions):
| | | | Actual | | | Minimum Capital
Requirements | | | Capital Requirements
To Be Classified as
Well-Capitalized | | | Actual | | Minimum Capital
Requirements | | Capital Requirements
To Be Classified as
Well-Capitalized |
| | | Amount | | Ratio(1) | | Amount | | Ratio | | Amount(2) | | Ratio(2) | | Amount | | Ratio(1) | | Amount | | Ratio | | Amount(2) | | Ratio(2) |
| September 30, 2020 | | | | | | | | | | | | |
| September 30, 2021 | | September 30, 2021 | | | | | | | | | | | |
| Total capital (to risk-weighted assets) | Total capital (to risk-weighted assets) | | Total capital (to risk-weighted assets) | |
| Discover Financial Services | Discover Financial Services | $ | 14,046 | | | 15.2 | % | | $ | 7,389 | | | ≥8.0% | | $ | 9,236 | | | ≥10.0% | Discover Financial Services | $ | 16,924 | | | 18.5 | % | | $ | 7,309 | | | ≥8.0% | | $ | 9,136 | | | ≥10.0% |
| Discover Bank | Discover Bank | $ | 13,838 | | | 15.2 | % | | $ | 7,304 | | | ≥8.0% | | $ | 9,130 | | | ≥10.0% | Discover Bank | $ | 15,905 | | | 17.7 | % | | $ | 7,186 | | | ≥8.0% | | $ | 8,982 | | | ≥10.0% |
| Tier 1 capital (to risk-weighted assets) | Tier 1 capital (to risk-weighted assets) | | Tier 1 capital (to risk-weighted assets) | |
| Discover Financial Services | Discover Financial Services | $ | 12,325 | | | 13.3 | % | | $ | 5,541 | | | ≥6.0% | | $ | 5,541 | | | ≥6.0% | Discover Financial Services | $ | 15,235 | | | 16.7 | % | | $ | 5,482 | | | ≥6.0% | | $ | 5,482 | | | ≥6.0% |
| Discover Bank | Discover Bank | $ | 11,729 | | | 12.8 | % | | $ | 5,478 | | | ≥6.0% | | $ | 7,304 | | | ≥8.0% | Discover Bank | $ | 13,935 | | | 15.5 | % | | $ | 5,389 | | | ≥6.0% | | $ | 7,186 | | | ≥8.0% |
| Tier 1 capital (to average assets) | Tier 1 capital (to average assets) | | Tier 1 capital (to average assets) | |
| Discover Financial Services | Discover Financial Services | $ | 12,325 | | | 10.6 | % | | $ | 4,662 | | | ≥4.0% | | N/A | | N/A | Discover Financial Services | $ | 15,235 | | | 13.8 | % | | $ | 4,424 | | | ≥4.0% | | N/A | | N/A |
| Discover Bank | Discover Bank | $ | 11,729 | | | 10.2 | % | | $ | 4,614 | | | ≥4.0% | | $ | 5,767 | | | ≥5.0% | Discover Bank | $ | 13,935 | | | 12.8 | % | | $ | 4,353 | | | ≥4.0% | | $ | 5,441 | | | ≥5.0% |
| Common Equity Tier 1 (to risk-weighted assets) | Common Equity Tier 1 (to risk-weighted assets) | | Common Equity Tier 1 (to risk-weighted assets) | |
| Discover Financial Services | Discover Financial Services | $ | 11,269 | | | 12.2 | % | | $ | 4,156 | | | ≥4.5% | | N/A | | N/A | Discover Financial Services | $ | 14,179 | | | 15.5 | % | | $ | 4,111 | | | ≥4.5% | | N/A | | N/A |
| Discover Bank | Discover Bank | $ | 11,729 | | | 12.8 | % | | $ | 4,109 | | | ≥4.5% | | $ | 5,935 | | | ≥6.5% | Discover Bank | $ | 13,935 | | | 15.5 | % | | $ | 4,042 | | | ≥4.5% | | $ | 5,839 | | | ≥6.5% |
| | December 31, 2019 | | |
| December 31, 2020 | | December 31, 2020 | |
| Total capital (to risk-weighted assets) | Total capital (to risk-weighted assets) | | Total capital (to risk-weighted assets) | |
| Discover Financial Services | Discover Financial Services | $ | 13,250 | | | 13.5 | % | | $ | 7,860 | | | ≥8.0% | | $ | 9,825 | | | ≥10.0% | Discover Financial Services | $ | 14,711 | | | 16.1 | % | | $ | 7,298 | | | ≥8.0% | | $ | 9,123 | | | ≥10.0% |
| Discover Bank | Discover Bank | $ | 13,441 | | | 13.8 | % | | $ | 7,776 | | | ≥8.0% | | $ | 9,720 | | | ≥10.0% | Discover Bank | $ | 14,507 | | | 16.1 | % | | $ | 7,214 | | | ≥8.0% | | $ | 9,018 | | | ≥10.0% |
| Tier 1 capital (to risk-weighted assets) | Tier 1 capital (to risk-weighted assets) | | Tier 1 capital (to risk-weighted assets) | |
| Discover Financial Services | Discover Financial Services | $ | 11,595 | | | 11.8 | % | | $ | 5,895 | | | ≥6.0% | | $ | 5,895 | | | ≥6.0% | Discover Financial Services | $ | 13,006 | | | 14.3 | % | | $ | 5,474 | | | ≥6.0% | | $ | 5,474 | | | ≥6.0% |
| Discover Bank | Discover Bank | $ | 11,203 | | | 11.5 | % | | $ | 5,832 | | | ≥6.0% | | $ | 7,776 | | | ≥8.0% | Discover Bank | $ | 12,415 | | | 13.8 | % | | $ | 5,411 | | | ≥6.0% | | $ | 7,214 | | | ≥8.0% |
| Tier 1 capital (to average assets) | Tier 1 capital (to average assets) | | Tier 1 capital (to average assets) | |
| Discover Financial Services | Discover Financial Services | $ | 11,595 | | | 10.3 | % | | $ | 4,482 | | | ≥4.0% | | N/A | | N/A | Discover Financial Services | $ | 13,006 | | | 10.9 | % | | $ | 4,757 | | | ≥4.0% | | N/A | | N/A |
| Discover Bank | Discover Bank | $ | 11,203 | | | 10.1 | % | | $ | 4,435 | | | ≥4.0% | | $ | 5,544 | | | ≥5.0% | Discover Bank | $ | 12,415 | | | 10.5 | % | | $ | 4,709 | | | ≥4.0% | | $ | 5,886 | | | ≥5.0% |
| Common Equity Tier 1 (to risk-weighted assets) | Common Equity Tier 1 (to risk-weighted assets) | | Common Equity Tier 1 (to risk-weighted assets) | |
| Discover Financial Services | Discover Financial Services | $ | 11,032 | | | 11.2 | % | | $ | 4,421 | | | ≥4.5% | | N/A | | N/A | Discover Financial Services | $ | 11,950 | | | 13.1 | % | | $ | 4,105 | | | ≥4.5% | | N/A | | N/A |
| Discover Bank | Discover Bank | $ | 11,203 | | | 11.5 | % | | $ | 4,374 | | | ≥4.5% | | $ | 6,318 | | | ≥6.5% | Discover Bank | $ | 12,415 | | | 13.8 | % | | $ | 4,058 | | | ≥4.5% | | $ | 5,862 | | | ≥6.5% |
|
(1)Capital ratios are calculated based on the Basel III Standardized Approachstandardized approach rules, subject to applicable transition provisions, including CECL transition provisions.
(2)The Basel III rules do not establish well-capitalized thresholds for these measures for bank holding companies. Existing well-capitalized thresholds established in the Federal Reserve's Regulation Y have been included where available.
13. Commitments, Contingencies and Guarantees
In the normal course of business, the Company enters into a number of off-balance sheet commitments, transactions and obligations under guarantee arrangements that expose the Company to varying degrees of risk. The Company's commitments, contingencies and guarantee relationships are described below.
Commitments
Unused Credit Arrangements
At September 30, 2020,2021, the Company had unused credit arrangements for loans of approximately $215.0$220.1 billion. Such arrangements arise primarily from agreements with customers for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions in the related agreements. These arrangements,The Company can terminate substantially all of which the Company can terminatethese arrangements at any time and whichtherefore the arrangements do not necessarily represent future cash requirements,requirements. The arrangements are periodically reviewed based on account usage, customer creditworthiness and loan qualification. As the Company’s credit card loans are unconditionally cancellable, no liability for expected credit losses is required for unused lines of credit. For all other loans, the Company records a liability for expected credit losses for unfunded
commitments, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition.
Contingencies
See Note 14: Litigation and Regulatory Matters for a description of potential liability arising from pending litigation or regulatory proceedings involving the Company.
Guarantees
The Company has obligations under certain guarantee arrangements, including contracts, indemnification agreements and representations and warranties, which contingently require the Company to make payments to the guaranteed party based on changes in an underlying asset, liability or equity security of a guaranteed party, rate or index. Also included as guarantees are contracts that contingently require the Company to make payments to a guaranteed party based on another entity's failure to perform under an agreement. The Company's use of guarantees is disclosed below by type of guarantee.
Securitizations Representations and Warranties
As part of the Company's financing activities, the Company provides representations and warranties that certain assets pledged as collateral in secured borrowing arrangements conform to specified guidelines. DueThe Company performs due diligence is performed by the Company, which is intended to ensure that asset guideline qualifications are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company maymight be required to replace, repurchase or sell such assets. InFor example, in its credit card securitization activities, the Company would replace nonconforming receivables through the allocation ofby allocating excess seller's interest or from additional transfers from the unrestricted pool of receivables. If the Company could not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors' interests would be triggered. In its private student loan securitizations, the Company would generally repurchase the loans from the trust at the outstanding principal amount plus interest.
The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of third-party investor interests in credit card asset-backed securities and the principal amount of any private student loan secured borrowings, plus any unpaid interest for the corresponding secured borrowings. The Company has recorded substantially all of the maximum potential amount of future payments in long-term borrowings on the Company's 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.
Counterparty Settlement Guarantees
Diners Club and DFS Services LLC (on behalf of PULSE) have various counterparty exposures, which are listed below:
•Merchant Guarantee. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants.
•ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.
•Global Network Alliance Guarantee. Discover Network, Diners Club and PULSE have entered into contractual relationships with certain international payment networks in which DFS Services LLC retains the counterparty exposure if a network fails to fulfill its settlement obligation.
The maximum potential amount of future payments related to such contingent obligations is dependent upondepends on the transaction volume processed between the time a potential counterparty defaults on its settlement and the time at which the Company disables the settlement of any further transactions for the defaulting party. The Company has some contractual remedies to offset these counterparty settlement exposures (such as letters of credit or pledged deposits), however,. However, there is no limitation on the maximum amount the Company may be liable to pay.
The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether particular counterparties will fail to meet their settlement obligations. In the event thatIf all licensees and/or issuers were to become
unable to settle their transactions, the Company estimates its maximum potential counterparty exposures to these settlement guarantees would be approximately $50$80 million as of September 30, 2020.2021.
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, 2020,2021, the Company had not recorded any material contingent liability in the condensed consolidated financial statements for these counterparty exposures and managementexposures. Management believes that the probability of any payments under these arrangements is low.
Discover Network Merchant Chargeback Guarantees
The Company operates the Discover Network, issues payment cards and permits third parties to issue payment cards. The Company is contingently liable for certain transactions processed on the Discover Network in the event of a dispute between the payment card customer and a merchant. The contingent liability arises if the disputed transaction involves a merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in the customer's favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, whowhich in turn credits its customer's account. The Discover Network will then charge back the disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by the applicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect the amount subject to dispute from the merchant or merchant acquirer (e.g., in the event of merchant default or dissolution or after expiration of the time period for chargebacks in the applicable agreement), the Discover Network will bear the loss for the amount credited or refunded to the customer. In most instances, a loss by the Discover Network is unlikely to arise in connection with payments on card transactions because most products or services are delivered when purchased and merchants issue credits are issued by merchants on returned items in a timely fashion, thus minimizing the likelihood of cardholder disputes with respect to amounts paid by the Discover Network. However, where the product or service is not scheduled to be provided to the customer until a later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases.Losses related to merchant chargebacks were not material for the three and nine months ended September 30, 20202021 and 2019.2020.
The maximum potential amount of obligations of the Discover Network arising as a result offrom such contingent obligations is estimated to be the portion of the total Discover Network transaction volume processed to date for which timely and valid disputes may be raised under applicable law and relevant issuer and customer agreements. There is no limitation on the maximum amount the Company may be liable to pay to issuers. However, the Company believes that such amount is not representative of the Company's actual potential loss exposure based on the Company's historical experience. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes may include or result in disputed transactions.
The following table summarizes certain information regarding merchant chargeback guarantees (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
Aggregate sales transaction volume(1) | $ | 46,128 | | | $ | 44,332 | | | $ | 125,214 | | | $ | 125,922 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Aggregate sales transaction volume(1) | $ | 58,107 | | | $ | 46,128 | | | $ | 160,717 | | | $ | 125,214 | |
| | | | | | | |
(1)Represents transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume.
The Company did not record any material contingent liability in the condensed consolidated financial statements for merchant chargeback guarantees as of September 30, 20202021 or December 31, 2019. The2020.The Company mitigates the risk of potential loss exposure by withholding settlement from merchants, obtaining third-party guarantees, or obtaining escrow deposits or letters of credit from certain merchant acquirers or merchants that are considered a higher risk due to various factors such as time delays in the delivery of products or services. As of September 30, 20202021 and December 31, 2019,2020, the Company had escrow deposits and settlement withholdings of $19$15 million and $8$16 million, respectively, which are recorded in interest-bearing deposit accounts and accrued expenses and other liabilities on the Company's condensed consolidated statements of financial condition.
14. Litigation and Regulatory Matters
In the normal course of business, from time to time, the Company has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The litigation process is not predictable and can lead to unexpected results. The Company contests liability and/or the amount of damages as appropriate in each pending matter.
The Company has historically offered its customers an arbitration clause in its customer agreements. The arbitration clause allows the Company and its customers to quickly and economically resolve disputes. Additionally, the arbitration clause has in some instances limited the costs of, and the Company's exposure to, litigation. Future legal and regulatory challenges and prohibitions may cause the Company to discontinue its offering and use of such clauses. From time to time, the Company is involved in legal actions challenging its arbitration clause. Bills may be periodically introduced in Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses.
The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company's business including, among other matters, consumer regulatory, accounting, tax and other operational matters, some of whichmatters. The investigations and proceedings may result in significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief, whichrelief. These outcomes could materially impact the Company's 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. Certain subsidiaries of the Company are subject to a consent order with the Consumer Financial Protection Bureau ("CFPB") regarding certain private student loan servicing practices, as described below. Pursuant to powers granted under federal banking laws, regulatory agencies have broad and sweeping discretion and may assess civil money penalties, require changes to certain business practices or require customer restitution at any time.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matters present loss contingencies that are both probable and estimable. Litigation and regulatory settlement related expense was not materialsettlement-related expenses were $51 million and $54 million for the three and nine months ended September 30, 20202021, respectively. Litigation and 2019.regulatory settlement-related expenses were immaterial for the three and nine months ended September 30, 2020.
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 $220 million.$250 million as of September 30, 2021. This estimated range of reasonably possible losses is based uponon currently available information for those proceedings in which the Company is involved and takes into accountconsiders the Company's best estimate of such losses for those matters for which an estimate can be made. It does not represent the Company's maximum potential loss exposure. Various aspects of the legal proceedings underlying the estimated range will change from time to time and actual results may vary significantly from the estimate.
The Company's estimated range noted above involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years and, in some cases, a wide range of business activities), unspecified damages and/or the novelty of the legal issues presented. The outcome of pending matters could adversely affect the Company's reputation and be material to the Company's condensed consolidated financial condition, operating results and cash flows for a particular future period, depending on, among other things, the level of the Company's income for such period.
OnIn July 22, 2015, the Company announced that its subsidiaries, Discover Bank, The Student Loan Corporation and Discover Products Inc. (the "Discover Subsidiaries"), agreed to a consent order with the CFPB resolving the agency's investigation with respect to certain private student loan servicing practices.practices (the “2015 Order”). The order required2015 Order expired in July 2020. On December 22, 2020, the Discover Subsidiaries agreed to providea consent order (the “2020 Order”) with the CFPB resolving the agency’s investigation into Discover Bank’s compliance with the 2015 Order. In connection with the 2020 Order, Discover is required to implement a redress of approximately $16and compliance plan and must pay at least $10 million in consumer redress to consumers who may have been affected by the activities described in the order related to certain collection calls, overstatements of minimum payment due amounts in billing statementsharmed and provision of interest paid information to consumers and provide regulatory disclosures with respect to loans acquired in default. In addition, the Discover Subsidiaries were required to pay a $2.5$25 million civil money penalty to the CFPB. As required by the consent order, on October 19, 2015, the Discover Subsidiaries submitted to the CFPB a redress plan and a compliance plan designed to ensure that the Discover Subsidiaries provide redress and otherwise comply with the terms of the order. The CFPB is currently investigating Discover Bank's compliance with the order and certain student loan servicing practices. Discover Bank is cooperating with the CFPB in connection with the investigation. Discover Bank is enhancing the
compliance plan submitted to the CFPB in 2015. The investigation could lead to a supervisory action, which may result in legal fees, penalties, fines and remediation expenses, and could require Discover Bank to change certain business practices.
On March 8, 2016, a class actionclass-action lawsuit was filed against the Company, other credit card networks, other issuing banks and EMVCo in the U.S.United States District Court for the Northern District of California (B&R Supermarket, Inc., d/b/a
Milam's Market, et al. v. Visa, Inc. et al.) alleging a conspiracy by defendants to shift fraud liability to merchants with the migration to the EMV security standard and chip technology. PlaintiffsThe plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys' fees, costs and injunctive relief. In May 2017, the Court entered an order transferring the entire action to a federal court in New York that is presiding over certain related claims that are pending in the actions consolidated as MDL 1720. On August 28, 2020, the Court granted Plaintiff'sthe plaintiffs' Motion to Certify a Class. DefendantsThe defendants appealed the ruling, which was denied on September 11, 2020. DiscoverJanuary 20, 2021. The Company filed a Letter Motion to Compel Arbitration, on which briefing closed in March 2021. On September 29, 2020.27, 2021, the court ruled the motion was premature and stated it would not issue a ruling until after the issuance of class notices. The court set the deadline for expert discovery on February 22, 2022. The Company is not in a position at this time to assess the likely outcome or its exposure, if any, with respect to this matter, butmatter. However, the Company will seek to defend itself vigorously defend against all claims asserted by the plaintiffs.
15. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement, provides a three-level hierarchy for classifying fair value measurements of financial instruments which is based on whether the inputs to the valuation techniques used to measure the fair value of each financial instrument are observable or unobservable. It also requires certain disclosures about those measurements. The three-level valuation hierarchy is as follows:
•Level 1: Fair values determined by Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
•Level 2: Fair values determined by Level 2 inputs are those that utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive markets, quoted prices for the identical assets in an inactive market and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company evaluates factors such as the frequency of transactions, the size of the bid-ask spread and the significance of adjustments made when considering transactions involving similar assets or liabilities to assess the relevance of those observed prices. If relevant and observable prices are available, the fair values of the related assets or liabilities would be classified as Level 2.
•Level 3: Fair values determined by Level 3 inputs are those based on unobservable inputs and include situations where there is little, if any, market activity for the asset or liability being valued. In instances in whichwhere the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy withinin which the fair value measurement in its entirety ismeasurements classified is based on the lowest level input that is significant to the fair value measurement in its entirety. TheAccordingly, the Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.
The determination ofCompany evaluates the classification of its financial instruments within the fair value hierarchy is performed at least quarterly by the Company. For transfers in and out of the levels of the fair value hierarchy, the Company discloses theeach fair value measurement based onwithin the value immediately preceding the transfer.hierarchy at least quarterly.
The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and involves consideration of factors specific to the asset or liability. Furthermore, certain techniques used to measure fair value involve some degree of judgment and, as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are as follows (dollars in millions): | | | Quoted Price in Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total | | 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, 2020 | | | | | | | | |
| Balance at September 30, 2021 | | Balance at September 30, 2021 | | | | | | | |
| Assets | Assets | | Assets | |
| Fair value - OCI | Fair value - OCI | | Fair value - OCI | |
| U.S. Treasury securities | $ | 9,548 | | | $ | 0 | | | $ | 0 | | | $ | 9,548 | | |
| United States Treasury and U.S. GSE securities | | United States Treasury and U.S. GSE securities | $ | 7,571 | | | $ | 9 | | | $ | — | | | $ | 7,580 | |
| Residential mortgage-backed securities - Agency | Residential mortgage-backed securities - Agency | 0 | | | 11,025 | | | 0 | | | 11,025 | | Residential mortgage-backed securities - Agency | — | | | 211 | | | — | | | 211 | |
| Available-for-sale investment securities | Available-for-sale investment securities | $ | 9,548 | | | $ | 11,025 | | | $ | 0 | | | $ | 20,573 | | Available-for-sale investment securities | $ | 7,571 | | | $ | 220 | | | $ | — | | | $ | 7,791 | |
| | | Fair value - Net income | | Fair value - Net income | |
| Marketable equity securities | | Marketable equity securities | $ | 600 | | | $ | — | | | $ | — | | | $ | 600 | |
Derivative financial instruments - fair value hedges(1) | | Derivative financial instruments - fair value hedges(1) | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
| | | Liabilities | | |
| | Balance at December 31, 2020 | | Balance at December 31, 2020 | |
| Assets | | Assets | |
| Fair value - OCI | Fair value - OCI | | Fair value - OCI | |
Derivative financial instruments - cash flow hedges(1) | $ | 0 | | | $ | 1 | | | $ | 0 | | | $ | 1 | | |
| United States Treasury securities | | United States Treasury securities | $ | 9,354 | | | $ | — | | | $ | — | | | $ | 9,354 | |
| Residential mortgage-backed securities - Agency | | Residential mortgage-backed securities - Agency | — | | | 300 | | | — | | | 300 | |
| Available-for-sale investment securities | | Available-for-sale investment securities | $ | 9,354 | | | $ | 300 | | | $ | — | | | $ | 9,654 | |
| | | | Fair value - Net income | Fair value - Net income | | Fair value - Net income | |
| Derivative financial instruments - fair value hedges(1) | Derivative financial instruments - fair value hedges(1) | $ | 0 | | | $ | 1 | | | $ | 0 | | | $ | 1 | | Derivative financial instruments - fair value hedges(1) | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
| | | Balance at December 31, 2019 | | |
| Assets | | |
| Fair value - OCI | | |
| U.S. Treasury securities | $ | 9,906 | | | $ | 0 | | | $ | 0 | | | $ | 9,906 | | |
| Residential mortgage-backed securities - Agency | 0 | | | 417 | | | 0 | | | 417 | | |
| Available-for-sale investment securities | $ | 9,906 | | | $ | 417 | | | $ | 0 | | | $ | 10,323 | | |
| | | Liabilities | | |
| Fair value - OCI | | |
Derivative financial instruments - cash flow hedges(1) | $ | 0 | | | $ | 2 | | | $ | 0 | | | $ | 2 | | |
| | Fair value - Net income | | |
Derivative financial instruments - fair value hedges(1) | $ | 0 | | | $ | 4 | | | $ | 0 | | | $ | 4 | | |
Derivative financial instruments - foreign exchange forward contracts(1) | $ | 0 | | | $ | 1 | | | $ | 0 | | | $ | 1 | | |
| |
(1)Derivative instrument carrying values in an asset or liability position are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.
Available-for-Sale Investment Securities
Investment securities classified as available-for-sale consist of United States Treasury and U.S. TreasuryGSE securities and residential mortgage-backed securities.RMBS. The fair value estimates of investment securities classified as Level 1, consisting of U.S.United States Treasury securities, are determined based on quoted market prices for the same securities. The Company classifies residential mortgage-backedthese U.S. GSE securities and RMBS as Level 2, the fair value estimates of which are based on the best information available. This data may consist of observed market prices for similar securities, broker quotes or discounted cash flow models that incorporate assumptions such as benchmark yields, issuer spreads, prepayment speeds, credit ratings and losses, the priority of which may vary based on the availability of information.
The Company validates the fair value estimates provided by pricing services primarily by comparisoncomparing to valuations obtained through other pricing sources. The Company evaluates pricing variances among 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, 2021, amounts reported in RMBS reflect U.S. government agency and U.S. GSE obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac with an aggregate par value of $201 million, a weighted-average coupon of 3.24% and a weighted-average remaining maturity of two 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.
At September 30, 2020, amounts reported in residential mortgage-backed securities reflect obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae with a par value of $309 million, a weighted-average coupon of 2.81% and a weighted-average remaining maturity of three years, as well as the $10.7 billion of RMBS recorded as part of the securities lending transaction disclosed in Note 2: Investments.
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 among 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 OIS to the Secured Overnight Financing Rate (“SOFR”) 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. 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 the assets is determined to be impaired.tested for impairment. The Company had $59recognized $92 million of impairments related to intangiblethese assets during the nine months ended September 30, 2020.2021. No impairments were recognized during the three months ended September 30, 2021. See Note 5: Intangible Assets for more information on the impact of the COVID-19 pandemic on intangible assets. NaN impairments of goodwill were recognized during the three and nine months ended September 30, 2020.
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):
| | Balance at September 30, 2020 | 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, 2021 | | Balance at September 30, 2021 | Quoted Prices in Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) | | Total | | Carrying
Value |
| Assets | Assets | | | | | | | | | | Assets | | | | | | | | | |
| Amortized cost | Amortized cost | | Amortized cost | |
| Residential mortgage-backed securities - Agency | Residential mortgage-backed securities - Agency | $ | 0 | | | $ | 290 | | | $ | 0 | | | $ | 290 | | | $ | 281 | | Residential mortgage-backed securities - Agency | $ | — | | | $ | 227 | | | $ | — | | | $ | 227 | | | $ | 223 | |
| Held-to-maturity investment securities | Held-to-maturity investment securities | $ | 0 | | | $ | 290 | | | $ | 0 | | | $ | 290 | | | $ | 281 | | Held-to-maturity investment securities | $ | — | | | $ | 227 | | | $ | — | | | $ | 227 | | | $ | 223 | |
| | Net loan receivables | Net loan receivables | $ | 0 | | | $ | 0 | | | $ | 89,767 | | | $ | 89,767 | | | $ | 80,434 | | Net loan receivables | $ | — | | | $ | — | | | $ | 90,019 | | | $ | 90,019 | | | $ | 82,681 | |
| Carrying value approximates fair value(1) | Carrying value approximates fair value(1) | | Carrying value approximates fair value(1) | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 9,513 | | | $ | 0 | | | $ | 0 | | | $ | 9,513 | | | $ | 9,513 | | Cash and cash equivalents | $ | 12,716 | | | $ | — | | | $ | — | | | $ | 12,716 | | | $ | 12,716 | |
| Restricted cash | Restricted cash | $ | 576 | | | $ | 0 | | | $ | 0 | | | $ | 576 | | | $ | 576 | | Restricted cash | $ | 32 | | | $ | — | | | $ | — | | | $ | 32 | | | $ | 32 | |
| Other short-term investments | $ | 8,048 | | | $ | 0 | | | $ | 0 | | | $ | 8,048 | | | $ | 8,048 | | |
| Accrued interest receivables(2) | Accrued interest receivables(2) | $ | 0 | | | $ | 1,008 | | | $ | 0 | | | $ | 1,008 | | | $ | 1,008 | | Accrued interest receivables(2) | $ | — | | | $ | 968 | | | $ | — | | | $ | 968 | | | $ | 968 | |
| | Liabilities | Liabilities | | Liabilities | |
| Amortized cost | Amortized cost | | Amortized cost | |
Time deposits(3) | Time deposits(3) | $ | 0 | | | $ | 31,739 | | | $ | 0 | | | $ | 31,739 | | | $ | 30,842 | | Time deposits(3) | $ | — | | | $ | 22,300 | | | $ | — | | | $ | 22,300 | | | $ | 21,831 | |
| Short-term borrowings | $ | 0 | | | $ | 10,700 | | | $ | 0 | | | $ | 10,700 | | | $ | 10,700 | | |
| | | Long-term borrowings - owed to securitization investors | Long-term borrowings - owed to securitization investors | $ | 0 | | | $ | 11,378 | | | $ | 136 | | | $ | 11,514 | | | $ | 11,425 | | Long-term borrowings - owed to securitization investors | $ | — | | | $ | 9,014 | | | $ | 110 | | | $ | 9,124 | | | $ | 9,064 | |
| Other long-term borrowings | Other long-term borrowings | 0 | | | 11,278 | | | 0 | | | 11,278 | | | 10,416 | | Other long-term borrowings | — | | | 10,204 | | | — | | | 10,204 | | | 9,452 | |
| Long-term borrowings | Long-term borrowings | $ | 0 | | | $ | 22,656 | | | $ | 136 | | | $ | 22,792 | | | $ | 21,841 | | Long-term borrowings | $ | — | | | $ | 19,218 | | | $ | 110 | | | $ | 19,328 | | | $ | 18,516 | |
| Carrying value approximates fair value(1) | Carrying value approximates fair value(1) | | Carrying value approximates fair value(1) | |
Accrued interest payables(2) | Accrued interest payables(2) | $ | 0 | | | $ | 170 | | | $ | 0 | | | $ | 170 | | | $ | 170 | | Accrued interest payables(2) | $ | — | | | $ | 124 | | | $ | — | | | $ | 124 | | | $ | 124 | |
| (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. | | |
(3)Excludes deposits without contractually defined maturities for all periods presented. | | |
| |
| | Balance at December 31, 2019 | Quoted Prices in Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) | | Total | | Carrying
Value | |
| Balance at December 31, 2020 | | Balance at December 31, 2020 | 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 | Assets | | | | | | | | | | Assets | | | | | | | | | |
| Amortized cost | Amortized cost | | Amortized cost | |
| Residential mortgage-backed securities - Agency | Residential mortgage-backed securities - Agency | $ | 0 | | | $ | 274 | | | $ | 0 | | | $ | 274 | | | $ | 272 | | Residential mortgage-backed securities - Agency | $ | — | | | $ | 269 | | | $ | — | | | $ | 269 | | | $ | 260 | |
| Held-to-maturity investment securities | Held-to-maturity investment securities | $ | 0 | | | $ | 274 | | | $ | 0 | | | $ | 274 | | | $ | 272 | | Held-to-maturity investment securities | $ | — | | | $ | 269 | | | $ | — | | | $ | 269 | | | $ | 260 | |
| | Net loan receivables | Net loan receivables | $ | 0 | | | $ | 0 | | | $ | 96,094 | | | $ | 96,094 | | | $ | 92,511 | | Net loan receivables | $ | — | | | $ | — | | | $ | 91,200 | | | $ | 91,200 | | | $ | 82,223 | |
| Carrying value approximates fair value(1) | Carrying value approximates fair value(1) | | Carrying value approximates fair value(1) | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 6,924 | | | $ | 0 | | | $ | 0 | | | $ | 6,924 | | | $ | 6,924 | | Cash and cash equivalents | $ | 13,564 | | | $ | — | | | $ | — | | | $ | 13,564 | | | $ | 13,564 | |
| Restricted cash | Restricted cash | $ | 40 | | | $ | 0 | | | $ | 0 | | | $ | 40 | | | $ | 40 | | Restricted cash | $ | 25 | | | $ | — | | | $ | — | | | $ | 25 | | | $ | 25 | |
| Other short-term investments | | Other short-term investments | $ | 2,200 | | | $ | — | | | $ | — | | | $ | 2,200 | | | $ | 2,200 | |
Accrued interest receivables(2) | Accrued interest receivables(2) | $ | 0 | | | $ | 1,044 | | | $ | 0 | | | $ | 1,044 | | | $ | 1,044 | | Accrued interest receivables(2) | $ | — | | | $ | 992 | | | $ | — | | | $ | 992 | | | $ | 992 | |
| | Liabilities | Liabilities | | Liabilities | |
| Amortized cost | Amortized cost | | Amortized cost | |
Time deposits(3) | Time deposits(3) | $ | 0 | | | $ | 34,910 | | | $ | 0 | | | $ | 34,910 | | | $ | 34,381 | | Time deposits(3) | $ | — | | | $ | 29,090 | | | $ | — | | | $ | 29,090 | | | $ | 28,269 | |
| | | Long-term borrowings - owed to securitization investors | Long-term borrowings - owed to securitization investors | $ | 0 | | | $ | 14,211 | | | $ | 172 | | | $ | 14,383 | | | $ | 14,284 | | Long-term borrowings - owed to securitization investors | $ | — | | | $ | 10,794 | | | $ | 130 | | | $ | 10,924 | | | $ | 10,840 | |
| Other long-term borrowings | Other long-term borrowings | 0 | | | 12,189 | | | 0 | | | 12,189 | | | 11,417 | | Other long-term borrowings | — | | | 11,418 | | | — | | | 11,418 | | | 10,401 | |
| Long-term borrowings | Long-term borrowings | $ | 0 | | | $ | 26,400 | | | $ | 172 | | | $ | 26,572 | | | $ | 25,701 | | Long-term borrowings | $ | — | | | $ | 22,212 | | | $ | 130 | | | $ | 22,342 | | | $ | 21,241 | |
| Carrying value approximates fair value(1) | Carrying value approximates fair value(1) | | Carrying value approximates fair value(1) | |
Accrued interest payables(2) | Accrued interest payables(2) | $ | 0 | | | $ | 283 | | | $ | 0 | | | $ | 283 | | | $ | 283 | | Accrued interest payables(2) | $ | — | | | $ | 233 | | | $ | — | | | $ | 233 | | | $ | 233 | |
|
(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.
(3)Excludes deposits without contractually defined maturities for all periods presented.
16. Derivatives and Hedging Activities
The Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or speculative purposes. Certain derivatives used to manage the Company's exposure to foreign currency are not designated as hedges and do not qualify for hedge accounting.
Derivatives may give rise to counterparty credit risk, which generally is addressed through collateral arrangements as described under the sub-heading "— Collateral Requirements and Credit-Risk Related Contingency Features." The Company enters into derivative transactions with established dealers that meet minimum credit criteria established by the Company. All counterparties must be pre-approved prior tobefore engaging in any transaction with the Company. Counterparties are monitored on a regular basis by theThe Company regularly monitors counterparties to ensure compliance with the Company's risk policies and limits. In determining the counterparty credit risk valuation adjustment for the fair values of derivatives, if any, the Company considers collateral and legally enforceable master netting agreements that mitigate credit exposure to related counterparties.
All derivatives are recorded in other assets at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values. See Note 15: Fair Value Measurements for a description of the valuation methodologies ofused for derivatives. Cash collateral amounts associated with derivative positions that are cleared through an exchange are legally characterized as settlement of the derivative positions. Such collateral amounts are reflected as offsets to the associated derivatives balances recorded in other assets or in accrued expenses and other liabilities. Other cash collateral posted and held balances are recorded in other assets and deposits, respectively, in the 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.
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 changes in interest rates related to future cash flows resulting from interest received on interest-earning assets and interest payments on credit card securitized debt and deposits. The Company's outstanding cash flow hedge is for an initial maximum period of seven years for deposits. The derivatives are designated as hedges of the risk of changes in cash flows on the Company's Federal Funds rate-basedfunding instruments. These interest payments andrate swaps qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"). As of September 30, 2021 and December 31, 2020, the Company's outstanding cash flow hedges related only to interest receipts from credit card receivables and had an initial maximum period of two years.
The change in the fair value of derivatives designated as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows affect earnings. Amounts reported in AOCI related to derivatives at September 30, 2020,2021, will be reclassified to interest expenseincome as interest paymentsreceipts are accrued on certain of the Company's floating-rate securitized debt and deposits.then outstanding credit card receivables. During the next 12 months, the Company estimates it will reclassify $4$3 million of pretax expense to interest expenseearnings primarily related to its derivatives1 terminated derivative formerly designated as a cash flow hedges.hedge.
Fair Value Hedges
The Company is exposed to changes in the fair value of its fixed-rate debt obligations due to changes in interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value of certain fixed-rate long-term borrowings, including securitized debt and bank notes, attributable to changes in LIBOR or OIS rate, which are benchmark interest rates as 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 the derivatives and (ii) the hedged long-term borrowings relating to the risk being hedged are recorded in interest expense. The changes generally provide substantial offset to one another.another, with any difference recognized in interest expense.
Derivatives Not Designated as Hedges
Foreign Exchange Forward Contracts
The Company has foreign exchange forward contracts that are economic hedges and are not designated as accounting hedges. The Company enters into foreign exchange forward contracts to manage foreign currency risk. Changes in the fair value of these contracts are recorded in other income.
Derivatives Cleared Through an Exchange
Cash variation margin payments on derivatives cleared through an exchange are legally considered settlement payments and are accounted for with corresponding derivative positions as one unit of account and not presented separately as collateral. With settlement payments on derivative positions cleared through this exchange reflected as offsets to the associated derivative asset and liability balances, the fair values of derivative instruments and collateral balances shown are generally reduced.
Derivatives Activity
The following table summarizes the fair value (including accrued interest) and outstanding notional amounts of derivative instruments and related collateral balances (dollars in millions): | | | | September 30, 2020 | | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 |
| | | Notional
Amount | | Number of Outstanding Derivative Contracts | | Derivative Assets | | Derivative Liabilities | | Notional
Amount | | Derivative Assets | | Derivative Liabilities | | Notional
Amount | | Number of Outstanding Derivative Contracts | | Derivative Assets | | Derivative Liabilities | | Notional
Amount | | Derivative Assets | | Derivative Liabilities |
| Derivatives designated as hedges | Derivatives designated as hedges | | | | | | | | | | | | | | Derivatives designated as hedges | | | | | | | | | | | | | |
| Interest rate swaps—cash flow hedge | Interest rate swaps—cash flow hedge | $ | 300 | | | 1 | | | $ | 0 | | | $ | 1 | | | $ | 900 | | | $ | 0 | | | $ | 2 | | Interest rate swaps—cash flow hedge | $ | 250 | | | 1 | | | $ | — | | | $ | — | | | $ | 250 | | | $ | — | | | $ | — | |
| Interest rate swaps—fair value hedge | Interest rate swaps—fair value hedge | $ | 12,175 | | | 16 | | | 0 | | | 1 | | | $ | 14,275 | | | 0 | | | 4 | | Interest rate swaps—fair value hedge | $ | 8,275 | | | 10 | | | 1 | | | — | | | $ | 11,625 | | | 1 | | | — | |
| Derivatives not designated as hedges | Derivatives not designated as hedges | | Derivatives not designated as hedges | |
Foreign exchange forward contracts(1) | Foreign exchange forward contracts(1) | $ | 23 | | | 6 | | | 0 | | | 0 | | | $ | 38 | | | 0 | | | 1 | | Foreign exchange forward contracts(1) | $ | 26 | | | 6 | | | — | | | — | | | $ | 24 | | | — | | | — | |
| Interest rate swaps | | Interest rate swaps | $ | 5 | | | 1 | | | — | | | — | | | $ | — | | | — | | | — | |
Total gross derivative assets/liabilities(2) | Total gross derivative assets/liabilities(2) | | 0 | | | 2 | | | 0 | | | 7 | | Total gross derivative assets/liabilities(2) | | 1 | | | — | | | 1 | | | — | |
| Less: collateral held/posted(3) | Less: collateral held/posted(3) | | 0 | | | (2) | | | 0 | | | (7) | | Less: collateral held/posted(3) | | — | | | — | | | — | | | — | |
| Total net derivative assets/liabilities | Total net derivative assets/liabilities | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | Total net derivative assets/liabilities | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | |
|
(1)The foreign exchange forward contracts have notional amounts of EUR 6 million, GBP 6 million, SGD 1 million and INR 596788 million as of September 30, 2020,2021, and notional amounts of EUR 96 million, GBP 146 million, SGD 1 million and INR 596 million as of December 31, 2019.2020.
(2)In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At September 30, 2020,2021, the Company had 0no outstanding contracts. At December 31, 2019,2020, the Company had 21 outstanding contractscontract with a total notional amount of $42$27 million and an immaterial fair value.
(3)Collateral amounts, which consist of both cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | | | December 31, 2019 | | |
| Carrying Amount of Hedged Assets/Liabilities | | Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities | | Carrying Amount of Hedged Assets/Liabilities | | Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities |
| Long-term borrowings | $ | 12,481 | | | $ | 339 | | | $ | 14,244 | | | $ | 13 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Carrying Amount of Hedged Liability | | Cumulative Amount of Fair Value Hedging Adjustment Increasing the Carrying Amount of Hedged Liability | | Carrying Amount of Hedged Liabilities | | Cumulative Amount of Fair Value Hedging Adjustment Increasing the Carrying Amount of Hedged Liability |
| Long-term borrowings | $ | 8,885 | | | $ | 115 | | | $ | 11,881 | | | $ | 281 | |
| | | | | | | |
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): | | | | | | | | | | | | | | | | | |
| Location and Amount of (Losses) Gains Recognized in Income | | | | |
| Interest Expense | | | | |
| Deposits | | Long-Term Borrowings | | Other Income |
| For the Three Months Ended September 30, 2020 | | | | | |
| Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (287) | | | $ | (126) | | | $ | 17 | |
| | | | | |
| The effects of cash flow and fair value hedging | | | | | |
| (Losses) gains on cash flow hedging relationship | | | | | |
| Amounts reclassified from OCI into earnings | $ | (4) | | | $ | 0 | | | $ | 0 | |
| | | | | |
| Gains (losses) on fair value hedging relationships | | | | | |
| Gains on hedged items | $ | 0 | | | $ | 59 | | | $ | 0 | |
| Gains (losses) on interest rate swaps | 0 | | | (9) | | | 0 | |
| Total gains (losses) on fair value hedging relationships | $ | 0 | | | $ | 50 | | | $ | 0 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| For the Three Months Ended September 30, 2019 | | | | | |
| Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (407) | | | $ | (231) | | | $ | 23 | |
| | | | | |
| The effects of cash flow and fair value hedging | | | | | |
| Gains on cash flow hedging relationship | | | | | |
| Amounts reclassified from OCI into earnings | $ | 1 | | | $ | 1 | | | $ | 0 | |
| | | | | |
| Gains (losses) on fair value hedging relationships | | | | | |
| Gains (losses) on hedged items | $ | 0 | | | $ | (20) | | | $ | 0 | |
| Gains on interest rate swaps | 0 | | | 12 | | | 0 | |
| Total gains (losses) on fair value hedging relationships | $ | 0 | | | $ | (8) | | | $ | 0 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | | | |
| Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income |
| Interest Expense | | | | |
| Deposits | | Long-Term Borrowings | | | | Other Income |
| 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 | $ | (156) | | | $ | (113) | | | | | $ | 18 | |
| | | | | | | |
| The effects of cash flow and fair value hedging | | | | | | | |
| Gains (losses) on cash flow hedging relationship | | | | | | | |
| Amounts reclassified from OCI into earnings | $ | — | | | $ | — | | | | | $ | — | |
| | | | | | | |
| Gains on fair value hedging relationships | | | | | | | |
| Gains on hedged items | $ | — | | | $ | 45 | | | | | $ | — | |
| Gains (losses) on interest rate swaps | — | | | (9) | | | | | — | |
| Total gains on fair value hedging relationships | $ | — | | | $ | 36 | | | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| For the Three Months Ended September 30, 2020 | | | | | | | |
| 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 | $ | (287) | | | $ | (126) | | | | | $ | 17 | |
| | | | | | | |
| The effects of cash flow and fair value hedging | | | | | | | |
| Gains on cash flow hedging relationship | | | | | | | |
| Amounts reclassified from OCI into earnings | $ | (4) | | | $ | — | | | | | $ | — | |
| | | | | | | |
| Gains on fair value hedging relationships | | | | | | | |
| Gains on hedged items | $ | — | | | $ | 59 | | | | | $ | — | |
| Gains (losses) on interest rate swaps | — | | | (9) | | | | | — | |
| Total gains on fair value hedging relationships | $ | — | | | $ | 50 | | | | | $ | — | |
| | | | | | | |
| The effects of derivatives not designated in hedging relationships | | | | | | | |
| Gains (losses) on derivatives not designated as hedges | $ | — | | | $ | — | | | | | $ | (1) | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | |
| Location and Amount of (Losses) Gains Recognized in Income | | | | |
| Interest Expense | | | | |
| Deposits | | Long-Term Borrowings | | Other Income |
| For the Nine Months Ended September 30, 2020 | | | | | |
| Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (1,000) | | | $ | (479) | | | $ | 59 | |
| | | | | |
| The effects of cash flow and fair value hedging | | | | | |
| (Losses) gains on cash flow hedging relationship | | | | | |
| Amounts reclassified from OCI into earnings | $ | (9) | | | $ | (2) | | | $ | 0 | |
| | | | | |
| Gains (losses) on fair value hedging relationships | | | | | |
| Gains (losses) on hedged items | $ | 0 | | | $ | (326) | | | $ | 0 | |
| Gains on interest rate swaps | 0 | | | 434 | | | 0 | |
| Total gains on fair value hedging relationships | $ | 0 | | | $ | 108 | | | $ | 0 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| For the Nine Months Ended September 30, 2019 | | | | | |
| Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (1,194) | | | $ | (721) | | | $ | 73 | |
| | | | | |
| The effects of cash flow and fair value hedging | | | | | |
| Gains on cash flow hedging relationship | | | | | |
| Amounts reclassified from OCI into earnings | $ | 3 | | | $ | 4 | | | $ | 0 | |
| | | | | |
| Gains (losses) on fair value hedging relationship | | | | | |
| Gains (losses) on hedged items | $ | 0 | | | $ | (160) | | | $ | 0 | |
| Gains on interest rate swaps | 0 | | | 128 | | | 0 | |
| Total gains (losses) on fair value hedging relationships | $ | 0 | | | $ | (32) | | | $ | 0 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | | | |
| Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income |
| Interest Expense | | | | |
| Deposits | | Long-Term Borrowings | | | Other Income |
| 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 | $ | (519) | | | $ | (356) | | | | | $ | 47 | |
| | | | | | | |
| The effects of cash flow and fair value hedging | | | | | | | |
| Gains (losses) on cash flow hedging relationship | | | | | | | |
| Amounts reclassified from OCI into earnings | $ | — | | | $ | (2) | | | | | $ | — | |
| | | | | | | |
| Gains on fair value hedging relationships | | | | | | | |
| Gains on hedged items | $ | — | | | $ | 167 | | | | | $ | — | |
| Gains (losses) on interest rate swaps | — | | | (38) | | | | | — | |
| Total gains on fair value hedging relationships | $ | — | | | $ | 129 | | | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| For the Nine Months Ended September 30, 2020 | | | | | | | |
| 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 | $ | (1,000) | | | $ | (479) | | | | | $ | 59 | |
| | | | | | | |
| The effects of cash flow and fair value hedging | | | | | | | |
| Losses on cash flow hedging relationship | | | | | | | |
| Amounts reclassified from OCI into earnings | $ | (9) | | | $ | (2) | | | | | $ | — | |
| | | | | | | |
| Gains on fair value hedging relationship | | | | | | | |
| Gains (losses) on hedged items | $ | — | | | $ | (326) | | | | | $ | — | |
| Gains on interest rate swaps | — | | | 434 | | | | | — | |
| Total gains on fair value hedging relationships | $ | — | | | $ | 108 | | | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
For the impact of the derivative instruments on OCI, see Note 9: Accumulated Other Comprehensive Income.
Collateral Requirements and Credit-Risk Related Contingency Features
The Company has master netting arrangements and minimum collateral posting thresholds with its counterparties for its fair value and cash flow hedge interest rate swaps and foreign exchange forward contracts. The Company has not sought a legal opinion in relation to the enforceability of its master netting arrangements and, as such, does not report any of these positions on a net basis. Collateral is required by either the Company or its subsidiaries or the counterparty depending on the net fair value position of thesethe derivatives held with that counterparty. The Company may also be required to post collateral with a counterparty for its fair value and cash flow hedge interest rate swaps depending on the credit rating it or Discover Bank receives from specified major credit rating agencies. These collateral receivable or payable amounts are generally not offset against the fair value of these derivatives but are recorded separately in other assets or deposits. Most of the Company's cash collateral amounts relate to positions cleared through an exchange and are reflected as offsets to the associated derivatives balances recorded in other assets and accrued expenses and other liabilities.
At September 30, 2020, Discover Bank's credit rating met specified thresholds set by its counterparties. However, if its credit rating is reduced below investment grade, Discover Bank would be required to post additional collateral. The amount of additional collateral as of September 30, 2020, would have been $9 million. DFS (Parent Company) had no outstanding derivatives as of September 30, 2020, and therefore, no collateral was required.
The Company also has agreements with certain of its derivative counterparties that contain a provision whereunder which the Company could be declared in default on any of its derivative obligations if the Company defaults on any of its indebtedness, including default where the lender has not accelerated repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.indebtedness.
17. Segment Disclosures
The Company'sCompany manages its business activities are managed in 2 segments: DirectDigital Banking and Payment Services.
•DirectDigital 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's credit card products generate substantially all revenues related to discount and interchange, protection products and loan fee income.
•Payment Services: The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and the Company's Network Partners business, which provides payment transaction processing and settlement services on the Discover Network. The majority of Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue from Diners Club.
The business segment reporting provided to and used by the Company's chief operating decision makerdecision-maker is prepared using the following principles and allocation conventions:
•The Company aggregates operating segments when determining reportable segments.
•Corporate overhead is not allocated between segments; all corporate overhead is included in the DirectDigital Banking segment.
•Through its operation of the Discover Network, the DirectDigital Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments, with the exception ofexcept for an allocation of direct and incremental costs driven by the Company's Payment Services segment.
•The Company's assets of the Company are not allocated among the operating segments in the information reviewed by the Company's chief operating decision maker.decision-maker.
•The revenues of each segment are derived from external sources. The segments do not earn revenue from intercompany sources.
•Income taxes are not specifically allocated between the operating segments in the information reviewed by the Company's chief operating decision maker.decision-maker.
| | | | | | | | | | | | | | | | | |
| The following table presents segment data (dollars in millions): | | | | | |
| Direct
Banking | | Payment
Services | | Total |
| For the Three Months Ended September 30, 2020 | | | | | |
| Interest income | | | | | |
| Credit card loans | $ | 2,171 | | | $ | 0 | | | $ | 2,171 | |
| Private student loans | 182 | | | 0 | | | 182 | |
| Personal loans | 237 | | | 0 | | | 237 | |
| Other | 91 | | | 0 | | | 91 | |
| Total interest income | 2,681 | | | 0 | | | 2,681 | |
| Interest expense | 416 | | | 0 | | | 416 | |
| Net interest income | 2,265 | | | 0 | | | 2,265 | |
| Provision for credit losses | 750 | | | 0 | | | 750 | |
| Other income | 371 | | | 78 | | | 449 | |
| Other expense | 969 | | | 36 | | | 1,005 | |
| Income before income taxes | $ | 917 | | | $ | 42 | | | $ | 959 | |
| | | | | |
| For the Three Months Ended September 30, 2019 | | | | | |
| Interest income | | | | | |
| Credit card loans | $ | 2,465 | | | $ | 0 | | | $ | 2,465 | |
| Private student loans | 204 | | | 0 | | | 204 | |
| Personal loans | 249 | | | 0 | | | 249 | |
| Other | 122 | | | 0 | | | 122 | |
| Total interest income | 3,040 | | | 0 | | | 3,040 | |
| Interest expense | 638 | | | 0 | | | 638 | |
| Net interest income | 2,402 | | | 0 | | | 2,402 | |
Provision for credit losses(1) | 799 | | | 0 | | | 799 | |
| Other income | 409 | | | 89 | | | 498 | |
| Other expense | 1,069 | | | 38 | | | 1,107 | |
| Income before income taxes | $ | 943 | | | $ | 51 | | | $ | 994 | |
| | | | | |
| (1) Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach. | | | | | |
| | | | | | | | | | | | | | | | | |
| Digital
Banking | | Payment
Services | | Total |
| 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 | |
| | | | | |
| For the Three Months Ended September 30, 2020 | | | | | |
| Interest income | | | | | |
| Credit card loans | $ | 2,171 | | | $ | — | | | $ | 2,171 | |
| Private student loans | 182 | | | — | | | 182 | |
| Personal loans | 237 | | | — | | | 237 | |
| Other loans | 27 | | | — | | | 27 | |
| Other interest income | 64 | | | — | | | 64 | |
| Total interest income | 2,681 | | | — | | | 2,681 | |
| Interest expense | 416 | | | — | | | 416 | |
| Net interest income | 2,265 | | | — | | | 2,265 | |
| Provision for credit losses | 750 | | | — | | | 750 | |
| Other income | 371 | | | 78 | | | 449 | |
| Other expense | 969 | | | 36 | | | 1,005 | |
| Income before income taxes | $ | 917 | | | $ | 42 | | | $ | 959 | |
| | | | | |
| | 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, 2020 | | | | | | |
| For the Nine Months Ended September 30, 2021 | | For the Nine Months Ended September 30, 2021 | | | | | |
| Interest income | Interest income | | Interest income | |
| Credit card loans | Credit card loans | $ | 6,760 | | | $ | 0 | | | $ | 6,760 | | Credit card loans | $ | 6,452 | | | $ | — | | | $ | 6,452 | |
| Private student loans | Private student loans | 569 | | | 0 | | | 569 | | Private student loans | 554 | | | — | | | 554 | |
| Personal loans | Personal loans | 722 | | | 0 | | | 722 | | Personal loans | 662 | | | — | | | 662 | |
| Other | 284 | | | 0 | | | 284 | | |
| Other loans | | Other loans | 85 | | | — | | | 85 | |
| Other interest income | | Other interest income | 156 | | | — | | | 156 | |
| Total interest income | Total interest income | 8,335 | | | 0 | | | 8,335 | | Total interest income | 7,909 | | | — | | | 7,909 | |
| Interest expense | Interest expense | 1,482 | | | 0 | | | 1,482 | | Interest expense | 875 | | | — | | | 875 | |
| Net interest income | Net interest income | 6,853 | | | 0 | | | 6,853 | | Net interest income | 7,034 | | | — | | | 7,034 | |
| Provision for credit losses | Provision for credit losses | 4,603 | | | 0 | | | 4,603 | | Provision for credit losses | (45) | | | — | | | (45) | |
| Other income | Other income | 1,091 | | | 320 | | | 1,411 | | Other income | 1,284 | | | 833 | | | 2,117 | |
| Other expense | Other expense | 3,069 | | | 172 | | | 3,241 | | Other expense | 3,290 | | | 203 | | | 3,493 | |
| Income before income tax expense | Income before income tax expense | $ | 272 | | | $ | 148 | | | $ | 420 | | Income before income tax expense | $ | 5,073 | | | $ | 630 | | | $ | 5,703 | |
| | For the Nine Months Ended September 30, 2019 | | |
| For the Nine Months Ended September 30, 2020 | | For the Nine Months Ended September 30, 2020 | |
| Interest income | Interest income | | Interest income | |
| Credit card loans | Credit card loans | $ | 7,223 | | | $ | 0 | | | $ | 7,223 | | Credit card loans | $ | 6,760 | | | $ | — | | | $ | 6,760 | |
| Private student loans | Private student loans | 612 | | | 0 | | | 612 | | Private student loans | 569 | | | — | | | 569 | |
| Personal loans | Personal loans | 727 | | | 0 | | | 727 | | Personal loans | 722 | | | — | | | 722 | |
| Other | 391 | | | 1 | | | 392 | | |
| Other loans | | Other loans | 78 | | | — | | | 78 | |
| Other interest income | | Other interest income | 206 | | | — | | | 206 | |
| Total interest income | Total interest income | 8,953 | | | 1 | | | 8,954 | | Total interest income | 8,335 | | | — | | | 8,335 | |
| Interest expense | Interest expense | 1,915 | | | 0 | | | 1,915 | | Interest expense | 1,482 | | | — | | | 1,482 | |
| Net interest income | Net interest income | 7,038 | | | 1 | | | 7,039 | | Net interest income | 6,853 | | | — | | | 6,853 | |
Provision for credit losses(1) | 2,395 | | | 0 | | | 2,395 | | |
| Provision for credit losses | | Provision for credit losses | 4,603 | | | — | | | 4,603 | |
| Other income | Other income | 1,217 | | | 259 | | | 1,476 | | Other income | 1,091 | | | 320 | | | 1,411 | |
| Other expense | Other expense | 3,097 | | | 112 | | | 3,209 | | Other expense | 3,069 | | | 172 | | | 3,241 | |
| Income before income tax expense | Income before income tax expense | $ | 2,763 | | | $ | 148 | | | $ | 2,911 | | Income before income tax expense | $ | 272 | | | $ | 148 | | | $ | 420 | |
|
(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
18. Revenue from Contracts with Customers
ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), generally applies to the sales of any good or service for which no other specific accounting guidance is provided. ASC 606 defines a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. The Company's revenue that is subject to this model includes discount and interchange, protection products fees, transaction processing revenue and certain amounts classified as other income.
The following table presents revenue from contracts with customers disaggregated by business segment and reconciles revenue from contracts with customers to total other income (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Digital Banking | | Payment Services | | Total |
| For the 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 (loss) not subject to ASC 606 | 121 | | | (167) | | | (46) | |
| Total other income (loss) by operating segment | $ | 447 | | | $ | (75) | | | $ | 372 | |
| | | | | |
| For the Three Months Ended September 30, 2020 | | | | | |
| Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 225 | | | $ | 13 | | | $ | 238 | |
| Protection products revenue | 44 | | | — | | | 44 | |
| Transaction processing revenue | — | | | 50 | | | 50 | |
| Other income | 2 | | | 15 | | | 17 | |
Total other income subject to ASC 606(2) | 271 | | | 78 | | | 349 | |
| Other income not subject to ASC 606 | | | | | |
| Loan fee income | 100 | | | — | | | 100 | |
| | | | | |
| | | | | |
| Total other income not subject to ASC 606 | 100 | | | — | | | 100 | |
| Total other income by operating segment | $ | 371 | | | $ | 78 | | | $ | 449 | |
| | | | | |
| | | | | |
Table of Contents | | | | | | | | | | | | | | | | | |
| Direct Banking | | Payment Services | | Total |
| For the Three Months Ended September 30, 2020 | | | | | |
| Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 225 | | | $ | 13 | | | $ | 238 | |
| Protection products revenue | 44 | | | 0 | | | 44 | |
| Transaction processing revenue | 0 | | | 50 | | | 50 | |
| Other income | 2 | | | 15 | | | 17 | |
Total other income subject to ASC 606(2) | 271 | | | 78 | | | 349 | |
| Other income not subject to ASC 606 | | | | | |
| Loan fee income | 100 | | | 0 | | | 100 | |
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| Total other income not subject to ASC 606 | 100 | | | 0 | | | 100 | |
| Total other income by operating segment | $ | 371 | | | $ | 78 | | | $ | 449 | |
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| For the Three Months Ended September 30, 2019 | | | | | |
| Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 238 | | | $ | 17 | | | $ | 255 | |
| Protection products revenue | 48 | | | 0 | | | 48 | |
| Transaction processing revenue | 0 | | | 52 | | | 52 | |
| Other income | 3 | | | 20 | | | 23 | |
Total other income subject to ASC 606(2) | 289 | | | 89 | | | 378 | |
| Other income not subject to ASC 606 | | | | | |
| Loan fee income | 120 | | | 0 | | | 120 | |
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| Total other income not subject to ASC 606 | 120 | | | 0 | | | 120 | |
| Total other income by operating segment | $ | 409 | | | $ | 89 | | | $ | 498 | |
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| Digital Banking | | Payment Services | | Total |
| 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 | |
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| Total other income not subject to ASC 606 | 333 | | | 562 | | | 895 | |
| Total other income by operating segment | $ | 1,284 | | | $ | 833 | | | $ | 2,117 | |
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| For the Nine Months Ended September 30, 2020 | | | | | |
| Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 644 | | | $ | 47 | | | $ | 691 | |
| Protection products revenue | 135 | | | — | | | 135 | |
| Transaction processing revenue | — | | | 143 | | | 143 | |
| Other income | 8 | | | 51 | | | 59 | |
Total other income subject to ASC 606(2) | 787 | | | 241 | | | 1,028 | |
| Other income not subject to ASC 606 | | | | | |
| Loan fee income | 304 | | | — | | | 304 | |
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| Realized gains on equity investments | — | | | 79 | | | 79 | |
| Total other income not subject to ASC 606 | 304 | | | 79 | | | 383 | |
| Total other income by operating segment | $ | 1,091 | | | $ | 320 | | | $ | 1,411 | |
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(1)Net of rewards, including Cashback Bonus rewards, of $514$689 million and $520$514 million for the three months ended September 30, 2021 and 2020, respectively, and 2019,$1.8 billion and $1.4 billion for the nine months ended September 30, 2021 and 2020, respectively.
(2)Excludes $1 million of deposit product fees that are reported within net interest income, for the three months ended September 30, 2020. Deposit product feeswhich were immaterial for the three months ended September 30, 2019.
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): | | | | | | | | | | | | | | | | | |
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| Direct Banking | | Payment Services | | Total |
| For the Nine Months Ended September 30, 2020 | | | | | |
| Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 644 | | | $ | 47 | | | $ | 691 | |
| Protection products revenue | 135 | | | 0 | | | 135 | |
| Transaction processing revenue | 0 | | | 143 | | | 143 | |
| Other income | 8 | | | 51 | | | 59 | |
Total other income subject to ASC 606(2) | 787 | | | 241 | | | 1,028 | |
| Other income not subject to ASC 606 | | | | | |
| Loan fee income | 304 | | | 0 | | | 304 | |
| Gains on equity investments | 0 | | | 79 | | | 79 | |
| Total other income not subject to ASC 606 | 304 | | | 79 | | | 383 | |
| Total other income by operating segment | $ | 1,091 | | | $ | 320 | | | $ | 1,411 | |
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| For the Nine Months Ended September 30, 2019 | | | | | |
| Other income subject to ASC 606 | | | | | |
Discount and interchange revenue, net(1) | $ | 738 | | | $ | 47 | | | $ | 785 | |
| Protection products revenue | 146 | | | 0 | | | 146 | |
| Transaction processing revenue | 0 | | | 146 | | | 146 | |
| Other income | 7 | | | 66 | | | 73 | |
Total other income subject to ASC 606(2) | 891 | | | 259 | | | 1,150 | |
| Other income not subject to ASC 606 | | | | | |
| Loan fee income | 326 | | | 0 | | | 326 | |
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| Total other income not subject to ASC 606 | 326 | | | 0 | | | 326 | |
| Total other income by operating segment | $ | 1,217 | | | $ | 259 | | | $ | 1,476 | |
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(1)Net of rewards, including Cashback Bonus rewards, of $1.4 billion for the nine months ended September 30, 20202021 and 2019.
(2)Excludes $2 million of deposit product fees that are reported within net interest income for the nine months ended September 30, 2020 and 2019.2020.
For a detailed description of the Company's significant revenue recognition accounting policies, see Note 2: Summary of Significant Accounting Policies to the consolidated financial statements ofin the Company's annual report on Form 10-K for the year ended December 31, 2019.2020.
19. Subsequent Events
The Company has evaluated events and transactions that have occurred subsequent to September 30, 20202021, and determined that there were no subsequent events that would require recognition or disclosure in the condensed consolidated financial statements.
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," "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; 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 and in "Item 1A. Risk Factors" in Part II of this quarterly report and in "Risk Factors," "Business, — Competition," "Business — Supervision and Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, 2019,2020, which is filed with the SECSecurities and Exchange Commission ("SEC") and available at the SEC's internet site (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") and Diners Club International ("Diners Club")., collectively known as the Discover Global Network. The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally as well asand merchant acceptance throughout the U.S.United States 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), credit 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.
Change in Accounting Principle
Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments became effective for us on January 1, 2020. The standard significantly amended accounting principles generally accepted in the United States by replacing the incurred loss model with the current expected credit loss ("CECL") approach. The CECL approach requires our allowance for credit losses to be based on an estimate of all anticipated credit losses over the remaining expected life of all of the loans, as opposed to an estimate of incurred losses as of the balance sheet date. For additional information on CECL, see Note 1: Background and Basis of Presentation to our condensed consolidated financial statements.
The ASU required modified-retrospective application, meaning a cumulative-effect adjustment was recorded on January 1, 2020, without adjusting comparative prior periods. This cumulative-effect adjustment did not reflect the economic disruption resulting from COVID-19 since the global disruption occurred subsequent to January 1, 2020. As a result of adoption, we recorded:
•A $2.5 billion increase to the allowance for credit losses on loan receivables primarily representing the adjustment for recording reserves for expected losses, not simply those deemed to be already incurred, and extending the loss estimate period over the entire life of the loan;
•A $0.6 billion increase to other assets related to deferred tax assets on the larger allowance for credit losses;
•An offsetting $1.9 billion decrease, net of tax, to the opening balance of retained earnings; and
•Immaterial adjustments to the following:
◦The carrying value of PCD loans and related accrued interest reflected in other assets; and
◦Accrued expenses and other liabilities to record reserves for unfunded commitments.
As required by the ASU, financial statement results and balances prior to January 1, 2020, have not been retrospectively adjusted to reflect the amendments in ASU No. 2016-13. Therefore, current period results and balances are not comparable to prior period amounts, particularly with regard to the provision and allowance for credit losses (and their related subtotals).
Additional Information for Comparability
In order to help investors understand our year-over-year performance, we are providing adjusted prior year allowance for credit losses and related allowance build figures using the CECL approach for comparative purposes. These adjusted prior year figures are non-GAAP financial measures and should be viewed in addition to, not as a substitute for, our reported results. We believe that these adjusted figures are useful to investors since credit losses were estimated using the incurred loss approach prior to adoption of ASU No. 2016-13 on January 1, 2020. The adjusted allowance and related build figures provide investors with comparable amounts to understand our results.
The following table provides a reconciliation of prior year allowance for credit losses figures as reported (using the incurred loss approach) to adjusted allowance for credit losses using the CECL approach, as well as related allowance build figures (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the Quarter Ended, | | | | | | | | As of |
| | Dec 31,
2019 | | Sep 30,
2019 | | Jun 30,
2019 | | Mar 31,
2019 | | Dec 31,
2018 |
| Allowance for credit losses - as reported (incurred) | $ | 3,383 | | | $ | 3,299 | | | $ | 3,202 | | | $ | 3,134 | | | $ | 3,041 | |
CECL adjustment(1) | 2,461 | | | 2,440 | | | 2,400 | | | 2,408 | | | 2,376 | |
| Allowance for credit losses - as adjusted (CECL) | $ | 5,844 | | | $ | 5,739 | | | $ | 5,602 | | | $ | 5,542 | | | $ | 5,417 | |
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Allowance build - as reported (incurred)(2) | $ | 84 | | | $ | 97 | | | $ | 68 | | | $ | 93 | | | |
Allowance build - as adjusted (CECL)(3) | $ | 105 | | | $ | 137 | | | $ | 60 | | | $ | 125 | | | |
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(1)Represents adjustment for recording reserves for expected losses, not simply those deemed to be already incurred, and extending the loss estimate period over the entire life of the loan.
(2)Calculated as the change in the allowance for credit losses as reported using the incurred loss approach.
(3)Calculated as the change in the allowance for credit losses as adjusted using the CECL approach.
Refer to "— Critical Accounting Estimates — Allowance for Credit Losses on Loan Receivables" for more details on our estimation process and key assumptions requiring significant judgment and to "— Loan Quality — Provision and Allowance for Credit Losses" for discussion of drivers of current period changes in the allowance for credit losses.
COVID-19 Pandemic Response and Impact
The COVID-19 pandemic has continued to have a widespread and unprecedented impact on a global scale. The health crisisWhile the United States economy continues to haverecover from a brief but severe effect onrecession triggered by the economy and unemployment. The impact of COVID-19 continues to evolve rapidly. Itspandemic, its future effects are uncertain and it may be difficult to assess or predict the extent of the impacts of the pandemic on us as many factors are beyond our control and knowledge. For a discussion of the risks we face with respect to the COVID-19 pandemic, the associated economic uncertainty, the steps taken to mitigate the pandemic and the resulting economic contraction, see "Item 1A — Risk Factors" in Part II of this quarterly report on Form 10-Q, which should be read in conjunction with the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019.2020, under "Risk Factors". This section includes a discussion of the significant areas of potential impact on us of the COVID-19 pandemic and certainspecific actions we are taking or expect to take in this time of uncertainty caused byuncertainty.
Financial Results and Outlook
The United States economy continues to recover from the impacts of the COVID-19 pandemic.
Outlook The easing of COVID-19 restrictions, economic expansion and Financial Results
During the first three quarters of the year, the pandemic has adverselygovernment stimulus have positively impacted our financial results, specifically in the decreasecredit performance and elevated payment rates. We saw an increase in sales volume for the three and credit cardnine months ended September 30, 2021, compared to the same periods in 2020. Additionally, we had modest loan growth as well asduring the increase inthree months ended September 30, 2021.
We also decreased our estimate of life of loan expectedallowance for credit losses from December 31, 2020. Refer to "— Loan Quality — Provision and Allowance for Credit Losses" for more details on the current period allowance for credit losses. As previously
Our outlook remains unchanged from what we disclosed in the second quarter of 2021. We anticipate modest loan growth in 2021 driven by positive sales trends and new account growth. We expect net interest margin to remain generally flat relative to the first quarter Form 10-Q, we continue to execute on our strategy to implement approximately $400 million of cost reductions off of previously provided guidance from the fourth quarter 2019 earnings release, targeting areas such as account acquisition costs and marketing expenses, due to the economic environment and the resulting pressure on earnings for2021 through the remainder of the year. Outbreaks of COVID-19 have resulted in state2021, with some variability from quarter to quarter. We expect net charge-offs to be lower year-over-year driven by continued stable credit performance. We remain committed to disciplined expense management and local governments implementing, and in some cases re-implementing, measures to try to contain the virus such as travel bans and restrictions, shutdowns and quarantines. We anticipate these measures as well as the related economic uncertainty will continue to negatively impact consumermake investments for profitable long-term growth through increased marketing and business spending habitsinvestments in core technology capabilities and the consumer credit environment, including the ability of consumers to repay their loans. While certain parts of the U.S. have lifted these measures, the re-emergence of COVID-19 has and may continue to result in governments re-imposing restrictions that may remain in place for a significant period of time. The economic uncertainty associated with COVID-19 and the measures taken to limit its spread have and will likely continue to adversely affect our business, results of operations and financial condition.efficiency improvements.
Regulatory and Legislative
Federal, state and local governments including the U.S. Congress, the Executive Branch and independent banking agencies have taken extraordinary measures to support the U.S.United States economy and mitigate the effectsimpacts of the COVID-19 pandemic on the economy and the impact of measures taken to slow its spread.society at large. These policies have included efforts to provide regulatory relief and flexibility to financial institutions, liquidity to capital markets and mandatesfinancial support to support businesses and consumers, including fiscal stimulus, checks, payment forbearance, small business lending programs, increased unemployment payments and other forms of assistance. Lawmakers continue to offer additional proposals as the situation evolves in an attempt to mitigate harm to the economy and consumers. It is too earlyThe effects of these programs are broad and very complex and depend upon a wide variety of factors, some of which are yet to determinebe identified. Thus, the overall effectiveness of
actions that have been taken and their ultimate impact of these programs and policies on our business, results of operations and financial condition.condition is difficult to quantify and may not be known for some time. For more information, see “— Regulatory Environment and Developments” below.
Loan Receivables and Allowance for Credit Losses
In our loan portfolio,At the onset of the pandemic, we continuecontinued to lend to customers but have tightened our standards for new accounts and for growing existing accounts. Currently, we are providing support to our customers impacted by COVID-19accounts across all products in our loan portfolio. Additionally, we temporarily reduced our customer acquisition and brand marketing in response to the significant economic downturn at the onset of the COVID-19 pandemic. As a result of the strong credit performance observed in the current year and positive economic outlook, we returned most of our underwriting criteria to pre-pandemic standards during the second quarter of 2021. Additionally, we increased our investments in credit card and private student loan productsmarketing and business development in the second and third quarters of 2021 to helpsupport our customers during this periodloan growth initiatives.
In the third quarter of economic difficulty. We have materially increased2021, we decreased our allowance for credit losses in anticipation of higherlower credit losses causeddriven by further deterioration inimproving macroeconomic forecasts and continued stable credit performance. Our allowance for credit losses includes the macroeconomic outlook. The reserve for
risk associated with all loans and considers the quarter endedeffects of all loan modifications, including troubled debt restructurings ("TDRs") and loan modifications exempt from the TDR designation under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act”). As of September 30, 2020,2021, the allowance for credit losses took into account our best estimate for the impact of programs put in place by federal and state governments and agencies to mitigate the economic impact of the pandemic. It is unclear whether the measures employed to date are complete or whether federal and state governments and agencies may take additional actionactions that could impact our business. Refer to "— Loan Quality — Impact of the COVID-19 Pandemic on the Loan Quality"Portfolio" for more details on the current period allowance for credit losses.
Capital and Liquidity
We entered the COVID-19 pandemic with strong capital and liquidity positions, which we believe allows us to maintain normal operations during periods of financial market stress and disruptions to wholesale and retail funding sources. We believe we have a sufficient reserve of high-qualitymaintained liquid assets and have been ablecapital levels in excess of historical norms as of September 30, 2021 as consumer loan payment rates and deposit balances remain above their pre-pandemic levels. We maintain good access to maintain access toall of our diverse funding channels. We continued to see strong demand for our direct-to-consumer and sweep deposit balances as consumer savings rates have increased and investors sought safer assets. For example, we took advantage of the low-rate, tight-credit-spread environment by issuing approximately $1.8 billion of credit card asset-backed securities in September 2021.
We remain well-capitalized with capital ratios in excess of regulatory minimums and have takentook prudent actions to preserve and augment our capital suchwhen the macroeconomic and operating environment turned uncertain last year. Our capital levels allow us to capitalize on loan receivable growth as suspending our share repurchase program. For purposes of calculating regulatory capital, we have electedcustomers moderate loan payment rates and continue to defer recognition ofincrease spending as the estimated impact of CECL on regulatory capital for two years in accordance witheconomy more fully re-opens from the interim final rule announced by Federal banking regulators on March 27, 2020. Pursuant to the interim final rule, the estimated impact of CECL on regulatory capital will be phased in over a three-year period beginning in 2022.
For more information on the impact of COVID-19 on liquidity and capital, see "— Liquidity and Capital Resources — Impact of COVID-19 on Liquidity and Capital."pandemic.
Payment Services
As governments across the U.S. and the world have taken steps to minimize the transmission of COVID-19, the number of cross-border transactions processed on the Discover Global Network has declined overall despite increases in certain categories.declined. Certain negatively impacted categories such as travel make up a small portion of the transactions processed but may have an outsized impact on some of our Diners Club franchisees. The current crisisimpacts from the COVID-19 pandemic may result in lasting changes in consumer payment behaviors, such as a shift from credit to debit, a decline in the use of cash, increasing online sales and rapid adoption of contactless payment. TheseAs economic uncertainty persists, these shifts may continue to result in changes to the Payment Services segment’s results of operations.
Fair Value and Impairments
With the uncertain nature of the pandemic's overall impact toon the economy, we continue to assess the impacteffects of COVID-19 with respect to our goodwill and intangible assets, investment securities and other long-term assets and determined that there were no material impairments necessary during the quarter. For more information on the impact of COVID-19 on intangible assets, seeassets. See Note 5: Intangible Assets to our condensed consolidated financial statements.statements for more information on the impact of the COVID-19 pandemic on intangible assets.
Business Continuity and Operations
We have openedre-opened some of our physical locations with appropriate health safety measures and capacity limitations, including our corporate headquarters. However, we have informed employees that they may continue to work from home and will not be required to return to our physical locations until June 2021, at the earliest.prior to January 2022. Notwithstanding the shift to work-from-home, we have been able to successfully operate with no significant impact to our operations continue largely unaffected dueor service levels. As a result, upon the return to our physical locations, we will offer flexible work-from-home arrangements that will provide our employees the successful implementation of certain of our business continuity plans. option to work remotely on a more frequent basis than before the pandemic.
Operational changes necessitated by the rapid shift in employee location have not thus far had a material adverse effect on us or our financial condition; however, the shift has caused us to grow increasingly dependent on third-party service providers, including those with which we have no relationship such as our employees’ internet service providers. For more information on the risks associated with reliance on third-party service providers and the shift to work from home, see our
the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019, as well as "Item 1A — Risk2020, under "Risk Factors" in Part II of this quarterly report on Form 10-Q..
Regulatory Environment and Developments
TheAs the United States and global economies attempt to normalize from the COVID-19 pandemic, continues to dramatically impact the U.S. and global economies. We are working with our customers to address their unique financial situations, while balancing safety and soundness requirements. We are in contact with our regulators, whobanking agencies continue to proactively encouraged banksevaluate whether additional actions are warranted to work with borrowers during this timeassist consumers, financial institutions and the overall economy. On March 31, 2021, the Consumer Financial Protection Bureau ("CFPB") announced it was rescinding several of stress. Among other actions,its policy statements and withdrawing its participation in several interagency policy statements issued in response to the federal banking agenciesCOVID-19 pandemic that had been intended to provide flexibility to financial institutions. The CFPB stated that the
rescissions "reflect the Bureau's commitment to consumer protection and the fact that financial institutions have had a year to adapt their operations to the difficulties posed by the pandemic."
In addition, the United States Congress has taken the following measureslegislative action to proactively address the economic disruptions caused by the COVID-19 outbreak and provide flexibility for banking organizations to work with impacted businesses and consumers:
•Market Stabilization: The Federal Reserve reduced short-term interest rates to near zero and launched numerous programs and facilities,pandemic, including the Term Asset-Backed Securities Loan Facility, to increase market liquidityMarch 2020 CARES Act and promote stability;
•Capital & Liquidity Flexibility: Regulatory agencies issued statements urging banks to use their capitalDecember 2020 Omnibus and liquidity buffers to continue lending during the crisis;
•CECL: A joint agency interim final rule, which has since been adopted as a final rule, provided banks, such as Discover, with the option to delay CECL's impact on regulatory capital for two years, followed by three year phase-in of those impacts. The U.S. Treasury subsequently released a study on CECL impacts, noting the need to continue to assess and potentially make changes to the standard or regulatory capital requirements;
•Flexibility to Work with Consumers: The agencies issued joint guidance encouraging banks to work with borrowers and provided guidelines for prudent relief programs, and agencies worked with FASB to provide accounting-classification flexibility for certain short-term loan modifications. Subsequently, the Federal Financial Institutions Examination Council (“FFIEC”) issued a statement emphasizing the need for institutions to utilize “prudent risk management and consumer protection principles…while working with borrowers as loans near the end of initial loan accommodation periods”;
•Pandemic Planning: The FFIEC released updated guidance to remind banks of actions they should be taking to minimize potential adverse effects of a pandemic on business continuity; and
•Supervisory Flexibility: Regulatory agencies have indicated willingness to work with institutions to provide flexibility and minimize burdens of supervisory activities, including extending deadlines for data collections.
In addition to the above regulatory actions, the Coronavirus Aid,COVID Relief and Economic SecurityResponse Act. Most recently, the American Rescue Plan Act of 2021 ("CARES Act"ARPA") was signed into law on, enacted in March 27, 2020, to provide relief to U.S. businesses and consumers impacted by the COVID-19 crisis. The CARES Act includes approximately $2 trillion of financial assistance, principally through federal loan programs intended to provide relief to consumers who have suffered job losses and aid businesses that have experienced disruption as a result of the pandemic. Additionally, the CARES Act provided expanded2021, contained additional stimulus payments, increased unemployment benefits and direct paymentsincreased small business funding under the Payment Protection Program. The ARPA also significantly increased and expanded the Child Tax Credit for one year and provides additional funding for rental assistance programs. These Congressional efforts offered financial assistance and benefits to impacted consumers and offered relief for consumers through changes to credit reporting requirements and mandated forbearance on certain federally backed mortgages and student loans. Specific to financial institutions,small businesses. As the CARES Act provided the option for financial institutions, including Discover, to temporarily suspend certain accounting requirements related to troubled debt restructurings ("TDRs") and delay the effective date of CECL for the duration of the national emergency. See "— Banking — Capital Standards and Stress Testing" below for more information. It also authorized the Federal Deposit Insurance Corporation ("FDIC") to establish an emergency guarantee program, which could be used to temporarily increase deposit insurance limits. Additionalpandemic continues, additional legislative and regulatory action may be proposed and could include requirementsprovisions that could significantly impact our prospects and business practices. The impact of these legislative and regulatory initiatives on us,our business, the economy and the U.S.United States consumer will depend upon a wide variety of factors, some of which are yet to be identified.
Banking
Capital Standards and Stress Testing
DiscoverDFS is subject to mandatory supervisory stress tests every other year and is required to submit annual capital plans to the Federal Reserve based on forward-looking internal forward-looking analysis of income and capital levels under expected and stressful conditions. DiscoverDFS is also subject to capital buffer requirements, including the Stress Capital Buffer ("SCB"), which requires maintenance of regulatory capital levels above a threshold that is established based on the results of supervisory stress tests after accounting for planned dividend payments.
OnIn June 25, 2020, we received results of the Federal Reserve’s supervisory stress tests and preliminary SCB requirement. The notice indicated that Discover’s capital ratios remain above all required minimums under each of the supervisory scenarios and our preliminary SCB requirement was set at 3.5%, which was announced as final in a public notice issued by the Federal Reserve on August 10, 2020. In addition to the stress test and SCB results, the Federal Reserve also notified Discoverissued a notice informing DFS that it and all other firms that participated in the 2020 Comprehensive Capital Analysis and Review ("CCAR") exercise would be required to submit a revised capital plan that willplans to be assessed by the Federal Reserve later this year under newly developed scenarios incorporating economic stresses reflecting the ongoing COVID-19 pandemic. The Federal Reserve has sincereleased the supervisory scenariosnotified all firms subject to CCAR that willthey would be utilized as part of thesubject to temporary restrictions on capital plan resubmission and informed covered firms that capital plans must be submitted by November 2, 2020, with the Federal Reserve planning to release firm-specific results via public disclosure before the end of the year. It is not yet known whether the Federal Reserve will utilize the capital plan resubmission to adjust firms’ SCB or distribution limits. In the interim, for bothdistributions in the third and fourth quarter of 2020 the Federal Reserve has capped covered firms’ capital distributionsthat restricted most share repurchases and limited dividends based on a formula that restricts most share repurchases and limits dividends based ontakes into account the firm's average net income duringover the pastpreceding four quarters.
On November 2, 2020, DFS submitted its revised capital plan as part of the CCAR resubmission process, and the Federal Reserve publicly announced the results of its analysis on December 18, 2020. The SCB is anticipatedresults indicate that DFS' regulatory capital ratios remained above all minimum requirements under each of the stress test scenarios. However, due to become effective beginning inongoing economic uncertainty, the firstFederal Reserve extended the temporary restrictions on capital distributions, with modifications, for all firms subject to the Federal Reserve's capital planning rule through the second quarter of 2021. ConsistentFollowing an announcement by the Federal Reserve on June 24, 2021, these restrictions were lifted and, effective June 30, 2021, DFS was authorized to make capital distributions that are consistent with the Federal Reserve's capital rule, inclusive of DFS' final SCB requirement of 3.5% that was previously announced by the Federal Reserve on August 10, 2020, and that remained in effect until the conclusion of the 2021 CCAR process and the subsequent, related announcement of DFS' adjusted SCB requirement.
On January 19, 2021, the Federal Reserve finalized regulatory expectations, we continueamendments that made targeted changes to conduct forward-looking sensitivity analysis and stress tests to assess the potential impact of economic changes resulting from the COVID-19 pandemic on capital planning, regulatory reporting and provide this informationSCB requirements for firms subject to our Board of Directors as well as our regulators.
Category IV standards to be consistent with the Federal Reserve’s regulatory tailoring framework. The final rules generally align to instructions the Federal Reserve issued a public notice on September 30, 2020, that it is soliciting comments on proposed changespreviously provided to its capital plan rule to reflect the tailored requirements for Category IV bank holding companies (including Discover). Among other things, the proposed rule would clarify that Category IV firms will be required to submit aregarding their respective capital plan to the Federal Reserve annually even in off-cycle years and would havesubmissions. The amended rules also provide Category IV firms, including DFS, with the option to submit to supervisory stress tests during off-cycleoff years if they wished to adjust their SCB. The deadline to provide comments towish for the Federal Reserve is November 20, 2020, andto reset the stress test portion of their 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 finaladditional changes to existing guidance or new guidance are uncertain.
On June 24, 2021, the Federal Reserve publicly announced the results of its supervisory stress tests for the firms required to participate in the 2021 CCAR process. In accordance with the capital plan rule amendments that were finalized in January 2021, DFS elected not to participate in the 2021 supervisory stress tests. Nevertheless, DFS was required to submit a capital plan based on a forward-looking internal assessment of income and capital under baseline and stressful conditions. This plan was submitted by DFS to the Federal Reserve on April 5, 2021. The Federal Reserve thereafter used our 2021 capital plan submission to assess its capital planning process and positions and, as of August 5, 2021, announced DFS'
adjusted SCB requirement of 3.6% to reflect DFS' planned common stock dividends. This adjusted SCB is unknown.effective as of October 1, 2021.
London Interbank Offered Rate
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, on March 5, 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 will cease 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, usually some form of SOFR. On July 29, 2021, the ARRC announced its recommendation of forward-looking term rates based on SOFR as additional alternative reference rate options.
We have a cross-functional team overseeing 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 primarily to three instruments—variable-rate student loans, interest rate swaps and capital markets securities—and we have materially reduced our remaining exposures in all of these instruments.
As of September 30, 2021, LIBOR-indexed variable-rate loans comprise approximately 44% of our private student loan portfolio and approximately 5% 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. United States banking regulators have directed banks to cease entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021. Therefore, beginning in November 2021, we will only originate new variable-rate student loans indexed to term SOFR.
We ceased entering into new LIBOR-indexed interest rate 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 one remaining LIBOR-indexed interest rate swap will mature 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 SOFR once 1- and 3-month LIBOR cease to be published in 2023. Approximately $1.5 billion of our capital markets securities that mature after June 2023 with no fallback provisions would be covered under pending federal legislation that would allow us to replace the LIBOR index with SOFR under a safe-harbor provision.Approximately $800 million of our capital markets securities contain fallback provisions that would not be covered under pending federal legislation; however, shortly after the expected June 2023 USD LIBOR cessation date, these securities will either mature or we may exercise our right to call and redeem them.
We have prepared for the cessation of USD LIBOR by taking steps to avoid new exposures and actively reduce our remaining exposures.We are on track to complete before year-end 2021 any remaining transition work, including providing our customers with information about the cessation of USD LIBOR and how it will affect their contracts with us.
Consumer Financial Services
The Consumer Financial Protection Bureau ("CFPB")CFPB regulates consumer financial products and services 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" and ensuring that consumers have access to fair, transparent and competitive financial products and services. The CFPB has rulemaking, supervision and enforcement powers with respect to federal consumer protection laws. 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 bi-annualbiennial review of the consumer credit card market. In response to the COVID-19 pandemic, federal banking regulators as well as the CFPB have encouraged banks to work with their borrowers and provided regulatory flexibility, given exam flexibility, delayed the Home Mortgage Disclosure Act and other data collections, and promoted other areas for relief. Similar to the banking regulators, we continue to be in regular contactDecember 2020, certain of our subsidiaries entered into a consent order with the CFPB regarding identified private student loan servicing practices. See Note 14: Litigation and Regulatory Matters to our condensed consolidated financial statements for more information.
Former Federal Trade Commissioner Rohit Chopra was sworn in as the COVID-19 pandemic evolves. Similarly, weDirector of the CFPB on October 12, 2021. Under Mr. Chopra’s leadership, the CFPB’s priorities are monitoringexpected to focus on, among other things, vigorous enforcement of existing consumer protection laws, with a particular focus on unfair, deceptive and abusive acts and practices and fair lending, student lending and servicing, fair lending, debt collection and credit reporting. These strategies and priorities and any resulting regulatory developments, findings, potential supervisory or enforcement actions and ratings could negatively impact business strategies, limit or change our business practices, limit consumer product offerings, invest more management time and resources in compliance efforts, limit fees charged for services, limit our ability to implement certain enhancements to product features and functionality 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 activity in the states and are in contact with state officials, as necessary, to ensure we are awarecost of and in compliance with state requirements respondingaccess to COVID-19.credit for consumers and results of business operations.
Data Security and Privacy
Policymakers at the federal and state levels remain focused on measures to enhanceenhancing 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. For example, theThe 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 on January 1, 2020, and the final California Attorney GeneralGeneral's final regulations became effective on August 14, 2020. California Attorney General2020, with enforcement for CCPA began onbeginning July 1, 2020. The California Privacy Rights Act ("CPRA"), a ballot measure led by the original proponent of the CCPA, has launched apassed on November 3, 2020, California ballot initiative with the goal of expanding the rights and remedies created bylargely enters into force on January 1, 2023. The CPRA replaces the CCPA while protectingto enhance consumer privacy protections further and creates a new California Privacy Protection Agency ("CPPA"). In September, the new law from future legislative amendments. This initiative will appear onCPPA Board initiated the November 2020 ballot.CPRA regulatory phase by issuing a request for preliminary comments. While it is too earlythe CPRA retains an exemption for information collected, processed, sold, or disclosed subject to determine the fullGramm-Leach-Bliley Act, we continue to evaluate the impact of these developments, they may result in the imposition of requirementsCPRA on Discoverour businesses and other providers of consumer financial services or networks that could adversely affect our businesses.services.
Payment Networks
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("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 and technology development strategies in order to assess their impact on our business and on competition in the marketplace. Following an inquiry by the U.S. Department of Justice into some of these competitor pricing strategies, PULSE filed a lawsuit against Visa in late 2014 with respect to these competitive concerns. The Court granted summary judgment in favor of Visa in August 2018. PULSE filed an appeal on January 17, 2019, and Visa filed their response to the appeal on April 5, 2019. The Fifth Circuit Court of Appeals held a hearing on the appeal on October 9, 2019, and will hold an additional hearing on the appeal in the coming months. Visa also faces ongoing merchant litigation as it relates to the underlying anticompetitive behavior that is the subject of PULSE's case against Visa. 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.
For more information on how the regulatory and supervisory environment, ongoing enforcement actions and findings and changes to laws and regulations could impact our strategies, the value of our assets or otherwise adversely affect our business see "Risk Factors — Current Economic and Regulatory Environment" in our annual report on Form 10-K year ended December 31, 2019. For more information on recent matters affecting us, see Note 14: Litigation and Regulatory Matters to our condensed consolidated financial statements.
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 theeach segment's operations of each segment, as well asand the allocation conventions used in our business segment reporting, see Note 17: 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, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Direct Banking | | | | | | | |
| Interest income | | | | | | | |
| Credit card | $ | 2,171 | | | $ | 2,465 | | | $ | 6,760 | | | $ | 7,223 | |
| Private student loans | 182 | | | 204 | | | 569 | | | 612 | |
| Personal loans | 237 | | | 249 | | | 722 | | | 727 | |
| Other | 91 | | | 122 | | | 284 | | | 391 | |
| Total interest income | 2,681 | | | 3,040 | | | 8,335 | | | 8,953 | |
| Interest expense | 416 | | | 638 | | | 1,482 | | | 1,915 | |
| Net interest income | 2,265 | | | 2,402 | | | 6,853 | | | 7,038 | |
Provision for credit losses(1) | 750 | | | 799 | | | 4,603 | | | 2,395 | |
| Other income | 371 | | | 409 | | | 1,091 | | | 1,217 | |
| Other expense | 969 | | | 1,069 | | | 3,069 | | | 3,097 | |
| Income before income taxes | 917 | | | 943 | | | 272 | | | 2,763 | |
| Payment Services | | | | | | | |
| Net interest income | — | | | — | | | — | | | 1 | |
Provision for credit losses(1) | — | | | — | | | — | | | — | |
| Other income | 78 | | | 89 | | | 320 | | | 259 | |
| Other expense | 36 | | | 38 | | | 172 | | | 112 | |
| Income before income taxes | 42 | | | 51 | | | 148 | | | 148 | |
| Total income before income taxes | $ | 959 | | | $ | 994 | | | $ | 420 | | | $ | 2,911 | |
| | | | | | | |
(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Digital Banking | | | | | | | |
| Interest income | | | | | | | |
| Credit card loans | $ | 2,193 | | | $ | 2,171 | | | $ | 6,452 | | | $ | 6,760 | |
| Private student loans | 184 | | | 182 | | | 554 | | | 569 | |
| Personal loans | 219 | | | 237 | | | 662 | | | 722 | |
| Other loans | 30 | | | 27 | | | 85 | | | 78 | |
| Other interest income | 48 | | | 64 | | | 156 | | | 206 | |
| Total interest income | 2,674 | | | 2,681 | | | 7,909 | | | 8,335 | |
| Interest expense | 269 | | | 416 | | | 875 | | | 1,482 | |
| Net interest income | 2,405 | | | 2,265 | | | 7,034 | | | 6,853 | |
| Provision for credit losses | 185 | | | 750 | | | (45) | | | 4,603 | |
| Other income | 447 | | | 371 | | | 1,284 | | | 1,091 | |
| Other expense | 1,151 | | | 969 | | | 3,290 | | | 3,069 | |
| Income before income taxes | 1,516 | | | 917 | | | 5,073 | | | 272 | |
| Payment Services | | | | | | | |
| | | | | | | |
| | | | | | | |
| Other (loss) income | (75) | | | 78 | | | 833 | | | 320 | |
| Other expense | 39 | | | 36 | | | 203 | | | 172 | |
| (Loss) income before income taxes | (114) | | | 42 | | | 630 | | | 148 | |
| Total income before income taxes | $ | 1,402 | | | $ | 959 | | | $ | 5,703 | | | $ | 420 | |
| | | | | | | |
The following table presents information on transactions and transaction volume (dollars in(in millions): | | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Network Transaction Volume | Network Transaction Volume | | | | | | | | Network Transaction Volume | | | | | | | |
| PULSE Network | PULSE Network | $ | 54,993 | | | $ | 47,535 | | | $ | 157,026 | | | $ | 142,030 | | PULSE Network | $ | 59,872 | | | $ | 54,993 | | | $ | 183,126 | | | $ | 157,026 | |
| Network Partners | Network Partners | 8,917 | | | 6,656 | | | 23,177 | | | 18,269 | | Network Partners | 10,377 | | | 8,917 | | | 29,474 | | | 23,177 | |
Diners Club(1) | Diners Club(1) | 5,839 | | | 8,386 | | | 17,915 | | | 25,136 | | Diners Club(1) | 6,547 | | | 5,839 | | | 18,570 | | | 17,915 | |
| Total Payment Services | Total Payment Services | 69,749 | | | 62,577 | | | 198,118 | | | 185,435 | | Total Payment Services | 76,796 | | | 69,749 | | | 231,170 | | | 198,118 | |
Discover Network—Proprietary(2) | Discover Network—Proprietary(2) | 38,699 | | | 38,722 | | | 106,228 | | | 110,664 | | Discover Network—Proprietary(2) | 49,360 | | | 38,699 | | | 135,763 | | | 106,228 | |
| Total Network Transaction Volume | Total Network Transaction Volume | $ | 108,448 | | | $ | 101,299 | | | $ | 304,346 | | | $ | 296,099 | | Total Network Transaction Volume | $ | 126,156 | | | $ | 108,448 | | | $ | 366,933 | | | $ | 304,346 | |
| Transactions Processed on Networks | Transactions Processed on Networks | | | | | | | | Transactions Processed on Networks | | | | | | | |
| Discover Network | Discover Network | 679 | | | 710 | | | 1,889 | | | 1,986 | | Discover Network | 868 | | | 679 | | | 2,345 | | | 1,889 | |
| PULSE Network | PULSE Network | 1,270 | | | 1,220 | | | 3,668 | | | 3,535 | | PULSE Network | 1,415 | | | 1,270 | | | 4,124 | | | 3,668 | |
| Total Transactions Processes on Networks | 1,949 | | | 1,930 | | | 5,557 | | | 5,521 | | |
| Total Transactions Processed on Networks | | Total Transactions Processed on Networks | 2,283 | | | 1,949 | | | 6,469 | | | 5,557 | |
| Credit Card Volume | Credit Card Volume | | | | | | | | Credit Card Volume | | | | | | | |
Discover Card Volume(3) | Discover Card Volume(3) | $ | 39,783 | | | $ | 41,168 | | | $ | 110,362 | | | $ | 117,489 | | Discover Card Volume(3) | $ | 50,389 | | | $ | 39,783 | | | $ | 138,772 | | | $ | 110,362 | |
Discover Card Sales Volume(4) | Discover Card Sales Volume(4) | $ | 37,134 | | | $ | 37,432 | | | $ | 101,843 | | | $ | 106,995 | | Discover Card Sales Volume(4) | $ | 47,613 | | | $ | 37,134 | | | $ | 130,817 | | | $ | 101,843 | |
|
(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.activities.
(4)Represents Discover card activity related to sales net of returns.
DirectDigital Banking
Our DirectDigital Banking segment reported pretax income of $1.5 billion and $5.1 billion, respectively, for the three and nine months ended September 30, 2021, as compared to a pretax income of $917 million and $272 million, respectively, for the three and nine months ended September 30, 20202020.
Net interest income increased for the three months ended September 30, 2021, as compared to pretaxthe same period in 2020, primarily driven by lower funding costs. Interest income remained flat during the three months ended September 30, 2021, as compared to the same period in 2020, due to favorable interest charge-offs offset by a lower card revolve rate. Interest expense decreased during the three months ended September 30, 2021, as compared to the same period in 2020, due to lower average market rates, a lower funding base, lower pricing on deposits and higher coupon maturities.
Net interest income increased for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily driven by lower funding costs, partially offset by a lower average level of $943 millionoutstanding loan receivables and $2.8 billion, respectively, forlower yields on loans. Interest income decreased during the nine months ended September 30, 2021, as compared to the same period in 2020. This decrease was primarily due to a lower average level of card loan receivables, driven by higher payment rates, as well as lower yields on loans due to the lower market rates. Interest expense decreased during the nine months ended September 30, 2021, as compared to the same period in 2020 due to lower average market rates, a lower funding base, lower pricing on deposits and higher coupon maturities.
For the three and nine months ended September 30, 2019.
Net interest income2021, the overall portfolio provision for credit losses decreased for the three and nine months ended September 30, 2020, as compared to the same periods in 20192020, primarily due to reserve releases in the current periods versus reserve builds in the prior periods and lower net charge-offs. The overall reserve release during the three months ended September 30, 2021, was primarily driven by lower yields onimprovements in the macroeconomic forecast and continued stable credit card loansperformance, partially offset by lower funding costs. Interest income decreased modest credit card loan receivables growth and seasonality in private student loan originations during the periods. The reserve buildduring the three andmonths ended September 30, 2020, was driven by a seasonal increase in private student loan originations during the period. The reserve release during the nine months ended September 30, 2020, as compared to2021, was primarily driven by improvements in the same periodsmacroeconomic forecast, continued stable credit performance and a reduction in 2019, primarily as a result of lower yields on credit card loans, which was the result of lower market rates. Interest expense decreasedloan receivables outstanding during the three and nine months ended September 30, 2020, as compared to the same periods in 2019 due to lower average market rates and lower funding costs.
period. The provision for credit losses increased forreserve build during the nine months ended September 30, 2020, as compared towas primarily driven by the same period in 2019, which primarily reflects the impact of life of loan reserving under CECL and a significantunfavorable change in the economic outlook due toresulting from the COVID-19 pandemic. For the three months ended September 30, 2020, the provision for credit losses decreased as compared with the same period in 2019 primarily due to lower levels of net charge-offs and lower reserve builds. For a detailed discussion on provision for credit losses, see "— Loan Quality — Provision and Allowance for Credit Losses."
Total other income decreased increasedfor the three and nine months ended September 30, 2020,2021, as compared to the same periods in 2019,2020, which was primarily due to a decreasean increase in discount and interchange revenue and loan fee income.revenue. The decreaseincrease in discount and interchange revenue was partially offset by a decreasean increase in rewards costs, both of which were the result of lowerhigher sales volume due toduring the impacts of the COVID-19 pandemic. Loan fee income decreased due to lower volume and late fees. Late fees decreased as a result of lower delinquencies as we continue to work with our customers through the economic stresses from COVID-19.period.
Total other expense decreasedincreased for the three months ended September 30, 2020,2021, as compared to the same period in 2019, which was2020, primarily driven bydue to increases in marketing and business development, other expense and professional fees. Marketing and business development decreasedincreased due to COVID-19 relatedaccelerated growth investments primarily in card. The increase in other expense reductions in brand advertising for card. Professional fees were lower primarilywas driven by a decrease in collection fees. Thislegal accrual. The professional fees increase was partially offsetdriven primarily by an increase in recovery fees.
Total other expense increased for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to increases in employee compensation and benefits, other expense, professional fees and information processingmarketing and communications.business development. Employee compensation and benefits increased as a result of a larger headcount basehigher bonus accruals and higher average salaries.salaries, partially offset by lower headcount. The increase in information processingother expense was driven by a legal accrual. The professional fees increase was driven primarily by an increase in recovery fees. Marketing and communications wasbusiness development increased due to accelerated growth investments primarily in infrastructure.card.
Discover card sales volume was $37.1$47.6 billion and $101.8$130.8 billion, respectively, for the three and nine months ended September 30, 2020,2021, which was a decreasean increase of 0.8%28.2% and 4.8%28.4%, respectively, as compared to the same periods in 2019.2020. This volume declinegrowth was primarily driven by lowerhigher consumer spending as a resultacross all spending categories, reflecting the easing of COVID-19.COVID-19 restrictions and continued economic expansion.
Payment Services
Our Payment Services segment reported pretax loss of $114 million and pretax income of $42 million and $148$630 million, respectively, for the three and nine months ended September 30, 2020,2021, as compared to pretax income of $51$42 million and $148 million respectively, for the same periods in 2019.2020. The decrease in segment pretax income for the three months ended September 30, 2020 and 2019, respectively,2021, was primarily driven
by lower volume. Segment pretax income was relatively flat for nine months ended September 30, 2020 and 2019, respectively.unrealized losses on equity investments. Unrealized losses on equity investments are the result of changes in the fair value of our investments in payment services entities that have actively traded stock. The increase in segment pretax income for the nine months ended September 30, 2021, was primarily due to unrealized gains on equity investment salesinvestments. Unrealized gains on equity investments are the result of investments in payment services entities that are carried at fair value because the shares are actively traded. This increase was partially offset by a decrease in realized gains on the sale of equity investments during the first and second quarters, offset by an increase in segment pretax expense driven by a COVID-19 related non-cash impairment charge on the Diners Club business in the second quarter.prior period.
Critical Accounting Estimates
In preparing our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States ("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 changes, 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,some instances, could have a material effect on our consolidated financial condition. Management has identified the estimatesestimate related to our allowance for credit losses on loan receivables, the evaluation of goodwill for potential impairment and the accrual of income taxes as a critical accounting estimates. Discussion ofestimate. The critical accounting estimatesestimate related to the evaluation of goodwillallowance for potential impairment and the accrual of income taxes arecredit losses is discussed in greater detail in our annual report on Form 10-K for the year ended December 31, 2019. That discussion can be found within2020, under "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates." There have not been any material changes in the methods used to formulate thesethis critical accounting estimates related to the evaluation of goodwill for potential impairment and the accrual of income taxesestimate from those discussed in our annual report on Form 10-K for the year ended December 31, 2019. Discussion of our critical accounting estimate related to our allowance for credit losses on loan receivables, which has been updated for adoption of the CECL approach for estimating losses on January 1, 2020, is discussed below. For more information on CECL adoption, see Note 1: Background and Basis of Presentation to our condensed consolidated financial statements.2020.
Allowance for Credit Losses on Loan Receivables
We base our allowance for credit losses on several analyses that help us estimate credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. In deriving this estimate, 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. Our estimation process includes models that predict customer losses based on risk characteristics and portfolio attributes, macroeconomic variables and historical data and analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced to determine the allowance. The allowance for credit losses for each loan product type is based on: 1) a reasonable and supportable forecast period, 2) a reversion period and 3) a post-reversion period based on historical information covering the remaining life of the loan. For credit card loans, we use a modeling framework that includes the following components: 1) probability of default, 2) exposure at default and 3) loss given default, as well as estimated recoveries for estimating expected credit losses. For student loans and personal loans, we use vintage-based models that estimate expected credit losses net of recoveries over the life of the loans. The considerations in these models include past and current loan performance, loan growth and seasoning, risk management practices, account collection strategies, economic conditions, bankruptcy filings, policy changes and forecasting uncertainties. Given the same information, others may reach different reasonable estimates.
The key assumptions requiring significant judgment in the allowance for credit losses estimate on a quarterly basis include determination of the lengths of the reasonable and supportable forecast and reversion periods, as well as the macroeconomic variables selected for use in loss forecast models. The lengths of the reasonable and supportable forecast and reversion periods can vary and are subject to a quarterly assessment that considers the economic outlook and level of variability among macroeconomic forecasts. Generally, a straight-line method is used to revert from the reasonable and supportable forecast period to the post-reversion period, but in certain stressed scenarios, a weighted approach may be deemed more appropriate. The specific macroeconomic variables most significant to the loss forecast models may change over time, but generally include measures of consumer indebtedness, unemployment, personal income and housing-related metrics.
The overall economic environment directly impacts both the reasonable and supportable forecast and reversion periods, as well as 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 recently under 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. See "— Loan Quality" and Note 3: Loan Receivables to our condensed consolidated financial statements for further details about our allowance for credit losses.
Earnings Summary
The following table outlines changes in our condensed consolidated statements of income (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | 2020 vs. 2019
(Decrease) Increase | | | | For the Nine Months Ended September 30, | | | | 2020 vs. 2019
(Decrease) Increase | | |
| | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % |
| Interest income | $ | 2,681 | | | $ | 3,040 | | | $ | (359) | | | (12) | % | | $ | 8,335 | | | $ | 8,954 | | | $ | (619) | | | (7) | % |
| Interest expense | 416 | | | 638 | | | (222) | | | (35) | % | | 1,482 | | | 1,915 | | | (433) | | | (23) | % |
| Net interest income | 2,265 | | | 2,402 | | | (137) | | | (6) | % | | 6,853 | | | 7,039 | | | (186) | | | (3) | % |
Provision for credit losses(1) | 750 | | | 799 | | | (49) | | | (6) | % | | 4,603 | | | 2,395 | | | 2,208 | | | 92 | % |
| Net interest income after provision for credit losses | 1,515 | | | 1,603 | | | (88) | | | (5) | % | | 2,250 | | | 4,644 | | | (2,394) | | | (52) | % |
| Other income | 449 | | | 498 | | | (49) | | | (10) | % | | 1,411 | | | 1,476 | | | (65) | | | (4) | % |
| Other expense | 1,005 | | | 1,107 | | | (102) | | | (9) | % | | 3,241 | | | 3,209 | | | 32 | | | 1 | % |
| Income before income taxes | 959 | | | 994 | | | (35) | | | (4) | % | | 420 | | | 2,911 | | | (2,491) | | | (86) | % |
| Income tax expense | 188 | | | 224 | | | (36) | | | (16) | % | | 78 | | | 662 | | | (584) | | | (88) | % |
| Net income | $ | 771 | | | $ | 770 | | | $ | 1 | | | — | % | | $ | 342 | | | $ | 2,249 | | | $ | (1,907) | | | (85) | % |
| | | | | | | | | | | | | | | |
(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | 2021 vs. 2020
(Decrease) Increase | | For the Nine Months Ended September 30, | | 2021 vs. 2020
(Decrease) Increase |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
| Interest income | $ | 2,674 | | | $ | 2,681 | | | $ | (7) | | | NM | | $ | 7,909 | | | $ | 8,335 | | | $ | (426) | | | (5) | % |
| Interest expense | 269 | | | 416 | | | (147) | | | (35) | % | | 875 | | | 1,482 | | | (607) | | | (41) | % |
| Net interest income | 2,405 | | | 2,265 | | | 140 | | | 6 | % | | 7,034 | | | 6,853 | | | 181 | | | 3 | % |
| Provision for credit losses | 185 | | | 750 | | | (565) | | | (75) | % | | (45) | | | 4,603 | | | (4,648) | | | (101) | % |
| Net interest income after provision for credit losses | 2,220 | | | 1,515 | | | 705 | | | 47 | % | | 7,079 | | | 2,250 | | | 4,829 | | | 215 | % |
| Other income | 372 | | | 449 | | | (77) | | | (17) | % | | 2,117 | | | 1,411 | | | 706 | | | 50 | % |
| Other expense | 1,190 | | | 1,005 | | | 185 | | | 18 | % | | 3,493 | | | 3,241 | | | 252 | | | 8 | % |
| Income before income taxes | 1,402 | | | 959 | | | 443 | | | 46 | % | | 5,703 | | | 420 | | | 5,283 | | | NM |
| Income tax expense | 311 | | | 188 | | | 123 | | | 65 | % | | 1,321 | | | 78 | | | 1,243 | | | NM |
| Net income | $ | 1,091 | | | $ | 771 | | | $ | 320 | | | 42 | % | | $ | 4,382 | | | $ | 342 | | | $ | 4,040 | | | NM |
| | | | | | | | | | | | | | | |
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-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 reducereduces 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-earning assets, including our liquidity 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 Funds rate, interest rate on excess reserves and London Interbank Offered Rate ("LIBOR");LIBOR; and
•The effectiveness of interest rate swaps in our interest rate risk management program.
Net interest income decreasedincreased for the three and nine months ended September 30, 2020,2021, as compared to the same periodsperiod in 20192020, primarily driven by lower yields on credit card loans partially offset by lower funding costs. Interest income remained flat during the three months ended September 30, 2021, as compared to the same period in 2020, due to favorable interest charge-offs offset by a lower card revolve rate. Interest expense decreased during the three months ended September 30, 2021, as compared to the same period in 2020, due to lower average market rates, a lower funding base, lower pricing on deposits and higher coupon maturities.
Net interest income increased for the nine months ended September 30, 2020,2021, as compared to the same periodsperiod in 2019,2020, primarily asdriven by lower funding costs, partially offset by a resultlower average level of outstanding loan receivables and lower yields on creditloans. Interest income decreased during the nine months ended September 30, 2021, as compared to the same period in 2020. This decrease was primarily due to a lower average level of card loan receivables, driven by higher payment rates, as well as lower yields on loans which wasdue to the result of lower market rates. Interest expense decreased during the three and nine months ended September 30, 2020,2021, as compared to the same periodsperiod in 20192020 due to lower average market rates, anda lower funding costs.base, lower pricing on deposits and higher coupon maturities.
Average Balance Sheet Analysis
(dollars in millions) | | | For the Three Months Ended September 30, | | | For the Three Months Ended September 30, |
| | | 2020 | | | 2019 | | | 2021 | | 2020 |
| | | Average Balance | | Yield/Rate | | Interest | | Average Balance | | Yield/Rate | | Interest | | Average Balance | | Yield/Rate | | Interest | | Average Balance | | Yield/Rate | | Interest |
| Assets | Assets | | | | | | | | | | | | Assets | | | | | | | | | | | |
| Interest-earning assets | Interest-earning assets | | Interest-earning assets | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 12,552 | | | 0.12 | % | | $ | 4 | | | $ | 7,029 | | | 2.20 | % | | $ | 39 | | Cash and cash equivalents | $ | 12,192 | | | 0.16 | % | | $ | 3 | | | $ | 12,552 | | | 0.12 | % | | $ | 4 | |
| Restricted cash | Restricted cash | 775 | | | 0.09 | % | | — | | | 737 | | | 2.11 | % | | 4 | | Restricted cash | 571 | | | 0.03 | % | | NM | | 775 | | | 0.09 | % | | NM |
| Other short-term investments | Other short-term investments | 4,529 | | | 0.15 | % | | 2 | | | 1,000 | | | 2.66 | % | | 7 | | Other short-term investments | NM | | 0.10 | % | | NM | | 4,529 | | | 0.15 | % | | 2 | |
| Investment securities | Investment securities | 10,760 | | | 2.13 | % | | 58 | | | 9,186 | | | 2.26 | % | | 53 | | Investment securities | 8,431 | | | 2.09 | % | | 45 | | | 10,760 | | | 2.13 | % | | 58 | |
Loan receivables(1) | Loan receivables(1) | | Loan receivables(1) | |
Credit card(2) | 69,643 | | | 12.40 | % | | 2,171 | | | 73,248 | | | 13.35 | % | | 2,465 | | |
Credit card loans(2) | | Credit card loans(2) | 69,416 | | | 12.53 | % | | 2,193 | | | 69,643 | | | 12.40 | % | | 2,171 | |
| Private student loans | Private student loans | 9,790 | | | 7.40 | % | | 182 | | | 9,459 | | | 8.54 | % | | 204 | | Private student loans | 9,932 | | | 7.36 | % | | 184 | | | 9,790 | | | 7.40 | % | | 182 | |
| | Personal loans | Personal loans | 7,255 | | | 13.03 | % | | 237 | | | 7,522 | | | 13.17 | % | | 249 | | Personal loans | 6,900 | | | 12.61 | % | | 219 | | | 7,255 | | | 13.03 | % | | 237 | |
| Other | 1,734 | | | 6.25 | % | | 27 | | | 1,116 | | | 6.72 | % | | 19 | | |
| Other loans | | Other loans | 2,108 | | | 5.41 | % | | 30 | | | 1,734 | | | 6.25 | % | | 27 | |
| Total loan receivables | Total loan receivables | 88,422 | | | 11.78 | % | | 2,617 | | | 91,345 | | | 12.76 | % | | 2,937 | | Total loan receivables | 88,356 | | | 11.79 | % | | 2,626 | | | 88,422 | | | 11.78 | % | | 2,617 | |
| Total interest-earning assets | Total interest-earning assets | 117,038 | | | 9.11 | % | | 2,681 | | | 109,297 | | | 11.03 | % | | 3,040 | | Total interest-earning assets | 109,550 | | | 9.68 | % | | 2,674 | | | 117,038 | | | 9.11 | % | | 2,681 | |
Allowance for credit losses(3) | (8,183) | | | (3,198) | | | |
| Allowance for credit losses | | Allowance for credit losses | (7,020) | | | (8,183) | | |
| Other assets | Other assets | 5,981 | | | 4,674 | | | Other assets | 6,430 | | | 5,981 | | |
| Total assets | Total assets | $ | 114,836 | | | $ | 110,773 | | | Total assets | $ | 108,960 | | | $ | 114,836 | | |
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | | | | Liabilities and Stockholders' Equity | | | | |
| Interest-bearing liabilities | Interest-bearing liabilities | | Interest-bearing liabilities | |
| Interest-bearing deposits | Interest-bearing deposits | | Interest-bearing deposits | |
| Time deposits | Time deposits | $ | 32,063 | | | 2.33 | % | | 188 | | | $ | 33,757 | | | 2.61 | % | | 222 | | Time deposits | $ | 22,804 | | | 1.76 | % | | 101 | | | $ | 32,063 | | | 2.33 | % | | 188 | |
Money market deposits(5) | 8,104 | | | 0.94 | % | | 19 | | | 7,071 | | | 2.10 | % | | 37 | | |
Money market deposits(3) | | Money market deposits(3) | 8,108 | | | 0.53 | % | | 11 | | | 8,104 | | | 0.94 | % | | 19 | |
| Other interest-bearing savings deposits | Other interest-bearing savings deposits | 36,655 | | | 0.87 | % | | 80 | | | 28,801 | | | 2.03 | % | | 148 | | Other interest-bearing savings deposits | 41,059 | | | 0.42 | % | | 44 | | | 36,655 | | | 0.87 | % | | 80 | |
| Total interest-bearing deposits | Total interest-bearing deposits | 76,822 | | | 1.49 | % | | 287 | | | 69,629 | | | 2.32 | % | | 407 | | Total interest-bearing deposits | 71,971 | | | 0.86 | % | | 156 | | | 76,822 | | | 1.49 | % | | 287 | |
| Borrowings | Borrowings | | Borrowings | |
| Short-term borrowings | Short-term borrowings | 350 | | | 3.10 | % | | 3 | | | 1 | | | 2.18 | % | | — | | Short-term borrowings | 6 | | | 0.24 | % | | NM | | 350 | | | 3.10 | % | | 3 | |
Securitized borrowings(4)(5) | Securitized borrowings(4)(5) | 12,115 | | | 1.04 | % | | 31 | | | 13,719 | | | 2.95 | % | | 102 | | Securitized borrowings(4)(5) | 8,292 | | | 1.10 | % | | 22 | | | 12,115 | | | 1.04 | % | | 31 | |
Other long-term borrowings(4) | 10,426 | | | 3.60 | % | | 95 | | | 11,047 | | | 4.64 | % | | 129 | | |
Other long-term borrowings(5)(6) | | Other long-term borrowings(5)(6) | 9,550 | | | 3.78 | % | | 91 | | | 10,426 | | | 3.60 | % | | 95 | |
| Total borrowings | Total borrowings | 22,891 | | | 2.23 | % | | 129 | | | 24,767 | | | 3.70 | % | | 231 | | Total borrowings | 17,848 | | | 2.53 | % | | 113 | | | 22,891 | | | 2.23 | % | | 129 | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | 99,713 | | | 1.66 | % | | 416 | | | 94,396 | | | 2.68 | % | | 638 | | Total interest-bearing liabilities | 89,819 | | | 1.19 | % | | 269 | | | 99,713 | | | 1.66 | % | | 416 | |
| Other liabilities and stockholders' equity | Other liabilities and stockholders' equity | 15,123 | | | 16,377 | | | Other liabilities and stockholders' equity | 19,141 | | | 15,123 | | |
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 114,836 | | | $ | 110,773 | | | Total liabilities and stockholders' equity | $ | 108,960 | | | $ | 114,836 | | |
| Net interest income | Net interest income | | | $ | 2,265 | | | | | $ | 2,402 | | Net interest income | | | $ | 2,405 | | | | | $ | 2,265 | |
Net interest margin(6) | | 10.19 | % | | | | 10.43 | % | | | |
Net yield on interest-earning assets(7) | | 7.70 | % | | 8.72 | % | | |
Interest rate spread(8) | | 7.45 | % | | 8.35 | % | | |
Net interest margin(7) | | Net interest margin(7) | | 10.80 | % | | | | 10.19 | % | | |
Net yield on interest-earning assets(8) | | Net yield on interest-earning assets(8) | | 8.71 | % | | 7.70 | % | |
Interest rate spread(9) | | Interest rate spread(9) | | 8.49 | % | | 7.45 | % | |
| |
| | | | For the Nine Months Ended September 30, | | | For the Nine Months Ended September 30, |
| | | 2020 | | | 2019 | | | 2021 | | 2020 |
| | | Average
Balance | | Yield/Rate | | Interest | | Average
Balance | | Yield/Rate | | Interest | | Average
Balance | | Yield/Rate | | Interest | | Average
Balance | | Yield/Rate | | Interest |
| Assets | Assets | | | | | | | | | | | | Assets | | | | | | | | | | | |
| Interest-earning assets | Interest-earning assets | | Interest-earning assets | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 11,522 | | | 0.36 | % | | $ | 31 | | | $ | 10,884 | | | 2.38 | % | | $ | 194 | | Cash and cash equivalents | $ | 15,725 | | | 0.12 | % | | $ | 14 | | | $ | 11,522 | | | 0.36 | % | | $ | 31 | |
| Restricted cash | Restricted cash | 544 | | | 0.48 | % | | 2 | | | 809 | | | 2.26 | % | | 14 | | Restricted cash | 536 | | | 0.03 | % | | NM | | 544 | | | 0.48 | % | | 2 | |
| Other short-term investments | Other short-term investments | 1,667 | | | 0.15 | % | | 2 | | | 707 | | | 2.66 | % | | 14 | | Other short-term investments | 235 | | | 0.12 | % | | NM | | 1,667 | | | 0.15 | % | | 2 | |
| Investment securities | Investment securities | 10,658 | | | 2.14 | % | | 171 | | | 6,584 | | | 2.43 | % | | 120 | | Investment securities | 9,125 | | | 2.08 | % | | 142 | | | 10,658 | | | 2.14 | % | | 171 | |
Loan receivables(1) | Loan receivables(1) | | Loan receivables(1) | |
Credit card(2) | 71,934 | | | 12.55 | % | | 6,760 | | | 72,041 | | | 13.41 | % | | 7,223 | | |
Credit card loans(2) | | Credit card loans(2) | 68,522 | | | 12.59 | % | | 6,452 | | | 71,934 | | | 12.55 | % | | 6,760 | |
| Private student loans | Private student loans | 9,869 | | | 7.70 | % | | 569 | | | 9,525 | | | 8.59 | % | | 612 | | Private student loans | 10,044 | | | 7.38 | % | | 554 | | | 9,869 | | | 7.70 | % | | 569 | |
| | Personal loans | Personal loans | 7,477 | | | 12.90 | % | | 722 | | | 7,470 | | | 13.02 | % | | 727 | | Personal loans | 6,953 | | | 12.73 | % | | 662 | | | 7,477 | | | 12.90 | % | | 722 | |
| Other | 1,609 | | | 6.48 | % | | 78 | | | 990 | | | 6.79 | % | | 50 | | |
| Other loans | | Other loans | 2,002 | | | 5.64 | % | | 85 | | | 1,609 | | | 6.48 | % | | 78 | |
| Total loan receivables | Total loan receivables | 90,889 | | | 11.95 | % | | 8,129 | | | 90,026 | | | 12.79 | % | | 8,612 | | Total loan receivables | 87,521 | | | 11.84 | % | | 7,753 | | | 90,889 | | | 11.95 | % | | 8,129 | |
| Total interest-earning assets | Total interest-earning assets | 115,280 | | | 9.66 | % | | 8,335 | | | 109,010 | | | 10.98 | % | | 8,954 | | Total interest-earning assets | 113,142 | | | 9.35 | % | | 7,909 | | | 115,280 | | | 9.66 | % | | 8,335 | |
Allowance for credit losses(3) | (6,991) | | | (3,124) | | | |
| Allowance for credit losses | | Allowance for credit losses | (7,521) | | | (6,991) | | |
| Other assets | Other assets | 5,787 | | | 4,557 | | | Other assets | 6,189 | | | 5,787 | | |
| Total assets | Total assets | $ | 114,076 | | | $ | 110,443 | | | Total assets | $ | 111,810 | | | $ | 114,076 | | |
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | | | | Liabilities and Stockholders’ Equity | | | | |
| Interest-bearing liabilities | Interest-bearing liabilities | | Interest-bearing liabilities | |
| Interest-bearing deposits | Interest-bearing deposits | | Interest-bearing deposits | |
| Time deposits | Time deposits | $ | 33,202 | | | 2.46 | % | | 611 | | | $ | 33,853 | | | 2.55 | % | | 646 | | Time deposits | $ | 24,856 | | | 1.90 | % | | 354 | | | $ | 33,202 | | | 2.46 | % | | 611 | |
Money market deposits(5) | 7,635 | | | 1.28 | % | | 73 | | | 7,062 | | | 2.17 | % | | 115 | | |
Money market deposits(3) | | Money market deposits(3) | 8,151 | | | 0.53 | % | | 32 | | | 7,635 | | | 1.28 | % | | 73 | |
| Other interest-bearing savings deposits | Other interest-bearing savings deposits | 33,852 | | | 1.25 | % | | 316 | | | 27,657 | | | 2.09 | % | | 433 | | Other interest-bearing savings deposits | 40,760 | | | 0.43 | % | | 133 | | | 33,852 | | | 1.25 | % | | 316 | |
| Total interest-bearing deposits | Total interest-bearing deposits | 74,689 | | | 1.79 | % | | 1,000 | | | 68,572�� | | | 2.33 | % | | 1,194 | | Total interest-bearing deposits | 73,767 | | | 0.94 | % | | 519 | | | 74,689 | | | 1.79 | % | | 1,000 | |
| Borrowings | Borrowings | | Borrowings | |
| Short-term borrowings | Short-term borrowings | 118 | | | 3.10 | % | | 3 | | | 1 | | | 2.41 | % | | — | | Short-term borrowings | 3 | | | 0.21 | % | | NM | | 118 | | | 3.10 | % | | 3 | |
Securitized borrowings(4)(5) | Securitized borrowings(4)(5) | 13,051 | | | 1.55 | % | | 152 | | | 14,913 | | | 3.01 | % | | 335 | | Securitized borrowings(4)(5) | 9,798 | | | 1.05 | % | | 77 | | | 13,051 | | | 1.55 | % | | 152 | |
Other long-term borrowings(4) | 11,193 | | | 3.91 | % | | 327 | | | 10,898 | | | 4.73 | % | | 386 | | |
Other long-term borrowings(5)(6) | | Other long-term borrowings(5)(6) | 10,037 | | | 3.72 | % | | 279 | | | 11,193 | | | 3.91 | % | | 327 | |
| Total borrowings | Total borrowings | 24,362 | | | 2.64 | % | | 482 | | | 25,812 | | | 3.73 | % | | 721 | | Total borrowings | 19,838 | | | 2.40 | % | | 356 | | | 24,362 | | | 2.64 | % | | 482 | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | 99,051 | | | 2.00 | % | | 1,482 | | | 94,384 | | | 2.71 | % | | 1,915 | | Total interest-bearing liabilities | 93,605 | | | 1.25 | % | | 875 | | | 99,051 | | | 2.00 | % | | 1,482 | |
| Other liabilities and stockholders’ equity | Other liabilities and stockholders’ equity | 15,025 | | | 16,059 | | | Other liabilities and stockholders’ equity | 18,205 | | | 15,025 | | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 114,076 | | | $ | 110,443 | | | Total liabilities and stockholders’ equity | $ | 111,810 | | | $ | 114,076 | | |
| Net interest income | Net interest income | | | $ | 6,853 | | | | | $ | 7,039 | | Net interest income | | | $ | 7,034 | | | | | $ | 6,853 | |
Net interest margin(6) | | 10.07 | % | | | | 10.45 | % | | | |
Net yield on interest-earning assets(7) | | 7.94 | % | | 8.63 | % | | |
Interest rate spread(8) | | 7.66 | % | | 8.27 | % | | |
Net interest margin(7) | | Net interest margin(7) | | 10.74 | % | | | | 10.07 | % | | |
Net yield on interest-earning assets(8) | | Net yield on interest-earning assets(8) | | 8.31 | % | | 7.94 | % | |
Interest rate spread(9) | | Interest rate spread(9) | | 8.10 | % | | 7.66 | % | |
|
(1)Average balances of loan receivables and yield calculations include non-accruing loans, which are included in the yield calculations.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 $70$73 million and $71$70 million of amortization of balance transfer fees for the three months ended September 30, 20202021 and 2019,2020, respectively, and $227$217 million and $201$227 million for the nine months ended September 30, 20202021 and 2019,2020, respectively.
(3)PriorIncludes the impact of interest rate swap agreements used to adoptionchange a portion of ASU No. 2016-13 on January 1, 2020, credit losses were estimated usingfloating-rate funding to fixed-rate funding for the incurred loss approach.three and nine months ended September 30, 2020.
(4)Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the three and nine months ended September 30, 2021 and 2020.
(5)Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding.funding for the three and nine months ended September 30, 2021 and 2020.
(5)(6)Includes the impact of interest rate swap agreements used to changeone terminated derivative formerly designated as a portion of floating-rate funding to fixed-rate funding.fair value hedge for the three and nine months ended September 30, 2021.
(6)(7)Net interest margin represents net interest income as a percentage of average total loan receivables.
(7)(8)Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
(8)(9)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 QualityPortfolio
The COVID-19 pandemic and its impact toon the economy has had a significant effect onhave significantly affected our sales volume and credit card loan growth during the first three quarters of 2020. While we continue to lend to customers, we havegrowth. We tightened standards for new accounts and for growing existing accounts across all products.
In responseproducts and reduced our marketing and customer acquisition expenditures at the onset of the pandemic. Due to 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 United States economy upon expiration of COVID-19 restrictions, contributed to an increase in sales volume for the three and nine months ended September 30, 2021, when compared to the same periods in 2020. Our outstanding loan receivables as of September 30, 2021, decreased when compared to December 31, 2020, due to elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows. The decrease in outstanding loan receivables was partially offset by the robust credit card sales trends and seasonality in private student loan originations during the nine months ended September 30, 2021.
At the onset of the COVID-19 pandemic, we expanded borrower relief offerings to includedinclude Skip-a-Pay (payment deferral) programs("SaP") and other loan modifications,modification programs, complementing the assistance already available through our existing loan modification programs. On August 31, 2020, we ceased offering enrollments in the SaP and other loan modification programs specifically developed in response to the COVID-19 pandemic. The accounts using these modifications as a result of the COVID-19 pandemic impact, were evaluated for potential exclusion from the TDR statusdesignation either due to the insignificance of the concession or because they qualified for an exemption pursuant to the CARES Act. While we continueThe SaP programs provided only an insignificant delay in payment on the enrolled accounts or loans and therefore those deferrals were not classified as TDRs.
Section 4013 of the CARES Act provides certain financial institutions with the option to supportsuspend the application of accounting and provide assistance to all customers impacted by COVID-19, we are no longer offering enrollments in the Skip-a-Pay (payment deferral) programs orreporting guidance for TDRs for a limited period of time for loan modifications developed specifically for COVID-19 as of August 31, 2020. Whilemade to address the Skip-a-Pay (payment deferral) programs were active, we enrolled approximately 699 thousand customers and $5.5 billion in receivables in total.
The utilization of these Skip-a-Pay (payment deferral) programs had a favorable impact on reported credit performance because, pursuant to regulatory guidelines, accounts enrolled in the programs did not advance through delinquency cycles in the same time frame as would have occurred without the programs. Specifically, current accounts enrolled in the programs did not advance to delinquency and delinquent accounts enrolled in the programs did not advance to the next delinquency cycle or to charge-off. Our delinquency ratios have been favorably impacted at September 30, 2020, as compared to December 31, 2019, by customer usageeffects of the Skip-a-Pay (payment deferral) programs.
Additionally, due toCOVID-19 pandemic. Section 541 of the Omnibus and COVID Relief and Response Act extended the TDR accounting and reporting relief provided by the CARES Act certain customerthrough the earlier of January 1, 2022, or the date that is 60 days after the termination of the presidentially-declared national emergency. We elected to apply the option to suspend the application of accounting and reporting guidance for TDRs as provided under Section 4013 of the CARES Act and as subsequently extended. As such, the number of accounts entering loan modification programs duringand corresponding balances designated as a TDR for the pandemic were excluded from being reported as TDRs. As a result, fewer modifications were reported as TDRs atthree and nine months ended September 30, 2021 and 2020, have been favorably impacted by the exclusion of certain modifications from the TDR designation pursuant to these exemptions and are expected to remain lower than they otherwise would have been. The payment status of modified accounts excluded from the TDR designation pursuant to the CARES Act is reflected in our delinquency reporting.
The table below reflects the number and balance of both the new loan modifications reported as TDRs and new loan modifications excluded from the TDR designation pursuant to the CARES Act (dollars in millions)(1): | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 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 Three Months Ended September 30, 2020(2) | | | | | | | |
| Credit card loans | 20,779 | | | $ | 150 | | | 80,656 | | | $ | 591 | |
| Private student loans | 118 | | | $ | 2 | | | 1,922 | | | $ | 35 | |
| Personal loans | 2,505 | | | $ | 33 | | | 2,193 | | | $ | 39 | |
| | | | | | | |
For the Nine Months Ended September 30, 2021(3) | | | | | | | |
| 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 | |
| | | | | | | |
For the Nine Months Ended September 30, 2020(3) | | | | | | | |
| Credit card loans | 130,869 | | | $ | 875 | | | 155,676 | | | $ | 1,169 | |
| Private student loans | 1,767 | | | $ | 32 | | | 3,416 | | | $ | 62 | |
| Personal loans | 6,315 | | | $ | 83 | | | 2,431 | | | $ | 43 | |
| | | | | | | |
(1)SaP programs were not considered TDRs and therefore are not included in accounts excluded from the TDR designation by the CARES Act.
(2)Certain prior period amounts have been reclassified to conform to the current period presentation.
(3)As the TDR exemption pursuant to the CARES Act took effect in March 2020, the nine months ended September 30, 2021, is not comparable to the same period in 2020.
The number and balance of new credit card and personal loan modifications, including the combined total of those identified as TDRs and those exempt from the TDR designation, decreased during the three and nine months ended September 30, 2021, when compared to the same periods in 2020. The decrease in both periods is primarily due to the impacts of several rounds of government stimulus and disaster relief programs, which reduced the need for our customers to enroll in a loan modification program. The number and balance of loan modifications across all products, including the combined total of those identified as TDRs and those exempt from the TDR designation, during the three and nine months ended September 30, 2020, were favorably impacted by the utilization of SaP programs in lieu of traditional loan modification programs. Additionally, enrollments in personal loan modification programs were favorably impacted by tighter underwriting standards that were implemented in early 2020.
The following table provides the number of accounts that exited a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act and corresponding outstanding balances along with the amount of new modifications excluded from TDR classification as a result of regulatory reliefthe outstanding balances that were delinquent (30 or more days past due) upon exiting the temporary loan modification program (dollars in millions)(1): | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2020 | | | | | | |
| Accounts that entered a program and were classified as TDRs during the period | | | | Accounts excluded from the TDR designation due to regulatory exemptions | | |
| Number of Accounts | | Balances | | Number of Accounts | | Balances |
| Credit card loans | 130,869 | | | $ | 875 | | | 155,676 | | | $ | 1,169 | |
| Private student loans | 1,767 | | | $ | 32 | | | 3,416 | | | $ | 62 | |
| Personal loans | 6,315 | | | $ | 83 | | | 2,431 | | | $ | 43 | |
| | | | | | | |
Despite | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 | | |
| | | | | | | | | |
| Number of Accounts | | Outstanding Balances | | Balances Delinquent(2) | | | | | | | | | | | | |
| Credit card loans | 42,067 | | | $ | 254 | | | $ | 35 | | | | | | | | | | | | | |
Private student loans(3) | 2,290 | | | $ | 40 | | | NM | | | | | | | | | | | | |
Personal loans(3) | 1,307 | | | $ | 21 | | | NM | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 | | | | | | |
| | | | | | | | | |
| Number of Accounts | | Outstanding Balances | | Balances Delinquent(2) | | | | | | | | | | | | |
| Credit card loans | 155,712 | | | $ | 955 | | | $ | 129 | | | | | | | | | | | | | |
Private student loans(3) | 6,024 | | | $ | 106 | | | NM | | | | | | | | | | | | |
Personal loans(3) | 4,101 | | | $ | 61 | | | NM | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
(1)As the lower delinquency and TDR trends resultingexemption pursuant to the CARES Act took effect in March 2020, the nine months ended September 30, 2021, is not comparable to the same period in 2020. The number of accounts that exited a temporary loan modification program that were exempt from the relief we are providingTDR designation pursuant to the CARES Act and corresponding outstanding balances were not meaningful for the three and nine months ended September 30, 2020.
(2)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, 2021 and 2020.
(3)The private student loan and personal loan balances that were delinquent upon exiting a temporary loan modification program were not meaningful for the three and nine months ended September 30, 2021 and 2020.
Our estimate of expected loss reflected in our customers, weallowance for credit losses includes the risk associated with all loans. We consider the effects of all loan modifications, including TDRs, loan modifications exempt from the TDR designation pursuant to the CARES Act and SaP programs. We believe we have appropriately reflected the risk presented byof the accounts using these programs as well asand the worsening economic impact of the COVID-19 pandemic on our customers in the allowance for credit losses. Since the adoption of CECL on January 1, 2020, the increases in the allowance for credit losses during the first three quarters of 2020 are indicative of the deterioration in consumer credit we expect related to the pandemic. The year-to-date build in the allowance of $4.8 billion, which includes the $2.5 billion cumulative-effect adjustment for the adoption of CECL, is largely attributable to card loans but includes increases associated with all loan products. Labor markets, historically indicative of trends in credit losses, have been significantly stressed by the pandemic with unemployment reaching unprecedented levels. The higher allowance for credit losses reflects our view of this economic impact on our customers. 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,
2020 | | December 31, 2019 | | September 30,
2021 | | December 31, 2020 |
| Credit card loans | Credit card loans | $ | 69,656 | | | $ | 77,181 | | Credit card loans | $ | 70,320 | | | $ | 71,472 | |
| Other loans | Other loans | | Other loans | |
| Private student loans | Private student loans | 10,016 | | | 9,653 | | Private student loans | 10,184 | | | 9,954 | |
| Personal loans | Personal loans | 7,211 | | | 7,687 | | Personal loans | 6,890 | | | 7,177 | |
| Other | 1,777 | | | 1,373 | | |
| Other loans | | Other loans | 2,148 | | | 1,846 | |
| Total other loans | Total other loans | 19,004 | | | 18,713 | | Total other loans | 19,222 | | | 18,977 | |
| Total loan receivables | Total loan receivables | 88,660 | | | 95,894 | | Total loan receivables | 89,542 | | | 90,449�� | |
Allowance for credit losses(1) | Allowance for credit losses(1) | (8,226) | | | (3,383) | | Allowance for credit losses(1) | (6,861) | | | (8,226) | |
| Net loan receivables | Net loan receivables | $ | 80,434 | | | $ | 92,511 | | Net loan receivables | $ | 82,681 | | | $ | 82,223 | |
|
Provision and Allowance for Credit Losses
Provision for credit losses is the expense related to maintaining the allowance for credit losses at an appropriate level to absorb the estimate of credit losses anticipated over the remaining expected life of loan receivables at each period end date. In deriving the estimate of expected credit losses,loss, 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 expected credit losses requires significant management judgment. The factors that influence the provision for credit 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 among other factors, our credit granting practices and the effectiveness of collection efforts;efforts, among other factors;
•The impact of general economic conditions on the consumer, including national and regional conditions, unemployment levels, bankruptcy trends and interest rate movements;
•The level and direction of historical losses; and
•Regulatory changes or new regulatory guidance.
ForRefer to "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates" in our annual report on Form 10-K for the year ended December 31, 2020, and Note 3: Loan Receivables to our condensed consolidated financial statements for more details on how we estimate the allowance for credit losses, refer to "— Critical Accounting Estimates — Allowance for Credit Losses on Loan Receivables" and Note 3: Loan Receivables to our condensed consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| The following tables provide changes in our allowance for credit losses (dollars in millions): | | | | | | | | | |
| For the Three Months Ended September 30, 2020 | | | | | | | | |
| | Credit Card | | Student Loans | | Personal Loans | | Other | | Total |
| Balance at June 30, 2020 | $ | 6,491 | | | $ | 799 | | | $ | 857 | | | $ | 37 | | | $ | 8,184 | |
| Additions | | | | | | | | | |
Provision for credit losses(1) | 604 | | | 55 | | | 49 | | | 2 | | | 710 | |
| Deductions | | | | | | | | | |
| Charge-offs | (759) | | | (20) | | | (62) | | | (1) | | | (842) | |
| Recoveries | 155 | | | 6 | | | 13 | | | — | | | 174 | |
| Net charge-offs | (604) | | | (14) | | | (49) | | | (1) | | | (668) | |
| | | | | | | | | |
| Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| | | | | | | | | |
| For the Three Months Ended September 30, 2019 | | | | | | | | |
| | Credit Card | | Student Loans | | Personal Loans | | Other | | Total |
Balance at June 30, 2019(2) | $ | 2,691 | | | $ | 167 | | | $ | 338 | | | $ | 6 | | | $ | 3,202 | |
| Additions | | | | | | | | | |
Provision for credit losses(2) | 719 | | | (6) | | | 86 | | | — | | | 799 | |
| Deductions | | | | | | | | | |
| Charge-offs | (784) | | | (17) | | | (89) | | | (1) | | | (891) | |
| Recoveries | 173 | | | 3 | | | 13 | | | — | | | 189 | |
Net charge-offs(3) | (611) | | | (14) | | | (76) | | | (1) | | | (702) | |
| | | | | | | | | |
Balance at September 30, 2019(2) | $ | 2,799 | | | $ | 147 | | | $ | 348 | | | $ | 5 | | | $ | 3,299 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | The following tables provide changes in our allowance for credit losses (dollars in millions): | | |
| | For the Nine Months Ended September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Credit Card | | Student Loans | | Personal Loans | | Other | | Total | | For the Three Months Ended September 30, 2021 |
Balance at December 31, 2019(2) | $ | 2,883 | | | $ | 148 | | | $ | 348 | | | $ | 4 | | | $ | 3,383 | | |
Cumulative effect of ASU No. 2016-13 adoption(4) | 1,667 | | | 505 | | | 265 | | | 24 | | | 2,461 | | |
| Balance at January 1, 2020 | 4,550 | | | 653 | | | 613 | | | 28 | | | 5,844 | | |
| | | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
| Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | 5,409 | | | $ | 828 | | | $ | 745 | | | $ | 44 | | | $ | 7,026 | |
| Additions | | Additions | |
Provision for credit losses(1) | | Provision for credit losses(1) | 178 | | | 46 | | | (64) | | | — | | | 160 | |
| Deductions | | Deductions | |
| Charge-offs | | Charge-offs | (495) | | | (23) | | | (38) | | | — | | | (556) | |
| Recoveries | | Recoveries | 206 | | | 6 | | | 19 | | | — | | | 231 | |
| Net charge-offs | | Net charge-offs | (289) | | | (17) | | | (19) | | | — | | | (325) | |
| | Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | 5,298 | | | $ | 857 | | | $ | 662 | | | $ | 44 | | | $ | 6,861 | |
| | | | For the Three Months Ended September 30, 2020 |
| | | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
| Balance at June 30, 2020 | | Balance at June 30, 2020 | $ | 6,491 | | | $ | 799 | | | $ | 857 | | | $ | 37 | | | $ | 8,184 | |
| Additions | Additions | | Additions | |
Provision for credit losses(1) | Provision for credit losses(1) | 3,916 | | | 233 | | | 426 | | | 11 | | | 4,586 | | Provision for credit losses(1) | 604 | | | 55 | | | 49 | | | 2 | | | 710 | |
| Deductions | Deductions | | Deductions | |
| Charge-offs | Charge-offs | (2,480) | | | (62) | | | (224) | | | (1) | | | (2,767) | | Charge-offs | (759) | | | (20) | | | (62) | | | (1) | | | (842) | |
| Recoveries | Recoveries | 505 | | | 16 | | | 42 | | | — | | | 563 | | Recoveries | 155 | | | 6 | | | 13 | | | — | | | 174 | |
| Net charge-offs | Net charge-offs | (1,975) | | | (46) | | | (182) | | | (1) | | | (2,204) | | Net charge-offs | (604) | | | (14) | | | (49) | | | (1) | | | (668) | |
| | Balance at September 30, 2020 | Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | | Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| | | For the Nine Months Ended September 30, 2019 | | | For the Nine Months Ended September 30, 2021 |
| | | Credit Card | | Student Loans | | Personal Loans | | Other | | Total | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
Balance at December 31, 2018(2) | $ | 2,528 | | | $ | 169 | | | $ | 338 | | | $ | 6 | | | $ | 3,041 | | |
| Balance at December 31, 2020 | | Balance at December 31, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
| Additions | | Additions | |
Provision for credit losses(1) | | Provision for credit losses(1) | (18) | | | 61 | | | (96) | | | 6 | | | (47) | |
| Deductions | | Deductions | |
| Charge-offs | | Charge-offs | (1,778) | | | (63) | | | (150) | | | — | | | (1,991) | |
| Recoveries | | Recoveries | 603 | | | 19 | | | 51 | | | — | | | 673 | |
| Net charge-offs | | Net charge-offs | (1,175) | | | (44) | | | (99) | | | — | | | (1,318) | |
| | Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | 5,298 | | | $ | 857 | | | $ | 662 | | | $ | 44 | | | $ | 6,861 | |
| | | | For the Nine Months Ended September 30, 2020 |
| | | | Credit Card Loans | | Private Student Loans | | Personal Loans | | Other Loans | | Total Loans |
Balance at December 31, 2019(2) | | Balance at December 31, 2019(2) | $ | 2,883 | | | $ | 148 | | | $ | 348 | | | $ | 4 | | | $ | 3,383 | |
Cumulative effect of ASU No. 2016-13 adoption(3) | | Cumulative effect of ASU No. 2016-13 adoption(3) | 1,667 | | | 505 | | | 265 | | | 24 | | | 2,461 | |
| Balance at January 1, 2020 | | Balance at January 1, 2020 | 4,550 | | | 653 | | | 613 | | | 28 | | | 5,844 | |
| Additions | Additions | | Additions | |
Provision for credit losses(2) | Provision for credit losses(2) | 2,121 | | | 24 | | | 250 | | | — | | | 2,395 | | Provision for credit losses(2) | 3,916 | | | 233 | | | 426 | | | 11 | | | 4,586 | |
| Deductions | Deductions | | Deductions | |
| Charge-offs | Charge-offs | (2,347) | | | (54) | | | (274) | | | (1) | | | (2,676) | | Charge-offs | (2,480) | | | (62) | | | (224) | | | (1) | | | (2,767) | |
| Recoveries | Recoveries | 497 | | | 10 | | | 34 | | | — | | | 541 | | Recoveries | 505 | | | 16 | | | 42 | | | — | | | 563 | |
Net charge-offs(3) | (1,850) | | | (44) | | | (240) | | | (1) | | | (2,135) | | |
Other(5) | — | | | (2) | | | — | | | — | | | (2) | | |
Balance at September 30, 2019(2) | $ | 2,799 | | | $ | 147 | | | $ | 348 | | | $ | 5 | | | $ | 3,299 | | |
| Net charge-offs | | Net charge-offs | (1,975) | | | (46) | | | (182) | | | (1) | | | (2,204) | |
| | Balance at September 30, 2020 | | Balance at September 30, 2020 | $ | 6,491 | | | $ | 840 | | | $ | 857 | | | $ | 38 | | | $ | 8,226 | |
|
(1)Excludes a $25 million and $40 million build and $17 million buildreclassification of the liability for expected credit losses on unfunded commitments for the three months ended September 30, 2021 and 2020, respectively, and $2 million and $17 million for the nine months ended September 30, 2021 and 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in our condensed consolidated statements of financial condition.
(2)Prior to the adoption of ASUAccounting Standards Update ("ASU") No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
(3)Prior to adoption of ASU No. 2016-13 on January 1, 2020, net charge-offs on PCD loans generally did not result in a charge to earnings.
(4)Represents the adjustment to the allowance for credit losses as a result ofdue to the adoption of ASU No. 2016-13 on January 1, 2020.
The allowance for credit losses was $8.2approximately $6.9 billion at September 30, 2020. The allowance2021, which reflects a $4.8$165 million release from the amount of the allowance for credit losses at June 30, 2021 and a $1.4 billion build overrelease from the amount of the allowance for credit losses at December 31, 2019, and was essentially flat compared to the amount of2020.
The release in the allowance for credit losses atbetween September 30, 2021 and June 30, 2020.2021, was primarily driven by improving macroeconomic forecasts and continued stable credit performance, partially offset by modest loan growth during the period. The modest growth in loan receivables during the three months ended September 30, 2021, was driven by the robust credit card sales trends as COVID-19 restrictions continue to ease and the United States economy continues to more fully reopen. Additionally, credit card sales from new accounts and seasonality in private student loan originations contributed to an increase in ending outstanding loan receivables. The loan receivables growth was partially offset by elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows.
The releasein the allowance build across allfor credit losses between September 30, 2021 and December 31, 2020, was primarily driven by improvements in the macroeconomic forecast and continued stable credit performance. The release was also partially driven by a moderate reduction in loan productsreceivables outstanding during the period. The decrease in outstanding loan receivables, particularly credit card and personal loan receivables, and the stable credit performance, were driven by elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows. The decrease in outstanding loan receivables was due to (I) a $2.5 billion cumulative-effect adjustment forpartially offset by the adoption of CECL on January 1, 2020, and (II) a $2.3 billion buildrobust credit card sales trends during the period that primarily reflects an economic outlook with updated assumptions aboutand seasonality in private student loan originations in the impactthird quarter of the COVID-19 pandemic. 2021.
In estimating the allowance at September 30, 2020,2021, we used a macroeconomic forecast that projected slight improvement from prior quarter, including(i) a peak unemployment rate of 11%6.1%, which remained flatdecreasing to 5.5% and 4.0% through the end of 20202021 and recovers slowly over2022, respectively; and (ii) a 6.4% and 3.5% annualized growth in the next few years. We alsoreal gross domestic product for 2021 and 2022, respectively. Labor market conditions, which historically have been an important determinant of credit loss trends, continue to improve despite the spread of the COVID-19 delta variant. However, the unemployment rate and initial and continuing jobless claims remain moderately elevated relative to pre-pandemic levels. In estimating expected credit losses, we considered the uncertainties associated with someborrower behavior, payment trends and credit performance subsequent to the expiration of the assumptions used in that macroeconomic forecast, including the amount and timing of additional government stimulus. Furthermore, the estimate contemplated the impact of previous government stimulus programs, and other company-initiated loan modification programs on borrower payment trends. The impact of COVID-19 on the economy has continued to cause uncertainty in assumptions surrounding factors such as lengththe CARES Act and depthARPA, and disaster relief programs, such as foreclosure moratoriums and federal student loan and mortgage payment forbearance. During the third quarter of economic stresses and longer term impacts on borrower behavior, which2021, several disaster relief programs expired or were rescinded entirely. As the government's response to the pandemic wanes, there is uncertainty regarding the sustainability of the recent credit quality trends in our loan receivables portfolio. Accordingly, the estimation of the allowance for credit losses has required significant management judgment in estimating the allowance for credit losses.judgment.
The forecast period managementwe deemed to be reasonable and supportable was 18 months for all periods since the adoption of CECLpresented except for the estimate as of March 31, 2020. The decrease to 12 months as of March 31, 2020, where the forecast period was 12 months due to the uncertainty caused by the rapidly changing economic environment resulting fromexperienced at the onset of the COVID-19 pandemic. The return to an 18-month reasonable and supportable forecast period was deemed appropriate based on the viewobserved economic phase transition from recovery to expansion and the associated stabilization of macroeconomic forecasts. For all periods presented, we determined that the present macroeconomic conditions will last for a longer period than previously expected. The reversion period wasof 12 months was appropriate for similar reasons. Due to the uncertainties associated with borrower behavior resulting from government stimulus and disaster relief programs, we applied a weighted reversion method to provide a more reasonable transition to historical losses for all quarters sinceloan products for all periods presented with the adoption of CECL. During the first quarter offollowing exceptions: at March 31, 2020 and December 31, 2019, we applied a straight-line method was used to revert to appropriate historical information. In the second quarter offor all loan products. At June 30, 2020, the high degree of economic stress led us to applywe applied a weighted reversion method for credit card
loans that puts more emphasis on the loss forecast model rather than lower historical losses. For similar reasons, we determined it was appropriate to applyand a weighted reversionstraight-line method for all loans in the third quarter.other loan products.
The provision for credit 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 credit losses at the balance sheet date. For the three months ended September 30, 2021, the provision for credit losses decreased by $550 million, or 77%, compared to the same period in 2020. For the nine months ended September 30, 2021, the provision for credit losses decreased by $4.6 billion, or 101%, compared to the same period in 2020. The decrease in both periods was primarily due to reserve releases in the current periods versus reserve builds in the prior periods and lower net charge-offs. The reserve releases during the three and nine months ended September 30, 2021, were primarily driven by favorable change in the macroeconomic outlook related to the economic impacts of the COVID-19 pandemic-induced recession and continued stable credit performance. The reserve buildsduring the three and nine months ended September 30, 2020, the provision for credit losses decreased by $89 million or 11%, and increased $2.2 billion or 91%, respectively, as comparedwere primarily due to the same periods in 2019. The allowance build was determined under separate methodologies for each period, based on the timing of the adoption of ASU No. 2016-13 on January 1, 2020; however, the largest driver of the increase in provision between the two periods was the significantunfavorable change in economic outlook due toresulting from the COVID-19 pandemic.
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 credit losses, while fraud losses are recorded in other expense.
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, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 |
| | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % |
| Credit card loans | Credit card loans | $ | 604 | | | 3.45 | % | | $ | 611 | | | 3.32 | % | | $ | 1,975 | | | 3.67 | % | | $ | 1,850 | | | 3.43 | % | Credit card loans | $ | 289 | | | 1.65 | % | | $ | 604 | | | 3.45 | % | | $ | 1,175 | | | 2.29 | % | | $ | 1,975 | | | 3.67 | % |
Private student loans(1) | Private student loans(1) | $ | 14 | | | 0.58 | % | | $ | 14 | | | 0.59 | % | | $ | 46 | | | 0.63 | % | | $ | 44 | | | 0.62 | % | Private student loans(1) | $ | 17 | | | 0.68 | % | | $ | 14 | | | 0.58 | % | | $ | 44 | | | 0.58 | % | | $ | 46 | | | 0.63 | % |
| Personal loans | Personal loans | $ | 49 | | | 2.69 | % | | $ | 76 | | | 3.99 | % | | $ | 182 | | | 3.24 | % | | $ | 240 | | | 4.28 | % | Personal loans | $ | 19 | | | 1.11 | % | | $ | 49 | | | 2.69 | % | | $ | 99 | | | 1.91 | % | | $ | 182 | | | 3.24 | % |
|
(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020,The decreases in net charge-offs on PCD loans generally did not result in a charge to earnings.
Theand the net charge-off rate on ourrates for credit card and personal loans increased for the three and nine months ended September 30, 2020,2021, when compared to the same periods in 20192020, were primarily due to lower receivable balancesthe impacts of government stimulus and seasoning of recent years' loan growth, respectively. Thedisaster relief programs and to a lesser extent improved collection and recovery strategies. Additionally, the net charge-offs and the net charge-off rate on ourof personal loans for three and nine months ended September 30, 2021, were favorably impacted by tighter underwriting standards that were implemented in early 2020. The net charge-offs and net charge-off rate for private student loans was essentiallyremained relatively flat for the three and nine months ended September 30, 2020,2021, when compared to the same periods in 2019. The net charge-off rate on our personal loans decreased for the three and nine months ended September 30, 2020, when compareddue to the same periods in 2019 due to improved underwriting.impacts of government stimulus and disaster relief 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, loansloan receivables that are not accruing interest regardless of delinquency and loans restructured in TDR programs (dollars in millions): | | | | September 30, 2020 | | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 |
| | | $ | | % | | $ | | % | | $ | | % | | $ | | % |
| Loans 30 or more days delinquent | Loans 30 or more days delinquent | | | | | | | | Loans 30 or more days delinquent | | | | | | | |
| Credit card loans | Credit card loans | $ | 1,328 | | | 1.91 | % | | $ | 2,019 | | | 2.62 | % | Credit card loans | $ | 1,040 | | | 1.48 | % | | $ | 1,478 | | | 2.07 | % |
Private student loans(1) | Private student loans(1) | $ | 149 | | | 1.49 | % | | $ | 181 | | | 1.88 | % | Private student loans(1) | $ | 158 | | | 1.55 | % | | $ | 138 | | | 1.39 | % |
| Personal loans | Personal loans | $ | 79 | | | 1.10 | % | | $ | 105 | | | 1.37 | % | Personal loans | $ | 49 | | | 0.71 | % | | $ | 78 | | | 1.08 | % |
| Loans 90 or more days delinquent | Loans 90 or more days delinquent | | Loans 90 or more days delinquent | |
| Credit card loans | Credit card loans | $ | 650 | | | 0.93 | % | | $ | 1,020 | | | 1.32 | % | Credit card loans | $ | 467 | | | 0.66 | % | | $ | 739 | | | 1.03 | % |
Private student loans(1) | Private student loans(1) | $ | 32 | | | 0.31 | % | | $ | 45 | | | 0.47 | % | Private student loans(1) | $ | 36 | | | 0.35 | % | | $ | 28 | | | 0.28 | % |
| Personal loans | Personal loans | $ | 23 | | | 0.32 | % | | $ | 31 | | | 0.40 | % | Personal loans | $ | 13 | | | 0.19 | % | | $ | 25 | | | 0.35 | % |
| | Loans not accruing interest | Loans not accruing interest | $ | 228 | | | 0.25 | % | | $ | 266 | | | 0.28 | % | Loans not accruing interest | $ | 232 | | | 0.24 | % | | $ | 243 | | | 0.26 | % |
| | Loans restructured in TDR programs | | |
| Troubled debt restructurings: | | Troubled debt restructurings: | |
Credit card loans(2)(3)(4) | Credit card loans(2)(3)(4) | | Credit card loans(2)(3)(4) | |
| Currently enrolled | Currently enrolled | $ | 1,467 | | | 2.11 | % | | $ | 2,108 | | | 2.73 | % | Currently enrolled | $ | 888 | | | 1.26 | % | | $ | 1,225 | | | 1.71 | % |
| No longer enrolled | No longer enrolled | 446 | | | 0.64 | | | 1,254 | | | 1.62 | | No longer enrolled | 300 | | | 0.43 | | | 448 | | | 0.63 | |
| Total credit card loans | Total credit card loans | $ | 1,913 | | | 2.75 | % | | $ | 3,362 | | | 4.35 | % | Total credit card loans | $ | 1,188 | | | 1.69 | % | | $ | 1,673 | | | 2.34 | % |
Private student loans(5) | Private student loans(5) | $ | 293 | | | 2.93 | % | | $ | 269 | | | 2.79 | % | Private student loans(5) | $ | 258 | | | 2.53 | % | | $ | 286 | | | 2.87 | % |
Personal loans(6) | Personal loans(6) | $ | 215 | | | 2.98 | % | | $ | 208 | | | 2.71 | % | Personal loans(6) | $ | 197 | | | 2.86 | % | | $ | 222 | | | 3.09 | % |
|
(1)Includes PCDCredit card loans for all periods presented.that were 90 or more days delinquent at September 30, 2021 and December 31, 2020, included $58 million and $44 million, respectively, in modified loans exempt from the TDR designation under the CARES Act. Within private student and personal loans that were 90 or more days delinquent at September 30, 2021 and December 31, 2020, the respective amounts associated with modifications exempt from the TDR designation under the CARES Act were immaterial.
(2)We estimate that interest income recognized on credit card loans restructured in TDR programs was $50$24 million and $82$50 million for the three months ended September 30, 20202021 and 2019,2020, respectively, and $181$84 million and $152$181 million for the nine months ended September 30, 20202021 and 2019,2020, respectively. We do not separately track interest income on loans in TDR programs. ThisWe estimate this amount was estimated by applying an average interest rate to the average loans in the various TDR programs.
(3)We estimate that the grossincremental interest income that would have been recorded in accordance with the original terms of credit card loans restructured in TDR programs was $43$34 million and $50$43 million for the three months ended September 30, 20202021 and 2019,2020, respectively, and $144$106 million and $95$144 million for the nine months ended September 30, 20202021 and 2019,2020, respectively. We do not separately track the amount of additional grossincremental 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. ThisWe estimate this amount was estimated 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 $88$44 million and $184$94 million at September 30, 20202021 and December 31, 2019,2020, respectively, which are also included in loans 90 or more days delinquent.
(5)Private student loans restructured in TDR programs include $5$8 million and $10$6 million at September 30, 20202021 and December 31, 2019,2020, respectively, which are also included in loans 90 or more days delinquent.
(6)Personal loans restructured in TDR programs include $6$4 million and $7$6 million at September 30, 20202021 and December 31, 2019,2020, respectively, which are also included in loans 90 or more days delinquent.
The 30-day as well asand 90-day delinquency rates for credit cardin the table above include all loans, at September 30, 2020, decreased comparedincluding TDRs, modified loans exempt from TDR status and prior modifications that are no longer required to December 31, 2019, primarily due to the impact of changing consumer spending and savings patterns and the Skip-a-Pay (payment deferral) relief programs.be reported as TDRs. The 30-day and 90-day delinquency rates for private studentcredit card and personal loans at September 30, 2020,2021, decreased compared to December 31, 2019,2020, primarily due to seasonalitythe impacts of government stimulus and disaster relief programs. Additionally, the loan portfolio. The 30-day and 90-day delinquency rates for personal loans were favorably impacted by tighter underwriting standards that were implemented in early 2020. The 30-day and 90-day delinquency rate for private student loans at September 30, 2020, decreased2021, increased compared to December 31, 2019,2020, as a resultthe impacts of improved underwriting.government stimulus and disaster relief programs began to wane. The increase in the 30-day and 90-day delinquency rate for private student loans was partially offset by an increase in outstanding private student loan receivables resulting from seasonality in originations.
The balance of private student and credit card loans reported as TDRs decreased at September 30, 2020, as2021, compared to December 31, 2019,2020, primarily due to customer usage in programs subjectthe exclusion of accounts qualifying for the exemption from the TDR designation
pursuant to TDR exclusion in accordance with the CARES Act as well asand elevated payment rates resulting from the exclusionseveral rounds of customer accounts that had previously been classified as TDR for which the account has been returned to a market interest rategovernment stimulus and the customer has demonstrated financial stability. associated improvement in household cash flows.
The balance of personal loans reported as TDRs decreased at September 30, 2020, as2021, compared to December 31, 2019, was essentially flat. The2020, due to elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows. Additionally, enrollments in personal loan modification programs were favorably impacted by tighter underwriting standards that were implemented in early 2020, resulting in a lower balance of private student reportedpersonal loans entering into our loan modification programs. To provide additional clarity with respect to credit card loans classified as TDRs, increased at September 30, 2020, as comparedthe 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 December 31, 2019, due to continuedthe CARES Act (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | | | |
| | $ | | % | | $ | | % | | | | | | | | |
| Credit card loans | $ | 1,541 | | | 2.19 | % | | $ | 1,351 | | | 1.89 | % | | | | | | | | |
| Private student loans | $ | 218 | | | 2.14 | % | | $ | 101 | | | 1.01 | % | | | | | | | | |
| Personal loans | $ | 54 | | | 0.78 | % | | $ | 73 | | | 1.02 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
We believe loan growth and improved awareness ofmodification programs available to assist borrowers having difficulties making payment obligations. We plan to continue to
use TDR programs as we believe they are useful in assisting customers experiencing financial difficulties and allowing themhelp to make timely payments.prevent defaults. We plan to continue to use loan modification programs as a means to provide relief to customers experiencing financial difficulties. See Note 3: Loan Receivables to our condensed consolidated financial statements for furtheradditional description of our use of TDRloan modification programs to provide relief to customers experiencing financial hardship.
Modified and Restructured Loans
For information regarding modified and restructured loans, see "— Loan Quality — Delinquencies", "— Loan Quality — Impact of the COVID-19 Pandemic on the Loan Quality"Portfolio", "— COVID-19 Pandemic Response and Impact — Loan Receivables"Receivables and Allowance for Credit Losses" and Note 3: Loan Receivables to our condensed consolidated financial statements.
Other Income
The following table presents the components of other income (dollars in millions): | | | | For the Three Months Ended September 30, | | | 2020 vs 2019
(Decrease) Increase | | | For the Nine Months Ended September 30, | | | 2020 vs. 2019
(Decrease) Increase | | | For the Three Months Ended September 30, | | 2021 vs 2020
Increase (Decrease) | | For the Nine Months Ended September 30, | | 2021 vs. 2020
Increase (Decrease) |
| | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % | | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Discount and interchange revenue, net(1) | Discount and interchange revenue, net(1) | $ | 238 | | | $ | 255 | | | $ | (17) | | | (7) | % | | $ | 691 | | | $ | 785 | | | $ | (94) | | | (12) | % | Discount and interchange revenue, net(1) | $ | 299 | | | $ | 238 | | | $ | 61 | | | 26 | % | | $ | 879 | | | $ | 691 | | | $ | 188 | | | 27 | % |
| Protection products revenue | Protection products revenue | 44 | | | 48 | | | (4) | | | (8) | % | | 135 | | | 146 | | | (11) | | | (8) | % | Protection products revenue | 43 | | | 44 | | | (1) | | | (2) | % | | 129 | | | 135 | | | (6) | | | (4) | % |
| Loan fee income | Loan fee income | 100 | | | 120 | | | (20) | | | (17) | % | | 304 | | | 326 | | | (22) | | | (7) | % | Loan fee income | 121 | | | 100 | | | 21 | | | 21 | % | | 333 | | | 304 | | | 29 | | | 10 | % |
| Transaction processing revenue | Transaction processing revenue | 50 | | | 52 | | | (2) | | | (4) | % | | 143 | | | 146 | | | (3) | | | (2) | % | Transaction processing revenue | 58 | | | 50 | | | 8 | | | 16 | % | | 167 | | | 143 | | | 24 | | | 17 | % |
| Gains on equity investments | — | | | — | | | — | | | — | % | | 79 | | | — | | | 79 | | | — | % | |
| Unrealized (losses) gains on equity investments | | Unrealized (losses) gains on equity investments | (167) | | | — | | | (167) | | | 100 | % | | 562 | | | — | | | 562 | | | 100 | % |
| Realized gains on equity investments | | Realized gains on equity investments | — | | | — | | | — | | | — | % | | — | | | 79 | | | (79) | | | (100) | % |
| Other income | Other income | 17 | | | 23 | | | (6) | | | (26) | % | | 59 | | | 73 | | | (14) | | | (19) | % | Other income | 18 | | | 17 | | | 1 | | | 6 | % | | 47 | | | 59 | | | (12) | | | (20) | % |
| Total other income | Total other income | $ | 449 | | | $ | 498 | | | $ | (49) | | | (10) | % | | $ | 1,411 | | | $ | 1,476 | | | $ | (65) | | | (4) | % | Total other income | $ | 372 | | | $ | 449 | | | $ | (77) | | | (17) | % | | $ | 2,117 | | | $ | 1,411 | | | $ | 706 | | | 50 | % |
|
(1)Net of rewards, including Cashback Bonus rewards, of $514$689 million and $520$514 million for the three months ended September 30, 2021 and 2020, respectively, and 2019, respectively,$1.8 billion and $1.4 billion for the nine months ended September 30, 2021 and 2020, and 2019.respectively.
Total other income decreased for the three and nine months ended September 30, 2020,2021, as compared to the same periodsperiod in 2019,2020, primarily due to a decreaseunrealized losses on equity investments offset by an increase in net discount and interchange revenue and loan fee income. The decrease in total other income was partially offset by an increase in gainUnrealized losses on equity investments forare the nine months ended September 30, 2020.result of changes in the fair value of our investments in payment services entities that have actively traded stock. The decreaseincrease in net discount and interchange revenue was partially
offset by a decreasean increase in rewards costs, both of which were the result of lowerhigher sales volume due to the impacts of the COVID-19 pandemic.volume. Loan fee income decreasedincreased due to lower volume and late fees. Late fees decreasedfee charge offs.
Total other income increased for the nine months ended September 30, 2021, as a result of lower delinquencies as we continuecompared to work with our customers through the economic stresses from COVID-19. Gainsame period in 2020, primarily due to unrealized gains on equity investments increased primarily fromand an increase in net discount and interchange revenue. Unrealized gains on equity investments are the result of investments in payment services entities that are carried at fair value because the shares are actively traded. The increase in discount and interchange revenue was partially offset by an increase in rewards costs, both of which were the result of higher sales volume. The increase in total other income was partially offset by a decrease in realized gains on the sale of equity investments during the first and second quarters.prior period.
Other Expense
The following table represents the components of other expense (dollars in millions): | | | | For the Three Months Ended September 30, | | | 2020 vs. 2019
Increase (Decrease) | | | For the Nine Months Ended September 30, | | | 2020 vs. 2019
Increase (Decrease) | | | For the Three Months Ended September 30, | | 2021 vs. 2020
Increase (Decrease) | | For the Nine Months Ended September 30, | | 2021 vs. 2020
Increase (Decrease) |
| | | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % | | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
| Employee compensation and benefits | Employee compensation and benefits | $ | 471 | | | $ | 439 | | | $ | 32 | | | 7 | % | | $ | 1,390 | | | $ | 1,291 | | | $ | 99 | | | 8 | % | Employee compensation and benefits | $ | 483 | | | $ | 471 | | | $ | 12 | | | 3 | % | | $ | 1,487 | | | $ | 1,390 | | | $ | 97 | | | 7 | % |
| Marketing and business development | Marketing and business development | 140 | | | 230 | | | (90) | | | (39) | % | | 500 | | | 649 | | | (149) | | | (23) | % | Marketing and business development | 210 | | | 140 | | | 70 | | | 50 | % | | 539 | | | 500 | | | 39 | | | 8 | % |
| Information processing and communications | Information processing and communications | 111 | | | 96 | | | 15 | | | 16 | % | | 342 | | | 296 | | | 46 | | | 16 | % | Information processing and communications | 121 | | | 111 | | | 10 | | | 9 | % | | 375 | | | 342 | | | 33 | | | 10 | % |
| Professional fees | Professional fees | 151 | | | 189 | | | (38) | | | (20) | % | | 525 | | | 539 | | | (14) | | | (3) | % | Professional fees | 198 | | | 151 | | | 47 | | | 31 | % | | 567 | | | 525 | | | 42 | | | 8 | % |
| Premises and equipment | Premises and equipment | 26 | | | 26 | | | — | | | — | % | | 83 | | | 80 | | | 3 | | | 4 | % | Premises and equipment | 23 | | | 26 | | | (3) | | | (12) | % | | 69 | | | 83 | | | (14) | | | (17) | % |
| Other expense | Other expense | 106 | | | 127 | | | (21) | | | (17) | % | | 401 | | | 354 | | | 47 | | | 13 | % | Other expense | 155 | | | 106 | | | 49 | | | 46 | % | | 456 | | | 401 | | | 55 | | | 14 | % |
| Total other expense | Total other expense | $ | 1,005 | | | $ | 1,107 | | | $ | (102) | | | (9) | % | | $ | 3,241 | | | $ | 3,209 | | | $ | 32 | | | 1 | % | Total other expense | $ | 1,190 | | | $ | 1,005 | | | $ | 185 | | | 18 | % | | $ | 3,493 | | | $ | 3,241 | | | $ | 252 | | | 8 | % |
|
Total other expense decreasedincreased for the three months ended September 30, 2020,2021, as compared to the same period in 2019. The decrease was2020, primarily driven bydue to increases in marketing and business development, other expense and professional fees. Marketing and business development decreasedincreased due to COVID-19 relatedaccelerated growth investments primarily in card. The increase in other expense reductions in brand advertising for card. Professional fees were lower primarilywas driven by a decrease in collection fees. Thislegal accrual. The professional fees increase was offsetdriven primarily by an increase in employee compensation and benefits due to higher average salaries.
Total other expense increased for the nine months ended September 30, 2020,2021, as compared to the same period in 2019. The increase was2020, primarily driven bydue to increases in employee compensation and benefits, a COVID-19 related non-cash impairment charge (included in Other expense) on the Diners Clubother expense, professional fees and marketing and business in the second quarter, and information processing and communications.development. Employee compensation and benefits increased as a result of a larger headcount basehigher bonus accruals and higher average salaries. The impairment charge was triggeredsalaries, partially offset by changes in the international travel and entertainment businesses and a declining revenue outlook for the foreseeable future resulting from COVID-19.lower headcount. The increase in information processingother expense was driven by a legal accrual. The professional fees increase was driven primarily by an increase in recovery fees. Marketing and communications wasbusiness development increased due to accelerated growth investments primarily in infrastructure. This was offset by a decrease in marketing costs due to COVID-19 related expense reductions in brand advertising for card.
Income Tax Expense
The following table presents the calculation of the effective income tax rate (dollars in millions, except effective income tax rate)millions): | | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Income before income taxes | Income before income taxes | $ | 959 | | | $ | 994 | | | $ | 420 | | | $ | 2,911 | | Income before income taxes | $ | 1,402 | | | $ | 959 | | | $ | 5,703 | | | $ | 420 | |
| Income tax expense | Income tax expense | $ | 188 | | | $ | 224 | | | $ | 78 | | | $ | 662 | | Income tax expense | $ | 311 | | | $ | 188 | | | $ | 1,321 | | | $ | 78 | |
| Effective income tax rate | Effective income tax rate | 19.6 | % | | 22.5 | % | | 18.6 | % | | 22.7 | % | Effective income tax rate | 22.2 | % | | 19.6 | % | | 23.2 | % | | 18.6 | % |
|
Income tax expense decreased $36increased $123 million and $584 million$1.2 billion for the three and nine months ended September 30, 2020,2021, respectively, as compared to the same periods in 2019. Income2020. The increase in income tax expense and thewas primarily driven by an increase in pretax income. The effective tax rate increased for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020, are lowerprimarily due to lower projected pretax income for the full year. We calculate our provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year to pretax income or loss excluding unusual or infrequently occurring discrete items. As we are projecting lower pretax income for the full year, the impact of certain favorable items, such as tax credits having a lower rate benefit on the effective tax rate is amplified, thereby resulting in a full-year effective tax rate that is lower than the historical annual effective tax rate. For the three and nine months ended September 30, 2020 and 2019, respectively, the effective tax rate was favorably impacted by the resolutionhigher pretax income.
Liquidity and Capital Resources
Impact of the COVID-19 Pandemic on Liquidity and Capital
We enteredThe United States economy has made substantial progress recovering from a brief but severe recession caused by responses to the COVID-19 pandemic, with measures of aggregate output and income expanding for multiple quarters and surpassing their pre-pandemic levels. While the unemployment rate has fallen substantially from its pandemic peak, the labor market has not fully recovered from the recession. Nonfarm payroll employment and labor force participation rates, important indicators in March 2020 with strong capital and liquidity positions sized to allow us to maintain normal operations during extended periods of financialthe Federal Reserve's monetary policy considerations, remain below pre-pandemic levels. However, job openings have reached record highs, suggesting that the labor market stress and disruptions to wholesale and retail funding sources. Our reserves of high-quality liquid assets and access to diverse funding channels allowed us to refrain from issuing debt while certain wholesale funding markets experienced disruptions and wider credit spreads, particularly during the second quarter. Moreover, our direct-to-consumer and sweep deposit balances increased substantially during the second and third quarters as investors sought safe-haven assets. Consequently, our store of cash and other liquid assets has increased materially since the onset of the pandemic, thus curtailing our need for wholesale funding. We plan to maintain a prudent liquid asset buffer, particularly so long as heightened uncertainty around the macroeconomic and financial operating environment persists.recovery will continue.
We remain well-capitalized with capital ratios in excess of regulatory minimums and took prudent actions to preserve and augment our capital when the macroeconomic and operating environment turned uncertain. Of note,own internal targets. Consequently, we suspended our plans to purchase shares ofresumed our common stock took actionsrepurchase program during the first quarter of 2021. However, we maintain ample capital to reducefinance loan receivable growth as and when customers moderate loan payment rates and continue to increase spending as the economy continues to more fully reopen from the COVID-19 pandemic.
Our level of liquid assets remains in excess of historical norms as of September 30, 2021 as consumer loan payment rates and deposit balances remain above their pre-pandemic levels. Although these factors have curtailed our exposuresneed for wholesale funding, we maintain good access to higher-risk segmentsall of our diverse funding channels. Credit spreads have tightened materially this year, nearing record-low levels as of September 30, 2021. We took advantage of the low-rate, tight-credit-spread environment by issuing approximately $1.8 billion of credit portfolioand issued preferred stock during the second quarter. We have completed numerous stress tests to assess the impact of a severe economic downturn on our capital and liquidity and maintain ample amounts of both to ensure we remain well-capitalized and funded while continuing to serve our customers and extend special accommodations to those who need it.card asset-backed securities in September 2021.
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 comprised of highly liquid, unencumbered assets, including cash and cash
equivalents short term investments 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 with the Federal Reserve discount window, which provides another source of contingent liquidity.
During September 2020, in an initiative for one of Discover Bank's lending businesses, we entered into a short-term securities lending transaction with a counterparty. As part of the transaction, we lent $11.4 billion of U.S. Treasury bills and securities to the counterparty and received agency pass-through residential mortgage-backed securities (“RMBS”) as collateral from the borrower. See Note 2: Investments to our condensed consolidated financial statements for further discussion regarding the securities lending transaction.
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"); and (ii) indirectly through contractual arrangements with securities brokerage firms ("brokered deposits"). Direct-to-consumer deposits include online savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts, while brokeredchecking/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 regulations on brokered deposits. Under the FDIC's final rule, our regulatory reporting must reflect changes to the categorization of deposits beginning January 1, 2022. We are evaluating those changes. In accordance with the final rule, certain retail deposit products such as affinity deposits and deposits generated through certain sweep deposit relationships may no longer be categorized as brokered for regulatory reporting purposes in the future. At September 30, 2020,2021, we had $62.9$62.0 billion of direct-to-consumer deposits and $15.1$10.6 billion of brokered and other deposits.
Credit Card Securitization Financing
We securitize 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 in both public and 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 seller's interest. We retain significant exposure to the performance of trust assetsthe securitized credit card receivables through holdings of the seller's interest and subordinated security classes of DCENT.DCENT DiscoverSeries notes. At September 30, 2020,2021, we had $11.2$8.9 billion of
outstanding public asset-backed securities and $4.2$4.0 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.securitized credit card receivables. For the three months ended September 30, 2020,2021, the DiscoverSeries three-month rolling average excess spread was 12.99%14.92%. The period of ultimate repayment would be determined by the amount and timing of collections received.
Through our wholly-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' interests. This excessminimum interest is referred to as the minimum seller's interest. The required minimum seller'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' 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's interest could occur if balance repayments and charge-offscharge offs exceeded new lending on the securitized accounts or as a result of changes in total outstanding 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' interests would be triggered.
An early amortization event would impair our liquidity and may require us to utilize our available non-securitization relatednon-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 additional receivables to the trust,DCMT, which would reduce our available borrowing capacity at the Federal Reserve discount window. As of September 30,
2020, 2021, there were $27.0$24.5 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization investors for the three and nine months ended September 30, 2020.2021. Alternatively, we could employ structured discounting, which was used effectively in 2009 to bolster excess spread and mitigate early amortization risk.
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, 2020 | Total | | Less Than
One Year | | One Year
Through
Three Years | | Four Years
Through
Five Years | | After Five
Years | |
| At September 30, 2021 | | At September 30, 2021 | 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 | Scheduled maturities of long-term borrowings - owed to credit card securitization investors | $ | 11,289 | | | $ | 4,017 | | | $ | 5,933 | | | $ | 1,339 | | | $ | — | | Scheduled maturities of long-term borrowings - owed to credit card securitization investors | $ | 8,954 | | | $ | 2,560 | | | $ | 5,796 | | | $ | 598 | | | $ | — | |
|
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 use 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 FASBFinancial 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 2009. OtherHowever, other legislative and regulatory developments may however, impact our ability 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 United States of America ("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 United States 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, 2021, we had approximately $1.3 billion of borrowing capacity through the FHLB of Chicago based on the amount and type of assets pledged. As of September 30, 2021, there were no borrowings outstanding with the FHLB of Chicago. 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, 2020, $1362021, $110 million of remaining principal balance was outstanding on securitized debt assumed as part of our 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—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, 20202021 | Principal Amount Outstanding |
| Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2022-2027 | $ | 3,422 | |
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing 2021-20312022-2031 | $ | 341168 | |
Discover Bank fixed-rate senior bank notes, maturing 2021-20302023-2030 | $ | 6,1005,350 | |
| Discover Bank fixed-rate subordinated bank notes, maturing 2028 | $ | 500 | |
| |
Certain Discover Financial Services 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-rated investment securities such as U.S.United States Treasury bills or notes, or federal agency mortgage bonds or debentures.debentures issued by government agencies or U.S. GSEs. At September 30, 2020,2021, there were no outstanding balances in the federal funds market or under repurchase agreements.
As noted above, during Additionally, the FHLB of Chicago offers short-term advance structures that we may use for short-term liquidity needs. At September 2020, we entered into a30, 2021, there were no outstanding short-term securities lending transaction. As part of the transaction, we lent $11.4 billion of U.S. Treasury bills and securities to the counterparty and received agency pass-through RMBS as collateraladvances from the borrower. To reflect the obligation to return the RMBS collateral, we recognized $10.7 billion in
short-term borrowings, which are recorded within the condensed consolidated statements of financial condition as of September 30, 2020. We will release the RMBS when the securities lending transaction matures in November 2020. See Note 2: Investments to our condensed consolidated financial statements for further discussion regarding the securities lending transaction.FHLB.
Additional Funding Sources
Private Asset-Backed Securitizations
We have access to committed borrowing capacity through privately placed asset-backed securitizations. At September 30, 2020, 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, informed by our liquidity stress test results, for potential contingency funding needs. At September 30, 2021, we had a total committed
capacity of $4.0 billion, none of which was drawn. We also seek to ensure the stability and reliability of these securitizations by staggering their maturity dates, renewing them approximately one year prior to their scheduled maturity dates and periodically drawing them for operational testing purposestests and seasonal funding needs.
Federal Reserve
Discover Bank has access to the Federal Reserve Bank of Philadelphia's discount window. As of September 30, 2020,2021, Discover Bank had $32.6$32.7 billion of available borrowing capacity through the discount window based on the amount and type of assets pledged, primarily consumer loans. WeAs of September 30, 2021, we have no borrowings outstanding under the discount window and reserve this capacity as a source of contingent liquidity.
Funding Uses
Our primary uses of funds include the extensions of loans and credit, primarily through Discover Bank; the purchase of investmentsinvestment securities for our liquidity portfolio; working capital; and debt and capital service. 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 tests to assess the impact of idiosyncratic, systemic and hybrid (idiosyncratic(i.e., idiosyncratic and systemic) scenarios with varying levels of liquidity risk reflecting a range of stress severity.
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 credit ratings could reduce our borrowing capacity in the unsecured debt and asset securitization capital markets.
We also maintain agreements with certain of 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, 2020, Discover Bank's credit rating met specified thresholds set by its counterparties. However, if its credit rating was to fall below investment grade, Discover Bank would be required to post additional collateral, which, as of September 30, 2020, would have been $9 million. DFS (Parent Company) had no outstanding derivatives as of September 30, 2020, and therefore, no collateral was required.
The table below reflects our current credit ratings and outlooks. In light ofWhen the COVID-19 pandemic emerged in 2020, rating agencies have cited their expectation that the banking industry willwould experience heightened loan delinquencies and charge-offs ascharge offs from deterioration in the labor market weakens.market. During the second quarter of 2020, Moody’s, Standard and Poor’s and Fitch Ratings affirmed our credit ratings;ratings. Standard and Poor’s and Fitch changed the outlook on ourDFS' and Discover Bank's senior unsecured credit ratings from “stable” to “negative”, however, while Moody’s retainsretained a “stable” outlook on the credit ratings of each. On March 25, 2021, Standard and Poor's upgraded the outlook on DFS' and Discover Bank's senior unsecured debt from "negative" to "stable," recognizing better-than-expected operating performance in 2020 and our ratings.strong loss-absorbing capacity. For similar reasons, on May 3, 2021, Fitch Ratings also affirmed the credit ratings on DFS' and Discover Bank's senior unsecured debt and revised its outlook on those ratings from "negative" to "stable." Moreover, on May 27, 2021, Moody's affirmed its credit ratings for DFS and Discover Bank while upgrading its outlook on those ratings from "stable" to "positive." On July 12, 2021, Moody's upgraded Discover Bank's long-term subordinate debt rating to "Baa2" from "Baa3", driven by revisions to their Advanced Loss Given Failure analysis. The table below reflects our current credit ratings and outlooks on our debt did not change in the third quarter. A rating outlook reflects an agency's opinion regarding the likely rating direction over the medium term—often a period of about a year—but also indicates the agency's belief that the issuer's credit profile is consistent with its current rating level at that point in time.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 | | Negative | | NegativeStable |
| Discover Bank | | | | | |
| Senior unsecured debt | Baa2 | | BBB | | BBB+ |
| Outlook for Discover Bank senior unsecured debt | Positive | | Stable | | Negative | | NegativeStable |
| Subordinated debt | Baa3Baa2 | | 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.
A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization, and eachorganization. Each rating should be evaluated independently of any other rating. A credit
rating outlook reflects an agency's opinion regarding the likely rating direction over the medium term, often a period of about a year, and indicates the agency's belief that the issuer's credit profile is consistent with its current rating level at that point in time.
Liquidity
We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy debt obligations under stressed and normal operating conditions. In addition to the funding sources discussed in the previous section, we also maintain highly liquid, unencumbered assets in our liquidity portfolio that we expect to be able to convert to cash quickly and with little loss of value using either the repo market or outright sales.
We maintain a liquidity risk and funding management policy, which outlines the overall framework and general principles we follow in managing liquidity risk across our business. The policy is approved by the Board of Directors with implementation responsibilities delegated toapproves the policy and the Asset and Liability Management Committee (the "ALCO"). is responsible for its implementation. Additionally, we maintain a liquidity management framework document whichthat outlines the general strategies, objectives and principles we utilize to manage our liquidity position and the various liquidity risks inherent in our business model. We seek to balance the trade-offs between maintaining too much liquidity, which may be costly, with having too little liquidity, which could cause financial distress. Liquidity risk is centrally managed by theThe ALCO, which is chaired by our Treasurer and haswith cross-functional membership.membership, centrally manages liquidity risk. The ALCO monitors the liquidity risk profiles of DFS and Discover Bank and oversees any actions Corporate Treasury may take to ensure that we maintain ready access to our funding sources and sufficient liquidity to meet current and projected needs. In addition, the ALCO and our Board of Directors regularly review our compliance with our liquidity limits at DFS and Discover Bank, which are established in accordance with the liquidity risk appetite set by our Board of Directors.
We employ a variety of metrics to monitor and manage liquidity. We utilize early warning indicators ("EWIs") to detect emerging liquidity stress events and a reporting and escalation process that is designed to be consistent with regulatory guidance. The EWIs include both idiosyncratic and systemic measures and are monitored on a daily basis and reported to the ALCO regularly. A warning from one or more of these indicators triggers prompt review and decision-making by our senior management team and, in certain instances, may lead to the convening of a senior-level response team and activation of our contingency funding plan.
In addition, we conduct liquidity stress tests regularly and ensure contingency funding is in place to address potential liquidity shortfalls. We evaluate a range of stress scenarios that are designed in accordance withaccording to regulatory requirements, including idiosyncratic, systemic and a combination of such events that could impact funding sources and our ability to meet liquidity needs. These scenarios measure the projected liquidity position at DFS and Discover Bank across a range of time horizons by comparing estimated contingency funding needs to available contingent liquidity.
Our primary contingent liquidity sources include our liquidity portfolio securities, which we could sell, repo or borrow against, and private securitizations with unused borrowing capacity. In addition, we could borrow FHLB advances by pledging securities to the FHLB of Chicago. Moreover, we have unused borrowing capacity with the Federal Reserve discount window, which provides an additional source of contingent liquidity. We seek to maintain sufficient liquidity to be able to satisfy all maturing obligations and fund business operations for at least 12 months in a severe stress environment. In such an environment, we may also take actions to curtail the size of our balance sheet, which would reduce the need for funding and liquidity.
At September 30, 2020,2021, our liquidity portfolio is comprised of highly liquid, unencumbered assets, including cash and cash equivalents short-term investments and investment securities. Cash and cash equivalents were primarily in the form of deposits with the Federal Reserve and United States Treasury bills. Short-term investments were primarily comprised of Treasury bills with contractual maturities greater than 90 days but less than one year at the time of acquisition. Investment securities primarily included debt obligations of the U.S.United States Treasury and RMBSU.S. GSEs and residential mortgage-backed securities ("RMBS") issued by U.S.United States government housing agencies or government-sponsored enterprises.U.S. GSEs. These investments are considered highly liquid and we expect to have the ability to raise cash by selling them, utilizing repurchase agreements or pledging certain of these investments to access secured funding. The size and composition of our liquidity portfolio may fluctuate based uponon the size of our balance sheet as well as operational requirements, market conditions and interest rate risk management strategies.policies. For instance, our liquidity portfolio has grown materiallygrew during this year2020 as our customer deposits increased and our loan balances declined, reflecting consumers’ response to the COVID-19 pandemic.
At September 30,
2020,2021, our liquidity portfolio and undrawn credit facilities were
$64.4$58.0 billion, which
was $8.1is $5.3 billion
higherlower than the balance at December 31,
2019.2020. Our liquidity portfolio and undrawn credit facilities shrunk in the third quarter of 2021 due to the redemption or maturity of some of our outstanding retail notes, senior bank notes, and securitized debt and lower aggregate direct-to-consumer deposit balances resulting from reduced marketing and lower deposit pricing. During the three and nine months ended September 30,
2020,2021, the average balance of our liquidity portfolio was
$27.9$20.9 billion and
$24.0$25.3 billion, respectively.
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (dollars in millions) | | |
| Liquidity portfolio | | | |
Cash and cash equivalents(1) | $ | 8,690 | | | $ | 6,406 | |
Other short-term investments(2) | 2,139 | | | — | |
Investment securities(3) | 14,930 | | | 10,202 | |
| Total liquidity portfolio | 25,759 | | | 16,608 | |
Private asset-backed securitizations(4) | 6,000 | | | 5,500 | |
| Primary liquidity sources | 31,759 | | | 22,108 | |
Federal Reserve discount window(4) | 32,635 | | | 34,220 | |
| Total liquidity portfolio and undrawn credit facilities | $ | 64,394 | | | $ | 56,328 | |
| | | |
| | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| Liquidity portfolio | | | |
Cash and cash equivalents(1) | $ | 11,984 | | | $ | 12,675 | |
| Other short-term investments | — | | | 2,200 | |
Investment securities(2) | 7,962 | | | 9,536 | |
| Total liquidity portfolio | 19,946 | | | 24,411 | |
Private asset-backed securitizations(3) | 4,000 | | | 6,000 | |
| Federal Home Loan Bank of Chicago | 1,341 | | | — | |
| Primary liquidity sources | 25,287 | | | 30,411 | |
Federal Reserve discount window(3) | 32,719 | | | 32,930 | |
| Total liquidity portfolio and undrawn credit facilities | $ | 58,006 | | | $ | 63,341 | |
| | | |
(1)Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes.
(2)Excludes $5.9 billion of short-term investments that have been pledged as securities lending collateral as of September 30, 2020.
(3)Excludes $5.6 billion$56 million and $121$117 million of U.S.United States Treasury securities that have been pledged as swap collateral in lieu of cash or securities lending collateral as of September 30, 20202021 and December 31, 2019,2020, respectively.
(4)(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, including 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, notably 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 DFS can meet upcoming funding obligations, including common and preferred stock dividend payments and debt service obligations using existing cash resources. In managing this metric, we structure our debt maturity schedule to manage prudently the amount of debt maturing within a short period. See Note 7: Long-Term Borrowings to our condensed consolidated financial statements for further information regarding our debt.
Capital
Our primary sources of capital are the earnings generated by our businesses and the proceeds from issuances of capital securities. We seek to manage capital to a level and composition sufficient to support theour businesses' growth and risks of our businesses and to meet regulatory requirements, rating agency targets and debt investor expectations. Within these constraints, we are focused on deploying capital in a manner that provides attractive returns to our stockholders. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments.
Under regulatory capital requirements adopted by the Federal Reserve and the FDIC, DFS, along with Discover Bank, must maintain minimum levels of capital.capital levels. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a direct material effect on our financial positioncondition and operating results. We must meet specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidance and regulations. Current or future legislative or regulatory reforms, such as the implementationadoption of CECL,the Current Expected Credit Loss ("CECL") accounting model, may require us to hold more capital or adversely impact our capital level. We consider the potential impacts of these reforms in managing our capital position.
DFS and Discover Bank are subject to regulatory capital requirements that became effective January 2015 under final rules issued by the Federal Reserve and the FDIC, to implement the provisionsrespectively, 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" entities as they are United States 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. The Basel III rules require DFS and Discover Bank to maintain minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios. Under Basel III rules for regulatory capital, DFS and Discover Bank are classified as "Standardized Approach" entities, defined as U.S. banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposures less than $10 billion.
As of January 1, 2019, thresholds within the Basel III rules were fully phased in with the exception of certain transition provisions that were frozen pursuant to regulation issued in November 2017. Pursuant to a final rule issued in July 2019, the transition provisions that were previously frozen have been replaced with new permanent thresholds as discussed below. Additionally, onOn March 27, 2020, federal bank regulatory agencies announced an interim final rule, which has since been adopted as aand now final rule that allows banks that have implemented the CECL the optionaccounting model to delay for two years the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, we have elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, the estimated impact of CECL on regulatory capital will be phased in over a three-year periodthree years, beginning in 2022. We estimate that electing this option raisesraised our Common Equity Tier 1 ("CET1") capital ratios in 2020.2020 and 2021. For additional information regarding the risk-based capital and leverage ratios, see Note 12: Capital Adequacy to our condensed consolidated financial statements.
On March 4, 2020, the Federal Reserve announced the SCB final rule, which would imposeimposes limitations on ourDFS' capital distributions if we do not maintain our capital ratios above stated regulatory minimum ratios based on the results of supervisory stress tests. We participated in the CCAR supervisory stress test this year and received our SCB of 3.5%, which primarily reflects the difference between our actual CET1 ratio as of the fourth quarter of 2019 and our projected minimum CET1 ratio based on the Federal Reserve’s models in its nine-quarter Severely Adverse stress scenario. The SCB became effective October 1, 2020. Under this rule, we will beDFS is required to assess ifwhether our planned capital actions are consistent with the effective capital distributionsdistribution limitations that will apply on a pro-forma basis throughout the planning horizon. The SCB reflects 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 the impact to capital of four quarters of planned common stock dividend distributions. The Federal Reserve sets and adjusts firms’ respective SCB requirements based on the results of supervisory stress tests conducted as part of the Federal Reserve’s annual CCAR. On August 5, 2021, the Federal Reserve notified DFS of its adjusted SCB requirement based on the 2021 CCAR exercise; DFS’ SCB, effective October 1, 2021, is 3.6%, a slight increase from our SCB in effect for the preceding year, which was 3.5%. DFS is required to submit an annual capital plan as part of the Federal Reserve’s capital stress test process. DFS was not subject to the supervisory stress test (also referred to as CCAR) in 2021, but will be in 2022. DFS' required 2021 capital plan submission employed a forward-looking internal assessment of income and capital under baseline and stressful conditions. The 2021 capital plan was submitted to the Federal Reserve on April 5, 2021 and covered the January 1, 2021 to March 31, 2023 forecast horizon. See "— Regulatory Environment and Developments — Banking — Capital Standards and Stress Testing" for additional information.
The Basel III rules provide for certain threshold-based deductions from At September 30, 2021, DFS and adjustments to CET1 toDiscover Bank met the extent that any one such category or all such categories in the aggregate exceed certain percentages of CET1. In July 2019, federal banking regulators issued a final rule that, among other things, revised certain capital requirements for Standardized Approach banks by raising"well-capitalized" status under the 10% of CET1 deduction threshold for certain itemsFederal Reserve's Regulation Y and the prompt corrective action rules and corresponding FDIC requirements, respectively, exceeding the regulatory minimums to 25% and eliminatingwhich they were subject under the 15% combined deduction threshold applying to these items. These changes became effective for all Standardized Approach banking institutions in April 2020.applicable rules.
Basel III rules also require disclosures relating to market discipline. This series of disclosures is commonly referred to as "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, 2020, 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. Additionally, we are subject to regulatory requirements imposed by the Federal Reserve as part of its stress testing framework and CCAR program. Refer to "— Regulatory Environment and Developments" for more information.
We disclose tangible common equity, which represents common equity less goodwill and intangibles. Management believes that common stockholders' equity excluding goodwill and intangibles is meaningful to investors as a measure of our true net asset value. As ofAt September 30, 2020,2021, tangible common equity is considered to be a non-GAAP financial measure as it is not formally defined by GAAP or codified in the federal banking regulations and, as such, is considered to be a non-GAAP financial measure.regulations. Other financial services companies may also disclose this measure and definitions may vary, so wevary. We advise users of this information to exercise caution in comparing this measure for different companies.
The following table provides a reconciliation of total common stockholders' equity (a GAAP financial measure) to tangible common equity (dollars in millions): | | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
Total common stockholders' equity(1) | Total common stockholders' equity(1) | $ | 9,196 | | | $ | 11,296 | | Total common stockholders' equity(1) | $ | 12,207 | | | $ | 9,828 | |
| Less: goodwill | Less: goodwill | (255) | | | (255) | | Less: goodwill | (255) | | | (255) | |
| Less: intangible assets, net | Less: intangible assets, net | (95) | | | (155) | | Less: intangible assets, net | (1) | | | (95) | |
| Tangible common equity | Tangible common equity | $ | 8,846 | | | $ | 10,886 | | Tangible common equity | $ | 11,951 | | | $ | 9,478 | |
|
(1)Total common stockholders' equity is calculated as total stockholders' equity less preferred stock.
Discover is required to submit a capital plan and submit to supervisory stress tests as partOur Board of the Federal Reserve’s annual CCAR process. On April 6, 2020, we submitted our annual capital plan to the Federal Reserve covering the period July 1, 2020 to June 30, 2021. On June 25, 2020, we received the stress test results, which are discussed herein. We were also informed that we, along with all other CCAR firms, will be required to submit an additional capital plan by November 2, 2020, to reflect macroeconomic conditions since the COVID-19 outbreak began.
We recentlyDirectors declared
a quarterly cash dividend on our common stock
of $0.44 per share, payable on September 3,dividends during 2021 and 2020
to holders of record on August 20, 2020, which is consistent with last quarter. as follows: | | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Record Date | | Payment Date | | Dividend per Share |
| 2021 | | | | | | |
| October 19, 2021 | | November 24, 2021 | | December 09, 2021 | | $ | 0.50 | |
| July 20, 2021 | | August 19, 2021 | | September 02, 2021 | | $ | 0.50 | |
| April 20, 2021 | | May 20, 2021 | | June 03, 2021 | | $ | 0.44 | |
| January 19, 2021 | | February 18, 2021 | | March 04, 2021 | | $ | 0.44 | |
| | | | | | |
| 2020 | | | | | | |
| October 20, 2020 | | November 19, 2020 | | December 03, 2020 | | $ | 0.44 | |
| July 21, 2020 | | August 20, 2020 | | September 03, 2020 | | $ | 0.44 | |
| April 21, 2020 | | May 21, 2020 | | June 04, 2020 | | $ | 0.44 | |
| January 21, 2020 | | February 20, 2020 | | March 05, 2020 | | $ | 0.44 | |
| | | | | | |
In light of the currentpandemic-induced economic downturn in 2020, the Federal Reserve required all large banks participating in the CCAR supervisory stress test to cap common stock dividends at the lower of the prior quarter's dividend or the average of a firm’s net income over the preceding four quarters. We also recently declaredThe Federal Reserve lifted this restriction as of July 1, 2021. As a semi-annual cash dividend on our preferred stock (Series C) of $2,750 per share, equal to $27.50 per depositary share, payable on October 30, 2020, to holders of record on October 15, 2020, which is consistent with the amount paid in the second quarter of 2020. On June 22, 2020, we issued and sold 500,000 depositary shares, each representing a 1/100th ownership interest in a share of 6.125% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D, $0.01 par value, with a liquidation preference of $100,000 per Share (equivalent to $1,000 per depositary share).
Our existing share repurchase program, which had $1.2 billion of remaining authorization expired on September 30, 2020. Having suspended share repurchases earlier this year in recognition of the pandemic-induced economic downturn, we repurchased no common stock during the three months ended September 30, 2020, andresult, our Board of Directors has notdeclared a common stock dividend of $0.50 per share on July 20, 2021, an increase of $0.06 per share from the previous rate of $0.44 per common share. See "— Regulatory Environment and Developments — Banking — Capital Standards and Stress Testing" for additional information.
Our Board of Directors declared Series C preferred stock dividends during 2021 and 2020 as follows: | | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Record Date | | Payment Date | | Dividend per Depositary Share |
| 2021 | | | | | | |
| July 20, 2021 | | October 15, 2021 | | November 01, 2021 | | $ | 27.50 | |
| January 19, 2021 | | April 15, 2021 | | April 30, 2021 | | $ | 27.50 | |
| | | | | | |
| 2020 | | | | | | |
| July 21, 2020 | | October 15, 2020 | | October 30, 2020 | | $ | 27.50 | |
| January 21, 2020 | | April 15, 2020 | | April 30, 2020 | | $ | 27.50 | |
| | | | | | |
Our Board of Directors declared Series D preferred stock dividends during 2021 as follows: | | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Record Date | | Payment Date | | Dividend per Depositary Share |
| 2021 | | | | | | |
| July 20, 2021 | | September 08, 2021 | | September 23, 2021 | | $ | 30.63 | |
January 19, 2021(1) | | March 08, 2021 | | March 23, 2021 | | $ | 46.11 | |
| | | | | | |
(1)The dividend includes $30.63 semi-annual dividend per depositary share plus $15.48 to account for the long first dividend period.
In light of the improved macroeconomic conditions and our strong financial results, our Board of Directors approved a new share repurchase program. With Boardprogram in July 2021. The new program authorizes up to $2.4 billion of Directors' approval, we may reinstateshare repurchases through March 31, 2022. This share repurchase authorization replaces our prior $1.1 billion share repurchase program, in the future, but the Federal Reserve has required all large banks participating in the CCAR supervisory stress testwhich was scheduled to suspend share repurchases for the third and fourth quarter. Thereafter, ourexpire on December 31, 2021. Our decision to repurchase additional shares of common stock will depend on our financial results, prevailing and expected economic conditions, potential regulatory limitations and other considerations. Share repurchasesWe use various methods to repurchase shares under the program, may be made through a variety of methods, including open market purchases, privately negotiated transactions or other purchases, including block trades, accelerated share repurchase transactions, or any combination of such methods. During the three months ended September 30, 2021, we repurchased approximately 6.5 million shares for approximately $813 million. During the nine months ended September 30, 2021, we repurchased 12.4 million shares for approximately $1.5 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 and other factors, such as the implementation of CECL.factors. 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. 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. In addition, as noted above, banking laws and regulations and our banking regulators may limit our ability to pay dividends and make share repurchases, including limitations on the extent to which our banking subsidiariessubsidiary (Discover Bank) can provide funds to us through dividends, loans or otherwise. Further, current or future regulatory reforms may require us to hold more capital or could adversely impact our capital level. ThereAs a result, there can be no assurance that we will declare and pay any dividends or repurchase any shares of our common stock in the future.
Certain Off-Balance Sheet Arrangements
Guarantees
Guarantees are contracts or indemnification agreements that contingently require us to make payments to a guaranteed party based on changes in an underlying asset, liability, or equity security of a guaranteed party, rate or index. Also included in guarantees are contracts that contingently require the guarantor to make payments to a guaranteed party based on another
entity's failure to perform under an agreement. Our guarantees relate to transactions processed on the Discover Network and certain transactions processed by PULSE and Diners Club. See Note 13: Commitments, Contingencies and Guarantees to our condensed consolidated financial statements for further discussion regarding our guarantees.
Contractual Obligations and Contingent Liabilities and Commitments
In the normal course of business, we enter into various contractual obligations that may require future cash payments. Contractual obligations at September 30, 2020, which include2021, including deposits, long-term borrowings, operating lease obligations, interest payments on fixed-rate debt, purchase obligations and other liabilities, were $103.7$94.4 billion. For a description of our contractual obligations, see our annual report on Form 10-K for the year ended December 31, 2019,2020, 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 and certain other loan products, provided there is no violation of conditions established in the related agreement. At September 30, 2020,2021, our unused credit arrangements were approximately $215.0$220.1 billion. These arrangements,We can terminate substantially all of which we can terminatethese arrangements at any time and whichtherefore the arrangements do not necessarily represent future cash requirements,requirements. The arrangements 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.
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 an investment position or portfolio. We are exposed to market risk primarily from changes in interest rates.
Interest Rate Risk
We borrow money from a variety ofvarious depositors and institutions in order to provide loans to our customers as well asand invest in other assets and our business. These loans to customers and other assets earn interest, which we use to pay interest on the money borrowed. Our net interest income and, therefore, earnings will be reduced if the interest rate earned on assets increases at a slower pace than the interest rate paid on our borrowings. Changes in interest rates and our competitors' responses to those changes may influence customer payment rates, loan balances or deposit account activity. As a result, we may incur higher funding costs which maythat could decrease our earnings.
Our interest rate risk management policies are designed to measure and manage the potential volatility of earnings that may arise from changes in interest rates by having a portfolio that reflects our mix of variable- and fixed-rate assets and liabilities. To the extent that the repricing characteristics of the assets and liabilities in a particular portfolio are not sufficiently matched, we may utilize interest rate derivative contracts, such as swap agreements, to achieve our objectives. Interest rate swap agreements effectively convert the underlying asset or liability from fixed- to floating-rate or from floating- to fixed-rate. See Note 16: 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 sensitive assets and liabilities will be impacted by a hypothetical, immediate 100 basis point change in interest rates relative to market consensus expectations as of the beginning of the period. The sensitivity is based uponon the hypothetical assumption that all relevant types of interest rates would change instantaneously, simultaneously and to the same degree.
Our interest rate sensitiveinterest-rate-sensitive assets include our variable-rate loan receivables and thecertain assets that make upin our liquidity portfolio. We have limitations on our ability to mitigate interest rate risk by adjusting rates on existing balances andbalances. Further, competitive actions may limit our ability to increase the rates that we charge to customers for new loans. At September 30, 2020,2021, the majority of our credit card and private student loans charge variable rates. Assets with ratesFixed-rate assets that are fixed at period end but which will mature or otherwise contractually reset to a market-based indexed rate or other fixed ratefixed-rate prior to the end of the 12-month measurement period are considered to be rate sensitive. The latter category includes certain revolving credit card loans that may
be offered at below-market rates for an introductory period, such as balance transfers and special promotional programs, after which the loans will contractually reprice in accordance with our normal market-based pricing structure. For assets that havewith a fixed interest rate butthat contractually will, or areis assumed to, reset to a market-based indexed rate or other fixed rate during the next 12 months, earnings sensitivity is measured from the expected repricing date. In addition, for all interest rate sensitive assets, earnings sensitivity is calculated net of expected credit losses, which forlosses. For purposes of this analysis, expected credit losses are assumed to remain unchanged relative to our baseline expectations over the analysis horizon.
Interest rate sensitiveInterest-rate-sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12-month period.12 months. Thus, liabilities that vary with changes in a market-based index, such as the federal funds rate or London Interbank Offered Rate ("LIBOR"), which will reset before the end of the 12-month period,next 12 months, or liabilities whosethat have fixed rates are fixed at the fiscal period end but will mature and are assumed to be replaced with a market-based indexed rate prior to the end of the 12-month period,12 months, are also considered to be rate sensitive. For these fixed-rate liabilities, earnings sensitivity is measured from the expected maturity date.
Net interest income sensitivity requires assumptions to be made regarding market conditions, consumer behavior and overall growth and composition of the balance sheet. The degree toby which our deposit rates change when benchmark interest rates change—change, our deposit “beta”—“beta,” is one of the moremost significant of these assumptions. Assumptions about deposit beta and other matters are inherently uncertain and, as a result, actual earnings may differ from the simulated earnings presented below. Our actual earnings depend on multiple factors including, but not limited to, the direction and timing of changes in interest rates, the movement of short-term versusinterest rates relative to long-term rates, balance sheet composition, competitor actions affecting pricing decisions in our loans and deposits and strategic actions undertaken by our management.
Our current short-term interest rate risk position as beingis modestly asset sensitive.asset-sensitive. We believe this position is prudent given that benchmark interest rates are currently very near zero.remain well below historical levels. The following table shows the impacts to net interest income over the following 12-month period that we estimate would result from an immediate and parallel change in interest rates affecting all interest rate sensitive assets and liabilities (dollars in millions): | | | At September 30, 2020 | | | At December 31, 2019 | | | At September 30, 2021 | | At December 31, 2020 |
| Basis point change | Basis point change | $ | | % | | $ | | % | Basis point change | $ | | % | | $ | | % |
| +100 | +100 | $ | 149 | | | 1.53 | % | | $ | 12 | | | 0.12 | % | +100 | $ | 158 | | | 1.59 | % | | $ | 153 | | | 1.55 | % |
| -100 | -100 | $ | (13) | | | (0.13) | % | | $ | (13) | | | (0.13) | % | -100 | NM | | NM | | NM | | NM |
|
We have not provided an estimate of any impact on net interest income of a decrease in interest rates at September 30, 2021 and December 31, 2020, as many of our interest rate sensitive assets and liabilities are tied to interest rates (i.e., Prime and Federal Funds) that are already at or near their historical minimum levels and, therefore, could not materially decrease further assuming U.S. market interest rates remain above zero percent. Sustained negative interest rates for an economy with the size and complexity of the United States would likely lead to broad macroeconomic impacts that are difficult to foresee. While there is a possibility that United States market interest rates could fall below zero percent, this has never occurred in the United States.
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")), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
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.
Glossary of Acronyms
•ALCO: Asset and Liability Management Committee
•AOCI: Accumulated Other Comprehensive Income (Loss)
•ARPA: American Rescue Plan Act of 2021
•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 Trust
•DCMT: Discover Card Master Trust
•DFS: Discover Financial Services
•EPS: Earnings Per Share
•EWI: Early Warning Indicator
•FASB: Financial Accounting Standards Board
•FCA: UK Financial Conduct Authority
•FDIC: Federal Deposit Insurance Corporation
•FFIEC:FHLB: Federal Financial Institutions Examination CouncilHome 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
•PCD: Purchased Credit-Deteriorated
•PCI: Purchased Credit-Impaired
•RMBS: Residential Mortgage-Backed Securities
•SaP: Skip-a-Pay (payment deferral) programs
•SCB: Stress Capital Buffer
•SEC: Securities and Exchange Commission
•SOFR: Secured Overnight Financing Rate
•TDR: Troubled Debt Restructuring
•USD: United States Dollar
•U.S. GSE: Government-sponsored Enterprises of the United States of America
•VIE: Variable Interest Entity
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of legal proceedings, see Note 14: Litigation and Regulatory Matters to our condensed consolidated financial statements.
Item 1A. Risk Factors
In light of recent developments relating to the coronavirus disease 2019 ("COVID-19") pandemic, we are supplementing our risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019. The following risk factor should be read in conjunction with the risk factors described in our annual report on Form 10-K.
The COVID-19 pandemic has and is expected to continue toThere have abeen no material adverse effect on our business, results of operations and financial condition.
The COVID-19 pandemic has had an unprecedented impact on a global scale. As a result of the COVID-19 pandemic and the measures implemented to contain the pandemic, economic activity has declined both on a national and global level and unemployment has risen at a record pace and remains at historically high levels. The depth and duration of this economic contraction is unknown and currently unpredictable. Federal and state governments and agencies have put in place programs to mitigate and respond to the impact of the pandemic. These programs are in their early stages and it is too early to tell how successful these measures will be. It is also unclear whether the measures employed to date are exhaustive, or whether federal and state governments and agencies may take additional action that could impact our business.
The impact of the COVID-19 pandemic and the resulting economic contraction has impacted and is expected to continue to adversely impact our financial results. As consumers grow increasingly uncertain about the economy, lose their jobs or are unable to find work due to the COVID-19 pandemic and the implementation of measures implemented to slow the spread of COVID-19, they may become increasingly unable or unwilling to repay their loans on time. The duration of the pandemic and the measures to contain it and the long-term negative economic impact in relation to increased unemployment could lead to increased customer delinquencies and charge-offs, which would cause an increase to our allowance for credit losses, which would adversely affect our profitability. We had put various programs in place to assist effected borrowers during the pandemic. The programs generally provided borrowers with flexibility to make monthly payments, including allowing customers to skip payments without penalty, or in certain cases, accrual of interest. The ultimate effect of these programs as well as federal stimulus programs on our credit losses will not be known for some time. The impact on the U.S. economy and the consumer credit environment may continue after the COVID-19 pandemic has subsided; the pace of recovery is uncertain and unpredictable. The resurgence of COVID-19 in areas where the pandemic previously appeared to have subsided or been contained only adds to the uncertainty and unpredictability of the pace of recovery. Additionally, in connection with the economic contraction due to COVID-19, we have decreased our marketing activities, which may adversely impact our ability to attract new customers and grow market share.
Given the nature of the crisis, our financial and economic models may be unable to accurately predict and respond to the impact of the economic contraction or lasting changes to consumer behaviors, which in turn may limit our ability to manage credit risk and avoid higher charge-off rates. Additionally, due to the nature and novelty of the crisis, our credit and economic models may not be able to adequately predict or forecast credit losses, sales, receivables or other financial metrics during and after the crisis, which could result in our reserves being too large or insufficient. For more information see the risk factor entitled "Our risk management framework and models for managing risks may not be effective in mitigating our risk of loss" in our annual report on Form 10-K year ended December 31, 2019.
As governments have put measures in place to contain the pandemic by requiring all non-essential businesses to close and/or their employees work from home and discouraging or prohibiting people generally from leaving their homes, our sales volume, credit card loan growth, interchange revenue and net-to-net volume have declined and may continue to do so even after such measures have been lifted. The economic contraction and associated slowdown in travel and transaction volume may have a material adverse impact on the financial condition of some of our Diners Club International ("Diners Club") franchises. In the past, we have extended financial support to franchises experiencing financial stress.
Beginning March 13, 2020, we have transitioned nearly all of our employees and non-employee contractors to working from home. Previously, only a small portion of employees worked primarily from a location other than one of our offices. We have opened some of our physical locations with appropriate health safety measures and capacity limitations, including our
corporate headquarters. However, we have informed employees that they may continue to work from home and will not be required to return to our physical locations until June, 2021, at the earliest. As we continue to adapt to this new way of working, it may become less effective and as a result our ability to design and implement new products, services or features may be adversely impacted. Additionally, in the event that a meaningful portion of our call center agents become ill due to COVID-19 or otherwise are unable to work effectively, our ability to meet our internal measures for customer service may be adversely effected. The pandemic has required us and our third-party vendors to activate certain business continuity programs and make ongoing adjustments to operations. To the extent that these plans and back-up servicing and other strategies and adjustments are either not available, insufficient or cannot be implemented in whole or in part, we may be exposed to legal, regulatory, reputational, operational, information security or financial risk. For example, if we are unable to send our customers certain required statements or disclosures due to disruptions in staffing and personnel or our back-up servicing plans, we may be exposed to legal and regulatory scrutiny. Finally, while nearly all of our employees are working from home, we are increasingly reliant on a handful of vendors, including those we have no direct relationship with such as our employees' internet service providers, to maintain reliable high speed access to our internal network. Failure by such third-party providers would impact our operations. Efforts by us, our vendors and their vendors to continue to adapt operations to this new environment may introduce additional vulnerabilities to our operations and information security programs and systems in ways we have not previously contemplated or otherwise prepared for.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak and the economic recovery following the containment of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects have had and are expected to continue to have a material impact on our results of operations and heighten many of our known risks described in the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019.2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On July 18, 2019,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(1) | | Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs (1) |
| July 1 - 30, 2021 | | | | | | | |
Repurchase program(1) | 2,357,484 | | | $ | 121.47 | | | 2,357,484 | | | $ | 2,264,036,179 | |
Employee transactions(2) | 467 | | | $ | 123.08 | | | N/A | | N/A |
| August 1 - 31, 2021 | | | | | | | |
Repurchase program(1) | 1,978,495 | | | $ | 129.35 | | | 1,978,495 | | | $ | 2,008,117,290 | |
Employee transactions(2) | 18,294 | | | $ | 125.35 | | | N/A | | N/A |
| September 1 - 30, 2021 | | | | | | | |
Repurchase program(1) | 2,185,471 | | | $ | 123.84 | | | 2,185,471 | | | $ | 1,737,477,898 | |
Employee transactions(2) | 334 | | | $ | 122.99 | | | N/A | | N/A |
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| Total | | | | | | | |
Repurchase program(1) | 6,521,450 | | | $ | 124.65 | | | 6,521,450 | | | $ | 1,737,477,898 | |
Employee transactions(2) | 19,095 | | | $ | 125.25 | | | N/A | | N/A |
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(1)In January 2021, our Board of Directors approved a share repurchase program authorizing the purchase of up to $2.2$1.1 billion of our outstanding shares of common stock. This share repurchaseThe program expiredexpires on September 30, 2020 andDecember 31, 2021. In July 2021, our Board of Directors did not approveapproved a replacementnew share repurchase program. We did notprogram authorizing the purchase of up to $2.4 billion of our outstanding shares of common stock through March 31, 2022. This share repurchase any shares during the three months ending September 30, 2020.authorization replaces our prior $1.1 billion share repurchase program.
The following table sets forth information regarding employee transactions that were made by us or on our behalf during the most recent quarter.(2) | | | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | | | |
| July 1 - 31, 2020 | | | | | | | |
| | | | | | | |
Employee transactions(1) | 1,011 | | | $ | 47.84 | | | | | |
| August 1 - 31, 2020 | | | | | | | |
| | | | | | | |
Employee transactions(1) | 12,137 | | | $ | 49.58 | | | | | |
| September 1 - 30, 2020 | | | | | | | |
| | | | | | | |
Employee transactions(1) | 1,101 | | | $ | 53.85 | | | | | |
| | | | | | | |
| Total | | | | | | | |
| | | | | | | |
Employee transactions(1) | 14,249 | | | $ | 49.79 | | | | | |
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(1) 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.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.On October 28, 2021, the Company’s Board of Directors (the “Board”) approved and adopted, effective immediately, amended and restated bylaws of the Company (the “Amended and Restated Bylaws”) to: (i) provide that stockholder meetings may be held by means of remote communication; (ii) update the procedures for stockholders to call a special meeting; (iii) update the advance notice procedures for director nominations and stockholder proposals; (iv) clarify that the Board selects the chairman of a stockholder meeting in the absence of the Chairman of the Board; (v) add provisions describing how the Board will operate and take actions during an emergency (including, without limitation, a pandemic); and (vi) make certain other clarifications and administrative or conforming revisions.
The preceding summary of the Amended and Restated Bylaws does not purport to be complete and is qualified in its entirety by reference to the Amended and Restated Bylaws, a copy of which is included as Exhibit 3.1 to this report and incorporated herein by reference.
Item 6. Exhibits
See "Exhibit Index" for documents filed herewith and incorporated herein by reference.
Exhibit Index | | | | | | | | |
Exhibit
Number | | Description |
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| | Amended and Restated Bylaws of Discover Financial Services, as amended and restated on October 28, 2021. |
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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. | | | | | | | | | | | |
| Discover Financial Services
(Registrant) | | |
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| By: | | /s/ JOHN T. GREENE |
| | | John T. Greene
Executive Vice President, Chief Financial Officer |
Date: October 26, 202028, 2021