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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Discover Financial Services | NYSE:DFS | NYSE | Common Stock |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
1.13 | 0.89% | 127.75 | 128.58 | 125.92 | 126.33 | 533,924 | 01:00:00 |
|
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
|
Large Accelerated Filer
|
☒
|
|
Accelerated Filer
|
☐
|
Non-accelerated Filer
|
☐
|
|
Smaller Reporting Company
|
☐
|
|
|
|
Emerging Growth Company
|
☐
|
|
|
||
Item 1
.
|
||
|
||
|
|
|
Part I.
|
FINANCIAL INFORMATION
|
Item 1.
|
Financial Statements
|
|
June 30,
2019 |
|
December 31,
2018 |
||||
|
(unaudited)
(dollars in millions,
except share amounts)
|
||||||
Assets
|
|
|
|
||||
Cash and cash equivalents
|
$
|
10,313
|
|
|
$
|
13,299
|
|
Restricted cash
|
1,040
|
|
|
1,846
|
|
||
Other short-term investments
|
1,000
|
|
|
—
|
|
||
Investment securities (includes $7,323 and $3,133 at fair value at June 30, 2019 and December 31, 2018, respectively)
|
7,581
|
|
|
3,370
|
|
||
Loan receivables
|
|
|
|
||||
Loan receivables
|
90,229
|
|
|
90,512
|
|
||
Allowance for loan losses
|
(3,202
|
)
|
|
(3,041
|
)
|
||
Net loan receivables
|
87,027
|
|
|
87,471
|
|
||
Premises and equipment, net
|
1,008
|
|
|
936
|
|
||
Goodwill
|
255
|
|
|
255
|
|
||
Intangible assets, net
|
160
|
|
|
161
|
|
||
Other assets
|
2,323
|
|
|
2,215
|
|
||
Total assets
|
$
|
110,707
|
|
|
$
|
109,553
|
|
Liabilities and Stockholders' Equity
|
|
|
|
||||
Liabilities
|
|
|
|
||||
Deposits
|
|
|
|
||||
Interest-bearing deposit accounts
|
$
|
69,064
|
|
|
$
|
67,084
|
|
Non-interest bearing deposit accounts
|
670
|
|
|
675
|
|
||
Total deposits
|
69,734
|
|
|
67,759
|
|
||
Long-term borrowings
|
25,163
|
|
|
27,228
|
|
||
Accrued expenses and other liabilities
|
4,317
|
|
|
3,436
|
|
||
Total liabilities
|
99,214
|
|
|
98,423
|
|
||
Commitments, contingencies and guarantees (Notes 8, 11 and 12)
|
|
|
|
||||
Stockholders' Equity
|
|
|
|
||||
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 566,018,680 and 564,851,848 shares issued at June 30, 2019 and December 31, 2018, respectively
|
6
|
|
|
6
|
|
||
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 5,700 shares issued and outstanding and aggregate liquidation preference of $570 at June 30, 2019 and December 31, 2018
|
563
|
|
|
563
|
|
||
Additional paid-in capital
|
4,167
|
|
|
4,130
|
|
||
Retained earnings
|
20,107
|
|
|
18,906
|
|
||
Accumulated other comprehensive loss
|
(83
|
)
|
|
(156
|
)
|
||
Treasury stock, at cost; 246,543,201 and 233,406,005 shares at June 30, 2019 and December 31, 2018, respectively
|
(13,267
|
)
|
|
(12,319
|
)
|
||
Total stockholders' equity
|
11,493
|
|
|
11,130
|
|
||
Total liabilities and stockholders' equity
|
$
|
110,707
|
|
|
$
|
109,553
|
|
|
|
|
|
|
June 30,
2019 |
|
December 31,
2018 |
||||
|
(unaudited)
(dollars in millions)
|
||||||
Assets
|
|
|
|
||||
Restricted cash
|
$
|
1,040
|
|
|
$
|
1,846
|
|
Loan receivables
|
$
|
31,564
|
|
|
$
|
33,424
|
|
Allowance for loan losses allocated to securitized loan receivables
|
$
|
(1,161
|
)
|
|
$
|
(1,150
|
)
|
Other assets
|
$
|
8
|
|
|
$
|
7
|
|
Liabilities
|
|
|
|
||||
Long-term borrowings
|
$
|
14,214
|
|
|
$
|
16,917
|
|
Accrued expenses and other liabilities
|
$
|
15
|
|
|
$
|
18
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
||||||||||||
|
2019
|
|
2018
|
|
2019
|
|
2018
|
||||||||
|
(unaudited)
(dollars in millions, except per share amounts)
|
||||||||||||||
Interest income
|
|
|
|
|
|
|
|
||||||||
Credit card loans
|
$
|
2,396
|
|
|
$
|
2,139
|
|
|
$
|
4,758
|
|
|
$
|
4,229
|
|
Other loans
|
460
|
|
|
421
|
|
|
917
|
|
|
838
|
|
||||
Investment securities
|
39
|
|
|
6
|
|
|
67
|
|
|
13
|
|
||||
Other interest income
|
82
|
|
|
70
|
|
|
172
|
|
|
125
|
|
||||
Total interest income
|
2,977
|
|
|
2,636
|
|
|
5,914
|
|
|
5,205
|
|
||||
Interest expense
|
|
|
|
|
|
|
|
||||||||
Deposits
|
401
|
|
|
287
|
|
|
787
|
|
|
549
|
|
||||
Long-term borrowings
|
244
|
|
|
220
|
|
|
490
|
|
|
427
|
|
||||
Total interest expense
|
645
|
|
|
507
|
|
|
1,277
|
|
|
976
|
|
||||
Net interest income
|
2,332
|
|
|
2,129
|
|
|
4,637
|
|
|
4,229
|
|
||||
Provision for loan losses
|
787
|
|
|
742
|
|
|
1,596
|
|
|
1,493
|
|
||||
Net interest income after provision for loan losses
|
1,545
|
|
|
1,387
|
|
|
3,041
|
|
|
2,736
|
|
||||
Other income
|
|
|
|
|
|
|
|
||||||||
Discount and interchange revenue, net
|
299
|
|
|
263
|
|
|
530
|
|
|
517
|
|
||||
Protection products revenue
|
49
|
|
|
50
|
|
|
98
|
|
|
103
|
|
||||
Loan fee income
|
102
|
|
|
95
|
|
|
206
|
|
|
191
|
|
||||
Transaction processing revenue
|
48
|
|
|
42
|
|
|
94
|
|
|
85
|
|
||||
Other income
|
22
|
|
|
24
|
|
|
50
|
|
|
53
|
|
||||
Total other income
|
520
|
|
|
474
|
|
|
978
|
|
|
949
|
|
||||
Other expense
|
|
|
|
|
|
|
|
||||||||
Employee compensation and benefits
|
427
|
|
|
400
|
|
|
852
|
|
|
805
|
|
||||
Marketing and business development
|
224
|
|
|
224
|
|
|
419
|
|
|
409
|
|
||||
Information processing and communications
|
101
|
|
|
86
|
|
|
200
|
|
|
168
|
|
||||
Professional fees
|
183
|
|
|
161
|
|
|
350
|
|
|
316
|
|
||||
Premises and equipment
|
26
|
|
|
24
|
|
|
54
|
|
|
50
|
|
||||
Other expense
|
117
|
|
|
89
|
|
|
227
|
|
|
204
|
|
||||
Total other expense
|
1,078
|
|
|
984
|
|
|
2,102
|
|
|
1,952
|
|
||||
Income before income tax expense
|
987
|
|
|
877
|
|
|
1,917
|
|
|
1,733
|
|
||||
Income tax expense
|
234
|
|
|
208
|
|
|
438
|
|
|
398
|
|
||||
Net income
|
$
|
753
|
|
|
$
|
669
|
|
|
$
|
1,479
|
|
|
$
|
1,335
|
|
Net income allocated to common stockholders
|
$
|
747
|
|
|
$
|
663
|
|
|
$
|
1,452
|
|
|
$
|
1,309
|
|
Basic earnings per common share
|
$
|
2.32
|
|
|
$
|
1.91
|
|
|
$
|
4.46
|
|
|
$
|
3.73
|
|
Diluted earnings per common share
|
$
|
2.32
|
|
|
$
|
1.91
|
|
|
$
|
4.46
|
|
|
$
|
3.72
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
||||||||||||
|
2019
|
|
2018
|
|
2019
|
|
2018
|
||||||||
|
(unaudited)
(dollars in millions)
|
||||||||||||||
Net income
|
$
|
753
|
|
|
$
|
669
|
|
|
$
|
1,479
|
|
|
$
|
1,335
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
||||||||
Unrealized gains (losses) on available-for-sale investment securities, net of tax
|
71
|
|
|
(1
|
)
|
|
102
|
|
|
(8
|
)
|
||||
Unrealized (losses) gains on cash flow hedges, net of tax
|
(18
|
)
|
|
7
|
|
|
(30
|
)
|
|
26
|
|
||||
Unrealized pension and post-retirement plan gains, net of tax
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
||||
Other comprehensive income
|
53
|
|
|
6
|
|
|
73
|
|
|
19
|
|
||||
Comprehensive income
|
$
|
806
|
|
|
$
|
675
|
|
|
$
|
1,552
|
|
|
$
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Treasury
Stock
|
|
Total
Stockholders' Equity |
||||||||||||||||
|
Preferred Stock
|
|
Common Stock
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|||||||||||||||||||||
|
(unaudited)
(dollars in millions, shares in thousands)
|
||||||||||||||||||||||||||||||||
For the Three Months Ended June 30, 2018
|
|||||||||||||||||||||||||||||||||
Balance at March 31, 2018
|
6
|
|
|
$
|
563
|
|
|
564,510
|
|
|
$
|
6
|
|
|
$
|
4,068
|
|
|
$
|
17,211
|
|
|
$
|
(139
|
)
|
|
$
|
(10,838
|
)
|
|
$
|
10,871
|
|
Cumulative effect of ASU No. 2018-02 adoption
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
(29
|
)
|
|
—
|
|
|
—
|
|
|||||||
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
669
|
|
|
—
|
|
|
—
|
|
|
669
|
|
|||||||
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|||||||
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(556
|
)
|
|
(556
|
)
|
|||||||
Common stock issued under employee benefit plans
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|||||||
Common stock issued and stock-based compensation expense
|
—
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|||||||
Dividends — common stock
($0.35 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(122
|
)
|
|
—
|
|
|
—
|
|
|
(122
|
)
|
|||||||
Balance at June 30, 2018
|
6
|
|
|
$
|
563
|
|
|
564,558
|
|
|
$
|
6
|
|
|
$
|
4,089
|
|
|
$
|
17,787
|
|
|
$
|
(162
|
)
|
|
$
|
(11,394
|
)
|
|
$
|
10,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
For the Three Months Ended June 30, 2019
|
|||||||||||||||||||||||||||||||||
Balance at March 31, 2019
|
6
|
|
|
$
|
563
|
|
|
565,973
|
|
|
$
|
6
|
|
|
$
|
4,148
|
|
|
$
|
19,484
|
|
|
$
|
(136
|
)
|
|
$
|
(12,806
|
)
|
|
$
|
11,259
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
753
|
|
|
—
|
|
|
—
|
|
|
753
|
|
|||||||
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53
|
|
|
—
|
|
|
53
|
|
|||||||
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(461
|
)
|
|
(461
|
)
|
|||||||
Common stock issued under employee benefit plans
|
—
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|||||||
Common stock issued and stock-based compensation expense
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|||||||
Dividends — common stock
($0.40 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(130
|
)
|
|
—
|
|
|
—
|
|
|
(130
|
)
|
|||||||
Balance at June 30, 2019
|
6
|
|
|
$
|
563
|
|
|
566,019
|
|
|
$
|
6
|
|
|
$
|
4,167
|
|
|
$
|
20,107
|
|
|
$
|
(83
|
)
|
|
$
|
(13,267
|
)
|
|
$
|
11,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
For the Six Months Ended June 30, 2018
|
|||||||||||||||||||||||||||||||||
Balance at December 31, 2017
|
6
|
|
|
$
|
563
|
|
|
563,498
|
|
|
$
|
6
|
|
|
$
|
4,042
|
|
|
$
|
16,687
|
|
|
$
|
(152
|
)
|
|
$
|
(10,254
|
)
|
|
$
|
10,892
|
|
Cumulative effect of ASU No. 2018-02 adoption
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
(29
|
)
|
|
—
|
|
|
—
|
|
|||||||
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,335
|
|
|
—
|
|
|
—
|
|
|
1,335
|
|
|||||||
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
19
|
|
|||||||
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,140
|
)
|
|
(1,140
|
)
|
|||||||
Common stock issued under employee benefit plans
|
—
|
|
|
—
|
|
|
45
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|||||||
Common stock issued and stock-based compensation expense
|
—
|
|
|
—
|
|
|
1,015
|
|
|
—
|
|
|
44
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|||||||
Dividends — common stock
($0.70 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(248
|
)
|
|
—
|
|
|
—
|
|
|
(248
|
)
|
|||||||
Dividends — preferred stock
($2,750 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
(16
|
)
|
|||||||
Balance at June 30, 2018
|
6
|
|
|
$
|
563
|
|
|
564,558
|
|
|
$
|
6
|
|
|
$
|
4,089
|
|
|
$
|
17,787
|
|
|
$
|
(162
|
)
|
|
$
|
(11,394
|
)
|
|
$
|
10,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
For the Six Months Ended June 30, 2019
|
|||||||||||||||||||||||||||||||||
Balance at December 31, 2018
|
6
|
|
|
$
|
563
|
|
|
564,852
|
|
|
$
|
6
|
|
|
$
|
4,130
|
|
|
$
|
18,906
|
|
|
$
|
(156
|
)
|
|
$
|
(12,319
|
)
|
|
$
|
11,130
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,479
|
|
|
—
|
|
|
—
|
|
|
1,479
|
|
|||||||
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
73
|
|
|||||||
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(948
|
)
|
|
(948
|
)
|
|||||||
Common stock issued under employee benefit plans
|
—
|
|
|
—
|
|
|
51
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|||||||
Common stock issued and stock-based compensation expense
|
—
|
|
|
—
|
|
|
1,116
|
|
|
—
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34
|
|
|||||||
Dividends — common stock
($0.80 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(262
|
)
|
|
—
|
|
|
—
|
|
|
(262
|
)
|
|||||||
Dividends — preferred stock
($2,750 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
(16
|
)
|
|||||||
Balance at June 30, 2019
|
6
|
|
|
$
|
563
|
|
|
566,019
|
|
|
$
|
6
|
|
|
$
|
4,167
|
|
|
$
|
20,107
|
|
|
$
|
(83
|
)
|
|
$
|
(13,267
|
)
|
|
$
|
11,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
||||||
|
2019
|
|
2018
|
||||
|
(unaudited)
(dollars in millions)
|
||||||
Cash flows from operating activities
|
|
|
|
||||
Net income
|
$
|
1,479
|
|
|
$
|
1,335
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
||||
Provision for loan losses
|
1,596
|
|
|
1,493
|
|
||
Depreciation and amortization
|
202
|
|
|
216
|
|
||
Amortization of deferred revenues and accretion of accretable yield on acquired loans
|
(201
|
)
|
|
(198
|
)
|
||
Net loss on investments and other assets
|
21
|
|
|
22
|
|
||
Other, net
|
(11
|
)
|
|
(93
|
)
|
||
Changes in assets and liabilities
|
|
|
|
||||
(Increase) decrease in other assets
|
(23
|
)
|
|
190
|
|
||
Increase (decrease) in accrued expenses and other liabilities
|
850
|
|
|
(141
|
)
|
||
Net cash provided by operating activities
|
3,913
|
|
|
2,824
|
|
||
|
|
|
|
||||
Cash flows from investing activities
|
|
|
|
||||
Purchases of other short-term investments
|
(1,000
|
)
|
|
—
|
|
||
Maturities of available-for-sale investment securities
|
70
|
|
|
86
|
|
||
Purchases of available-for-sale investment securities
|
(4,115
|
)
|
|
—
|
|
||
Maturities of held-to-maturity investment securities
|
12
|
|
|
9
|
|
||
Purchases of held-to-maturity investment securities
|
(34
|
)
|
|
(62
|
)
|
||
Net principal disbursed on loans originated for investment
|
(950
|
)
|
|
(1,639
|
)
|
||
Purchases of other investments
|
(21
|
)
|
|
(5
|
)
|
||
Purchases of premises and equipment
|
(151
|
)
|
|
(118
|
)
|
||
Net cash used for investing activities
|
(6,189
|
)
|
|
(1,729
|
)
|
||
|
|
|
|
||||
Cash flows from financing activities
|
|
|
|
||||
Proceeds from issuance of securitized debt
|
1,234
|
|
|
2,184
|
|
||
Maturities and repayment of securitized debt
|
(4,070
|
)
|
|
(2,337
|
)
|
||
Proceeds from issuance of other long-term borrowings
|
595
|
|
|
844
|
|
||
Maturities and repayment of other long-term borrowings
|
(7
|
)
|
|
(753
|
)
|
||
Proceeds from issuance of common stock
|
4
|
|
|
3
|
|
||
Purchases of treasury stock
|
(948
|
)
|
|
(1,140
|
)
|
||
Net increase in deposits
|
1,955
|
|
|
2,900
|
|
||
Dividends paid on common and preferred stock
|
(279
|
)
|
|
(264
|
)
|
||
Net cash (used for) provided by financing activities
|
(1,516
|
)
|
|
1,437
|
|
||
Net (decrease) increase in cash, cash equivalents and restricted cash
|
(3,792
|
)
|
|
2,532
|
|
||
Cash, cash equivalents and restricted cash, at beginning of period
|
15,145
|
|
|
13,387
|
|
||
Cash, cash equivalents and restricted cash, at end of period
|
$
|
11,353
|
|
|
$
|
15,919
|
|
|
|
|
|
||||
Reconciliation of cash, cash equivalents and restricted cash
|
|
|
|
||||
Cash and cash equivalents
|
$
|
10,313
|
|
|
$
|
15,289
|
|
Restricted cash
|
1,040
|
|
|
630
|
|
||
Cash, cash equivalents and restricted cash, at end of period
|
$
|
11,353
|
|
|
$
|
15,919
|
|
|
|
|
|
1.
|
Background and Basis of Presentation
|
2.
|
Investments
|
(1)
|
Includes certificates of deposit with maturity dates greater than 90 days but less than one year at the time of acquisition.
|
(2)
|
Includes
$53 million
and
$42 million
of U.S. Treasury securities pledged as swap collateral as of
June 30, 2019
and
December 31, 2018
, respectively.
|
(3)
|
Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
|
(1)
|
Available-for-sale investment securities are reported at fair value.
|
(2)
|
Held-to-maturity investment securities are reported at amortized cost.
|
(3)
|
Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.
|
(1)
|
Maturities of residential mortgage-backed securities are reflective of the contractual maturities of the investment.
|
3.
|
Loan Receivables
|
(1)
|
Amounts include carrying values of
$19.0 billion
and
$22.0 billion
in underlying investors' interest in trust debt at
June 30, 2019
and
December 31, 2018
, respectively, and
$12.3 billion
and
$11.1 billion
in seller's interest at
June 30, 2019
and
December 31, 2018
, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for
additional
information.
|
(2)
|
Amounts include carrying values of
$326 million
and
$363 million
in loans pledged as collateral against the note issued from The Student Loan Corporation ("SLC") securitization trust at
June 30, 2019
and
December 31, 2018
, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for
additional
information.
|
Information related to the delinquent and non-accruing loans in the Company's loan portfolio is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions):
|
|||||||||||||||||||
|
30-89 Days
Delinquent
|
|
90 or
More Days
Delinquent
|
|
Total Past
Due
|
|
90 or
More Days
Delinquent
and
Accruing
|
|
Total
Non-accruing
(1)
|
||||||||||
At June 30, 2019
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card loans
(2)
|
$
|
835
|
|
|
$
|
857
|
|
|
$
|
1,692
|
|
|
$
|
772
|
|
|
$
|
246
|
|
Other loans
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Personal loans
(3)
|
79
|
|
|
31
|
|
|
110
|
|
|
29
|
|
|
11
|
|
|||||
Private student loans (excluding PCI)
(4)
|
100
|
|
|
33
|
|
|
133
|
|
|
33
|
|
|
8
|
|
|||||
Other
|
3
|
|
|
1
|
|
|
4
|
|
|
—
|
|
|
14
|
|
|||||
Total other loans (excluding PCI)
|
182
|
|
|
65
|
|
|
247
|
|
|
62
|
|
|
33
|
|
|||||
Total loan receivables (excluding PCI)
|
$
|
1,017
|
|
|
$
|
922
|
|
|
$
|
1,939
|
|
|
$
|
834
|
|
|
$
|
279
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
At December 31, 2018
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card loans
(2)
|
$
|
885
|
|
|
$
|
887
|
|
|
$
|
1,772
|
|
|
$
|
781
|
|
|
$
|
266
|
|
Other loans
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Personal loans
(3)
|
84
|
|
|
35
|
|
|
119
|
|
|
33
|
|
|
11
|
|
|||||
Private student loans (excluding PCI)
(4)
|
117
|
|
|
38
|
|
|
155
|
|
|
37
|
|
|
8
|
|
|||||
Other
|
2
|
|
|
1
|
|
|
3
|
|
|
—
|
|
|
17
|
|
|||||
Total other loans (excluding PCI)
|
203
|
|
|
74
|
|
|
277
|
|
|
70
|
|
|
36
|
|
|||||
Total loan receivables (excluding PCI)
|
$
|
1,088
|
|
|
$
|
961
|
|
|
$
|
2,049
|
|
|
$
|
851
|
|
|
$
|
302
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of non-accruing credit card loans was
$11 million
and
$10 million
for the
three months ended June 30, 2019 and 2018
, respectively, and
$23 million
and
$19 million
for the
six months ended June 30, 2019 and 2018
, respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. This amount was estimated based on customers' current balances and most recent interest rates.
|
(2)
|
Credit card loans that are 90 or more days delinquent and accruing interest include
$135 million
and
$116 million
of loans accounted for as TDRs at
June 30, 2019
and
December 31, 2018
, respectively.
|
(3)
|
Personal loans that are 90 or more days delinquent and accruing interest include
$6 million
and
$5 million
of loans accounted for as TDRs at
June 30, 2019
and
December 31, 2018
, respectively.
|
(4)
|
Private student loans that are 90 or more days delinquent and accruing interest include
$7 million
of loans accounted for as TDRs at
June 30, 2019
and
December 31, 2018
.
|
(1)
|
Net charge-off rate represents net charge-off dollars (annualized) divided by average loans for the reporting period.
|
(1)
|
PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."
|
(1)
|
Includes both PCI and non-PCI private student loans.
|
(2)
|
Net change in reserves on PCI pools having no remaining non-accretable difference.
|
(1)
|
Includes both PCI and non-PCI private student loans.
|
(2)
|
Loan receivables evaluated for impairment in accordance with Accounting Standards Codification ("ASC") 310-10-35 include credit card loans, personal loans and student loans collectively evaluated for impairment in accordance with ASC Subtopic 310-40,
Receivables,
which consists of modified loans accounted for as TDRs. Other loans are individually evaluated for impairment and generally do not represent TDRs.
|
(3)
|
The unpaid principal balance of credit card loans was
$2.5 billion
and
$2.0 billion
at
June 30, 2019
and
December 31, 2018
, respectively. All loans accounted for as TDRs have a related allowance for loan losses.
|
(1)
|
The Company does not separately track interest income on loans in modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs.
|
(2)
|
The Company does not separately track the amount of additional gross interest income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on non-impaired loans and the average interest rate earned on loans in the modification programs to the average loans in the modification programs.
|
(3)
|
Includes credit card loans that were modified in TDRs, but are no longer enrolled in a TDR program due to noncompliance with the terms of the modification or due to successful completion of a program after which charging privileges may be reinstated based on customer-level evaluation. The average balance of credit card loans that were no longer enrolled in a TDR program was
$834 million
and
$397 million
for the
three months ended June 30, 2019 and 2018
, respectively, and
$756 million
and
$391 million
for the
six months ended June 30, 2019 and 2018
, respectively.
|
(1)
|
Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain revoked in most cases.
|
(2)
|
For credit card loans and personal loans, a customer defaults from a modification program after
two
consecutive missed payments. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.
|
(3)
|
For student loans, defaults have been defined as loans that are
60
or more days delinquent. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.
|
4.
|
Credit Card and Student Loan Securitization Activities
|
(1)
|
The Company maintains its allowance for loan losses at an amount sufficient to absorb probable losses inherent in all loan receivables, which includes all loan receivables in the trusts. Therefore, credit risk associated with the transferred receivables is fully reflected on the Company's balance sheet in accordance with GAAP.
|
5.
|
Deposits
|
(1)
|
Includes
$2.0 billion
and
$1.7 billion
in certificates of deposit equal to or greater than $250,000, the Federal Deposit Insurance Corporation ("FDIC") insurance limit, as of
June 30, 2019
and
December 31, 2018
, respectively.
|
6.
|
Long-Term Borrowings
|
(1)
|
The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in London Interbank Offered Rate ("LIBOR") or Overnight Index Swap ("OIS") Rate. Use of these interest rate swaps impacts carrying value of the debt. See Note 14: Derivatives and Hedging Activities.
|
(2)
|
Discover Card Execution Note Trust floating-rate asset-backed securities include issuances with the following interest rate terms:
1-month LIBOR + 23 to 60 basis points
as of
June 30, 2019
.
|
(3)
|
The Company uses interest rate swaps to manage its exposure to changes in interest rates related to future cash flows resulting from interest payments on a portion of these long-term borrowings. There is no impact on debt carrying value from use of these interest rate swaps. See Note 14: Derivatives and Hedging Activities.
|
(4)
|
SLC Private Student Loan Trust floating-rate asset-backed security includes an issuance with the following interest rate term:
Prime rate + 100 basis points
as of
June 30, 2019
.
|
(5)
|
Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying student loans. The date shown represents final maturity date.
|
7.
|
Accumulated Other Comprehensive Income
|
(1)
|
Represents the adjustment to AOCI as a result of adoption of ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the second quarter of 2018.
|
8.
|
Income Taxes
|
9.
|
Earnings Per Share
|
10.
|
Capital Adequacy
|
(1)
|
Capital ratios are calculated based on the Basel III Standardized Approach rules, subject to applicable transition provisions.
|
(2)
|
The Basel III rules do not establish well-capitalized thresholds for these measures for bank holding companies. Existing well-capitalized thresholds established in the Federal Reserve's Regulation Y have been included where available.
|
11.
|
Commitments, Contingencies and Guarantees
|
•
|
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.
|
•
|
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.
|
(1)
|
Represents period transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume.
|
12.
|
Litigation and Regulatory Matters
|
13.
|
Fair Value Measurements
|
•
|
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 which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.
|
(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.
|
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 June 30, 2019
|
Quoted Prices in Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Total
|
|
Carrying
Value
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
||||||||||
Amortized cost
|
|
|
|
|
|
|
|
|
|
||||||||||
Residential mortgage-backed securities - Agency
|
$
|
—
|
|
|
$
|
260
|
|
|
$
|
—
|
|
|
$
|
260
|
|
|
$
|
258
|
|
Held-to-maturity investment securities
|
$
|
—
|
|
|
$
|
260
|
|
|
$
|
—
|
|
|
$
|
260
|
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Net loan receivables
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90,586
|
|
|
$
|
90,586
|
|
|
$
|
87,027
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Carrying value approximates fair value
(1)
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
10,313
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,313
|
|
|
$
|
10,313
|
|
Restricted cash
|
$
|
1,040
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,040
|
|
|
$
|
1,040
|
|
Other short-term investments
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Accrued interest receivables
(2)
|
$
|
—
|
|
|
$
|
990
|
|
|
$
|
—
|
|
|
$
|
990
|
|
|
$
|
990
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Liabilities
|
|
|
|
|
|
|
|
|
|
||||||||||
Amortized cost
|
|
|
|
|
|
|
|
|
|
||||||||||
Time deposits
(3)
|
$
|
—
|
|
|
$
|
33,969
|
|
|
$
|
—
|
|
|
$
|
33,969
|
|
|
$
|
33,698
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Long-term borrowings - owed to securitization investors
|
$
|
—
|
|
|
$
|
14,101
|
|
|
$
|
194
|
|
|
$
|
14,295
|
|
|
$
|
14,214
|
|
Other long-term borrowings
|
—
|
|
|
11,589
|
|
|
—
|
|
|
11,589
|
|
|
10,949
|
|
|||||
Long-term borrowings
|
$
|
—
|
|
|
$
|
25,690
|
|
|
$
|
194
|
|
|
$
|
25,884
|
|
|
$
|
25,163
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Carrying value approximates fair value
(1)
|
|
|
|
|
|
|
|
|
|
||||||||||
Accrued interest payables
(2)
|
$
|
—
|
|
|
$
|
302
|
|
|
$
|
—
|
|
|
$
|
302
|
|
|
$
|
302
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
(1) The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year).
|
|||||||||||||||||||
(2)
Accrued interest receivable and payable carrying values are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company's
|
|||||||||||||||||||
condensed consolidated statements of financial condition.
|
|||||||||||||||||||
(3) Excludes deposits without contractually defined maturities for all periods presented.
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
(1)
|
The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year).
|
(2)
|
Accrued interest receivable and payable carrying values are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.
|
(3)
|
Excludes deposits without contractually defined maturities for all periods presented.
|
14.
|
Derivatives and Hedging Activities
|
The following table summarizes the fair value (including accrued interest) and outstanding notional amounts of derivative instruments and related collateral balances (dollars in millions):
|
||||||||||||||||||||||||||
|
June 30, 2019
|
|
December 31, 2018
|
|||||||||||||||||||||||
|
Notional
Amount
|
|
Number of Outstanding Derivative Contracts
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Notional
Amount
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|||||||||||||
Derivatives designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest rate swaps—cash flow hedge
|
$
|
1,650
|
|
|
4
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2,450
|
|
|
$
|
8
|
|
|
$
|
2
|
|
Interest rate swaps—fair value hedge
|
$
|
8,250
|
|
|
10
|
|
|
—
|
|
|
2
|
|
|
$
|
8,000
|
|
|
5
|
|
|
—
|
|
||||
Derivatives not designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Foreign exchange forward contracts
(1)
|
$
|
35
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
$
|
33
|
|
|
—
|
|
|
—
|
|
||||
Total gross derivative assets/liabilities
(2)
|
|
|
|
|
—
|
|
|
4
|
|
|
|
|
13
|
|
|
2
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Less: collateral held/posted
(3)
|
|
|
|
|
—
|
|
|
(4
|
)
|
|
|
|
(8
|
)
|
|
(2
|
)
|
|||||||||
Total net derivative assets/liabilities
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The foreign exchange forward contracts have notional amounts of EUR
9 million
, GBP
12 million
, SGD
1 million
and INR
596 million
as of
June 30, 2019
and notional amounts of EUR
9 million
, GBP
12 million
, SGD
1 million
and INR
464 million
as of
December 31, 2018
.
|
(2)
|
In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At
June 30, 2019
, the Company had
one
outstanding contract with a notional amount of
$46 million
and immaterial fair value. At
December 31, 2018
, the Company had
one
outstanding contract with a notional amount of
$79 million
and immaterial fair value.
|
(3)
|
Collateral amounts, which consist of both cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged.
|
15.
|
Segment Disclosures
|
•
|
Direct Banking:
The Direct Banking segment includes Discover-branded credit cards issued to individuals on the Discover Network and other consumer products and services, including private student loans, personal loans, home equity loans, and other consumer lending and deposit products. The majority of Direct Banking revenues relate to interest income earned on the segment's loan products. Additionally, the Company's credit card products generate substantially all revenues related to discount and interchange, protection products and loan fee income.
|
•
|
Payment Services:
The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and the Company's Network Partners business, which provides payment transaction processing and settlement services on the Discover Network. The majority of Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue from Diners Club.
|
•
|
The Company aggregates operating segments when determining reportable segments.
|
•
|
Corporate overhead is not allocated between segments; all corporate overhead is included in the Direct Banking segment.
|
•
|
Through its operation of the Discover Network, the Direct Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments, with the exception of an allocation of direct and incremental costs driven by the Company's Payment Services segment.
|
•
|
The assets of the Company are not allocated among the operating segments in the information reviewed by the Company's chief operating 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.
|
16.
|
Revenue from Contracts with Customers
|
(1)
|
Net of rewards, including Cashback Bonus rewards, of
$460 million
and
$461 million
for the
three months ended June 30, 2019 and 2018
, respectively, and
$906 million
and
$853 million
for the
six months ended June 30, 2019 and 2018
, respectively.
|
(2)
|
Excludes
$1 million
and
$2 million
of deposit product fees that are reported within net interest income for the
three and six months ended June 30, 2019
, respectively, and
$1 million
for the
three and six months ended June 30, 2018
.
|
17.
|
Subsequent Events
|
Item 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
•
|
Net income was
$753 million
, or
$2.32
per diluted share, compared to
$669 million
, or
$1.91
per diluted share, for the prior year.
|
•
|
Total loans
grew
$5.4 billion
, or
6%
, to
$90.2 billion
.
|
•
|
Credit card loans
grew
$4.6 billion
, or
7%
, to
$72.4 billion
.
|
•
|
The total net charge-off rate
increased
11
basis points to
3.22%
.
|
•
|
The net charge-off rate for credit card loans
increased
15
basis points to
3.49%
and the delinquency rate for credit card loans over 30 days past due
increased
18
basis points to
2.34%
.
|
•
|
Direct-to-consumer deposits
grew
$7.4 billion
, or
17%
, to
$49.7 billion
.
|
•
|
Payment Services transaction volume for the segment was
$61.8 billion
,
up
8%
.
|
(1)
|
Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment.
|
(2)
|
Represents gross proprietary sales volume on the Discover Network.
|
(3)
|
Represents Discover card activity related to net sales, balance transfers, cash advances and other activity.
|
(4)
|
Represents Discover card activity related to net sales.
|
•
|
The level and composition of loan receivables, including the proportion of credit card loans to other loans, as well as the proportion of loan receivables bearing interest at promotional rates as compared to standard rates;
|
•
|
The credit performance of our loans, particularly with regard to charge-offs of finance charges, which reduce interest income;
|
•
|
The terms of long-term borrowings and certificates of deposit upon initial offering, including maturity and interest rate;
|
•
|
The interest rates necessary to attract and maintain direct-to-consumer deposits;
|
•
|
The level and composition of other interest-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;
|
•
|
The effectiveness of interest rate swaps in our interest rate risk management program; and
|
•
|
The difference between the carrying amount and future cash flows expected to be collected on purchased credit-impaired ("PCI") loans.
|
Average Balance Sheet Analysis
(dollars in millions)
|
|||||||||||||||||||||
|
For the Three Months Ended June 30,
|
||||||||||||||||||||
|
2019
|
|
2018
|
||||||||||||||||||
|
Average Balance
|
|
Rate
|
|
Interest
|
|
Average Balance
|
|
Rate
|
|
Interest
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
11,641
|
|
|
2.41
|
%
|
|
$
|
70
|
|
|
$
|
14,870
|
|
|
1.82
|
%
|
|
$
|
68
|
|
Restricted cash
|
888
|
|
|
2.32
|
%
|
|
5
|
|
|
466
|
|
|
1.85
|
%
|
|
2
|
|
||||
Other short-term investments
|
1,000
|
|
|
2.66
|
%
|
|
7
|
|
|
—
|
|
|
—
|
%
|
|
—
|
|
||||
Investment securities
|
6,265
|
|
|
2.52
|
%
|
|
39
|
|
|
1,525
|
|
|
1.67
|
%
|
|
6
|
|
||||
Loan receivables
(1)
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card
(2)
|
71,492
|
|
|
13.44
|
%
|
|
2,396
|
|
|
66,594
|
|
|
12.88
|
%
|
|
2,139
|
|
||||
Personal loans
|
7,419
|
|
|
13.02
|
%
|
|
241
|
|
|
7,304
|
|
|
12.55
|
%
|
|
228
|
|
||||
Private student loans
|
7,985
|
|
|
8.64
|
%
|
|
172
|
|
|
7,321
|
|
|
8.21
|
%
|
|
150
|
|
||||
PCI student loans
|
1,479
|
|
|
8.35
|
%
|
|
31
|
|
|
1,898
|
|
|
7.45
|
%
|
|
35
|
|
||||
Other
|
983
|
|
|
6.83
|
%
|
|
16
|
|
|
531
|
|
|
6.02
|
%
|
|
8
|
|
||||
Total loan receivables
|
89,358
|
|
|
12.82
|
%
|
|
2,856
|
|
|
83,648
|
|
|
12.28
|
%
|
|
2,560
|
|
||||
Total interest-earning assets
|
109,152
|
|
|
10.94
|
%
|
|
2,977
|
|
|
100,509
|
|
|
10.52
|
%
|
|
2,636
|
|
||||
Allowance for loan losses
|
(3,133
|
)
|
|
|
|
|
|
(2,731
|
)
|
|
|
|
|
||||||||
Other assets
|
4,539
|
|
|
|
|
|
|
4,170
|
|
|
|
|
|
||||||||
Total assets
|
$
|
110,558
|
|
|
|
|
|
|
$
|
101,948
|
|
|
|
|
|
||||||
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Time deposits
(3)
|
$
|
33,576
|
|
|
2.56
|
%
|
|
214
|
|
|
$
|
29,829
|
|
|
2.14
|
%
|
|
159
|
|
||
Money market deposits
(4)
|
7,047
|
|
|
2.20
|
%
|
|
39
|
|
|
6,938
|
|
|
1.73
|
%
|
|
30
|
|
||||
Other interest-bearing savings deposits
|
27,801
|
|
|
2.14
|
%
|
|
148
|
|
|
23,858
|
|
|
1.65
|
%
|
|
98
|
|
||||
Total interest-bearing deposits
(5)
|
68,424
|
|
|
2.35
|
%
|
|
401
|
|
|
60,625
|
|
|
1.90
|
%
|
|
287
|
|
||||
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Short-term borrowings
|
—
|
|
|
2.59
|
%
|
|
—
|
|
|
1
|
|
|
1.89
|
%
|
|
—
|
|
||||
Securitized borrowings
(3)(4)
|
15,179
|
|
|
3.01
|
%
|
|
114
|
|
|
16,121
|
|
|
2.67
|
%
|
|
108
|
|
||||
Other long-term borrowings
(3)
|
10,932
|
|
|
4.75
|
%
|
|
130
|
|
|
9,866
|
|
|
4.57
|
%
|
|
112
|
|
||||
Total borrowings
|
26,111
|
|
|
3.74
|
%
|
|
244
|
|
|
25,988
|
|
|
3.39
|
%
|
|
220
|
|
||||
Total interest-bearing liabilities
|
94,535
|
|
|
2.73
|
%
|
|
645
|
|
|
86,613
|
|
|
2.35
|
%
|
|
507
|
|
||||
Other liabilities and stockholders' equity
|
16,023
|
|
|
|
|
|
|
15,335
|
|
|
|
|
|
||||||||
Total liabilities and stockholders' equity
|
$
|
110,558
|
|
|
|
|
|
|
$
|
101,948
|
|
|
|
|
|
||||||
Net interest income
|
|
|
|
|
$
|
2,332
|
|
|
|
|
|
|
$
|
2,129
|
|
||||||
Net interest margin
(6)
|
|
|
10.47
|
%
|
|
|
|
|
|
10.21
|
%
|
|
|
||||||||
Net yield on interest-earning assets
(7)
|
|
|
8.57
|
%
|
|
|
|
|
|
8.50
|
%
|
|
|
||||||||
Interest rate spread
(8)
|
|
|
8.21
|
%
|
|
|
|
|
|
8.17
|
%
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance Sheet Analysis
(dollars in millions)
|
|||||||||||||||||||||
|
For the Six Months Ended June 30,
|
||||||||||||||||||||
|
2019
|
|
2018
|
||||||||||||||||||
|
Average
Balance
|
|
Rate
|
|
Interest
|
|
Average
Balance
|
|
Rate
|
|
Interest
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
12,843
|
|
|
2.44
|
%
|
|
$
|
155
|
|
|
$
|
14,193
|
|
|
1.70
|
%
|
|
$
|
120
|
|
Restricted cash
|
846
|
|
|
2.33
|
%
|
|
10
|
|
|
643
|
|
|
1.61
|
%
|
|
5
|
|
||||
Other short-term investments
|
558
|
|
|
2.66
|
%
|
|
7
|
|
|
—
|
|
|
—
|
%
|
|
—
|
|
||||
Investment securities
|
5,261
|
|
|
2.57
|
%
|
|
67
|
|
|
1,537
|
|
|
1.71
|
%
|
|
13
|
|
||||
Loan receivables
(1)
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card
(2)
|
71,428
|
|
|
13.43
|
%
|
|
4,758
|
|
|
66,290
|
|
|
12.87
|
%
|
|
4,229
|
|
||||
Personal loans
|
7,444
|
|
|
12.94
|
%
|
|
478
|
|
|
7,345
|
|
|
12.49
|
%
|
|
455
|
|
||||
Private student loans
|
8,028
|
|
|
8.67
|
%
|
|
345
|
|
|
7,367
|
|
|
8.12
|
%
|
|
296
|
|
||||
PCI student loans
|
1,531
|
|
|
8.30
|
%
|
|
63
|
|
|
1,958
|
|
|
7.41
|
%
|
|
72
|
|
||||
Other
|
925
|
|
|
6.84
|
%
|
|
31
|
|
|
492
|
|
|
6.00
|
%
|
|
15
|
|
||||
Total loan receivables
|
89,356
|
|
|
12.81
|
%
|
|
5,675
|
|
|
83,452
|
|
|
12.24
|
%
|
|
5,067
|
|
||||
Total interest-earning assets
|
108,864
|
|
|
10.96
|
%
|
|
5,914
|
|
|
99,825
|
|
|
10.52
|
%
|
|
5,205
|
|
||||
Allowance for loan losses
|
(3,086
|
)
|
|
|
|
|
|
(2,674
|
)
|
|
|
|
|
||||||||
Other assets
|
4,497
|
|
|
|
|
|
|
4,196
|
|
|
|
|
|
||||||||
Total assets
|
$
|
110,275
|
|
|
|
|
|
|
$
|
101,347
|
|
|
|
|
|
||||||
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Time deposits
(3)
|
$
|
33,901
|
|
|
2.52
|
%
|
|
424
|
|
|
$
|
30,023
|
|
|
2.09
|
%
|
|
311
|
|
||
Money market deposits
(4)
|
7,058
|
|
|
2.20
|
%
|
|
77
|
|
|
6,856
|
|
|
1.66
|
%
|
|
56
|
|
||||
Other interest-bearing savings deposits
|
27,075
|
|
|
2.13
|
%
|
|
286
|
|
|
23,168
|
|
|
1.59
|
%
|
|
182
|
|
||||
Total interest-bearing deposits
(5)
|
68,034
|
|
|
2.33
|
%
|
|
787
|
|
|
60,047
|
|
|
1.85
|
%
|
|
549
|
|
||||
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Short-term borrowings
|
1
|
|
|
2.59
|
%
|
|
—
|
|
|
1
|
|
|
1.82
|
%
|
|
—
|
|
||||
Securitized borrowings
(3)(4)
|
15,520
|
|
|
3.03
|
%
|
|
233
|
|
|
16,150
|
|
|
2.55
|
%
|
|
204
|
|
||||
Other long-term borrowings
(3)
|
10,822
|
|
|
4.78
|
%
|
|
257
|
|
|
9,906
|
|
|
4.53
|
%
|
|
223
|
|
||||
Total borrowings
|
26,343
|
|
|
3.75
|
%
|
|
490
|
|
|
26,057
|
|
|
3.30
|
%
|
|
427
|
|
||||
Total interest-bearing liabilities
|
94,377
|
|
|
2.73
|
%
|
|
1,277
|
|
|
86,104
|
|
|
2.29
|
%
|
|
976
|
|
||||
Other liabilities and stockholders’ equity
|
15,898
|
|
|
|
|
|
|
15,243
|
|
|
|
|
|
||||||||
Total liabilities and stockholders’ equity
|
$
|
110,275
|
|
|
|
|
|
|
$
|
101,347
|
|
|
|
|
|
||||||
Net interest income
|
|
|
|
|
$
|
4,637
|
|
|
|
|
|
|
$
|
4,229
|
|
||||||
Net interest margin
(6)
|
|
|
10.47
|
%
|
|
|
|
|
|
10.22
|
%
|
|
|
||||||||
Net yield on interest-earning assets
(7)
|
|
|
8.59
|
%
|
|
|
|
|
|
8.54
|
%
|
|
|
||||||||
Interest rate spread
(8)
|
|
|
8.23
|
%
|
|
|
|
|
|
8.23
|
%
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Average balances of loan receivables include non-accruing loans, which are included in the yield calculations. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.
|
(2)
|
Interest income on credit card loans includes
$66 million
and
$60 million
of amortization of balance transfer fees for the
three months ended June 30, 2019 and 2018
, respectively, and
$130 million
and
$119 million
for the
six months ended June 30, 2019 and 2018
, respectively.
|
(3)
|
Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding.
|
(4)
|
Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding.
|
(5)
|
Includes the impact of FDIC insurance premiums and Large Institution Surcharge. As of October 2018, the FDIC no longer accesses a Large Institution Surcharge.
|
(6)
|
Net interest margin represents net interest income as a percentage of average total loan receivables.
|
(7)
|
Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
|
(8)
|
Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
|
Loan receivables consist of the following (dollars in millions):
|
|||||||
|
June 30,
2019 |
|
December 31, 2018
|
||||
Credit card loans
|
$
|
72,393
|
|
|
$
|
72,876
|
|
Other loans
|
|
|
|
||||
Personal loans
|
7,414
|
|
|
7,454
|
|
||
Private student loans
|
7,943
|
|
|
7,728
|
|
||
Other
|
1,047
|
|
|
817
|
|
||
Total other loans
|
16,404
|
|
|
15,999
|
|
||
PCI loans
(1)
|
1,432
|
|
|
1,637
|
|
||
Total loan receivables
|
90,229
|
|
|
90,512
|
|
||
Allowance for loan losses
|
(3,202
|
)
|
|
(3,041
|
)
|
||
Net loan receivables
|
$
|
87,027
|
|
|
$
|
87,471
|
|
|
|
|
|
(1)
|
Represents PCI private student loans. See Note 3: Loan Receivables to our condensed consolidated financial statements for more information regarding PCI loans.
|
•
|
The impact of general economic conditions on the consumer, including national and regional conditions, unemployment levels, bankruptcy trends and interest rate movements;
|
•
|
Changes in consumer spending, payment and credit utilization behaviors;
|
•
|
Changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio and maturation of the loan portfolio;
|
•
|
The level and direction of historical and anticipated loan delinquencies and charge-offs;
|
•
|
The credit quality of the loan portfolio, which reflects, among other factors, our credit granting practices and effectiveness of collection efforts; and
|
•
|
Regulatory changes or new regulatory guidance.
|
(1)
|
Includes both PCI and non-PCI private student loans.
|
(2)
|
Net change in reserves on PCI pools having no remaining non-accretable difference.
|
The following table presents amounts and rates of net charge-offs of key loan products (dollars in millions):
|
|||||||||||||||||||||||||||
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
||||||||||||||||||||||||
|
2019
|
|
2018
|
|
2019
|
|
2018
|
||||||||||||||||||||
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
||||||||||||
Credit card loans
|
$
|
623
|
|
|
3.49
|
%
|
|
$
|
555
|
|
|
3.34
|
%
|
|
$
|
1,239
|
|
|
3.50
|
%
|
|
$
|
1,095
|
|
|
3.33
|
%
|
Personal loans
|
$
|
80
|
|
|
4.33
|
%
|
|
$
|
72
|
|
|
3.97
|
%
|
|
$
|
164
|
|
|
4.43
|
%
|
|
$
|
145
|
|
|
4.00
|
%
|
Private student loans (excluding PCI
(1)
)
|
$
|
15
|
|
|
0.73
|
%
|
|
$
|
21
|
|
|
1.16
|
%
|
|
$
|
30
|
|
|
0.76
|
%
|
|
$
|
43
|
|
|
1.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note 3: Loan Receivables to our condensed consolidated financial statements for information regarding the accounting for charge-offs on PCI loans.
|
(1)
|
Excludes PCI loans, which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because we are recognizing interest income on a pool of loans, it is all considered to be performing.
|
(2)
|
Restructured credit card loans include
$143 million
and
$124 million
at
June 30, 2019
and
December 31, 2018
, respectively, which are also included in loans 90 or more days delinquent.
|
(3)
|
Restructured personal loans include
$7 million
and
$6 million
at
June 30, 2019
and
December 31, 2018
, which are also included in loans 90 or more days delinquent.
|
(4)
|
Restructured private student loans include
$7 million
at
June 30, 2019
and
December 31, 2018
, which are also included in loans 90 or more days delinquent.
|
(1)
|
Net of rewards, including
Cashback Bonus
rewards, of
$460 million
and
$461 million
for the
three months ended June 30, 2019 and 2018
, respectively and
$906 million
and
$853 million
for the
six months ended June 30, 2019
.
|
(1)
|
An "sf" in the rating denotes rating agency identification for structured finance product ratings.
|
|
June 30,
2019 |
|
December 31,
2018 |
||||
|
(dollars in millions)
|
||||||
Liquidity portfolio
|
|
|
|
||||
Cash and cash equivalents
(1)
|
$
|
9,013
|
|
|
$
|
12,832
|
|
Other short-term investments
|
1,000
|
|
|
—
|
|
||
Investment securities
(2)
|
7,270
|
|
|
3,091
|
|
||
Total liquidity portfolio
|
17,283
|
|
|
15,923
|
|
||
Private asset-backed securitizations
(3)
|
6,000
|
|
|
5,500
|
|
||
Primary liquidity sources
|
23,283
|
|
|
21,423
|
|
||
Federal Reserve discount window
(3)
|
32,466
|
|
|
31,486
|
|
||
Total liquidity portfolio and undrawn credit facilities
|
$
|
55,749
|
|
|
$
|
52,909
|
|
|
|
|
|
(1)
|
Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes.
|
(2)
|
Excludes
$53 million
and
$42 million
of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of
June 30, 2019
and
December 31, 2018
, respectively.
|
(3)
|
See "— Additional Funding Sources" for additional information.
|
(1)
|
Total common stockholders' equity is calculated as total stockholders' equity less preferred stock.
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Item 4.
|
Controls and Procedures
|
•
|
ALCO
: Asset and Liability Management Committee
|
•
|
AOCI
: Accumulated Other Comprehensive Income
|
•
|
ASC
: Accounting Standards Codification
|
•
|
ASU
: Accounting Standards Update
|
•
|
CCAR
: Comprehensive Capital Analysis and Review
|
•
|
CCB
: Capital Conservation Buffer
|
•
|
CCPA
: California Consumer Privacy Act
|
•
|
CECL
: Current Expected Credit Loss
|
•
|
CET1
: Common Equity Tier 1
|
•
|
CFPB
: Consumer Financial Protection Bureau
|
•
|
DCENT
: Discover Card Execution Note Trust
|
•
|
DCMT
: Discover Card Master Trust
|
•
|
DFS
: Discover Financial Services
|
•
|
EPS
: Earnings Per Share
|
•
|
EWIs
: Early Warning Indicators
|
•
|
FDIC
: Federal Deposit Insurance Corporation
|
•
|
GAAP
: Generally Accepted Accounting Principles
|
•
|
IRS
: Internal Revenue Service
|
•
|
LIBOR
: London Interbank Offered Rate
|
•
|
OCI
: Other Comprehensive Income
|
•
|
OIS
: Overnight Index Swap
|
•
|
PCD
: Purchased Credit-Deteriorated
|
•
|
PCI
: Purchased Credit-Impaired
|
•
|
SLC
: The Student Loan Corporation
|
•
|
TDR
: Troubled Debt Restructuring
|
•
|
VIEs
: Variable Interest Entities
|
Part II.
|
OTHER INFORMATION
|
Item 1.
|
Legal Proceedings
|
Item 1A.
|
Risk Factors
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
The following table sets forth information regarding purchases of our common stock related to our share repurchase program and employee transactions that were made by us or on our behalf during the most recent quarter.
|
|||||||||||||
Period
|
Total Number of Shares Purchased
|
|
Average Price Paid Per Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
(1)
|
|
Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs
(1)
|
||||||
April 1 - 30, 2019
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
1,859,629
|
|
|
$
|
75.28
|
|
|
1,859,629
|
|
|
$
|
1,540,479,353
|
|
Employee transactions
(2)
|
1,750
|
|
|
$
|
74.12
|
|
|
N/A
|
|
|
N/A
|
|
|
May 1 - 31, 2019
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
2,230,279
|
|
|
$
|
78.91
|
|
|
2,230,279
|
|
|
$
|
1,364,480,310
|
|
Employee transactions
(2)
|
1,405
|
|
|
$
|
79.45
|
|
|
N/A
|
|
|
N/A
|
|
|
June 1 - 30, 2019
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
1,860,869
|
|
|
$
|
77.38
|
|
|
1,860,869
|
|
|
$
|
1,220,480,007
|
|
Employee transactions
(2)
|
1,379
|
|
|
$
|
77.82
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
||||||
Total
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
5,950,777
|
|
|
$
|
77.30
|
|
|
5,950,777
|
|
|
$
|
1,220,480,007
|
|
Employee transactions
(2)
|
4,534
|
|
|
$
|
76.90
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On
July 18, 2019
, our Board of Directors approved a share repurchase program authorizing the purchase of up to
$2.2 billion
of our outstanding shares of common stock. This share repurchase program expires on
September 30, 2020
and may be terminated at any time.
|
(2)
|
Reflects shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock options.
|
Item 3.
|
Defaults Upon Senior Securities
|
Item 4.
|
Mine Safety Disclosures
|
Item 5.
|
Other Information
|
Item 6.
|
Exhibits
|
Exhibit
Number
|
|
Description
|
|
|
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
|
|
|
|
|
101.INS
|
|
XBRL Instance Document — the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document.
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
|
|
|
Discover Financial Services
(Registrant)
|
||
|
|
|
|
|
By:
|
|
/s/ R. M
ARK
G
RAF
|
|
|
|
R. Mark Graf
Executive Vice President, Chief Financial Officer
|
1 Year Discover Financial Servi... Chart |
1 Month Discover Financial Servi... Chart |
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