DISCOVER FINANCIAL SERVICES, 10-Q filed on 8/1/2019
Quarterly Report
v3.19.2
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2019
Jul. 26, 2019
Document Information [Line Items]    
Document type 10-Q  
Document quarterly report true  
Document period end date Jun. 30, 2019  
Document transition report false  
Entity file number 001-33378  
Entity registrant name DISCOVER FINANCIAL SERVICES  
Entity incorporation, state code DE  
Entity tax identification number 36-2517428  
Entity address, address line one 2500 Lake Cook Road  
Entity address, city or town Riverwoods  
Entity address, state or province IL  
Entity address, postal zip code 60015  
Entity phone number, city area code 224  
Entity phone number, local phone number 405-0900  
Title of 12(b) security Common Stock, par value $0.01 per share  
Trading symbol DFS  
Security exchange name NYSE  
Entity current reporting status Yes  
Entity interactive data current Yes  
Entity filer category Large Accelerated Filer  
Smaller reporting company false  
Emerging growth company false  
Entity shell company false  
Entity common stock, shares outstanding   318,241,033
Entity central index key 0001393612  
Current fiscal year end date --12-31  
Document fiscal year focus 2019  
Document fiscal period focus Q2  
Amendment flag false  
v3.19.2
Condensed Consolidated Statements of Financial Condition - USD ($)
$ in Millions
Jun. 30, 2019
Dec. 31, 2018
Assets    
Cash and cash equivalents $ 10,313 $ 13,299
Restricted cash 1,040 1,846
Other short-term investments 1,000 0
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    
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
Variable Interest Entity, Primary Beneficiary [Member]    
Assets    
Restricted cash 1,040 1,846
Loan receivables    
Loan receivables 31,564 33,424
Allowance for loan losses (1,161) (1,150)
Other assets 8 7
Liabilities    
Long-term borrowings 14,214 16,917
Accrued expenses and other liabilities $ 15 $ 18
v3.19.2
Condensed Consolidated Statements of Financial Condition (Parenthetical) - USD ($)
Jun. 30, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Amount of total investment securities at fair value (in dollars) [1] $ 7,323,000,000 $ 3,133,000,000
Common stock, par value per share (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized 2,000,000,000 2,000,000,000
Common stock, shares issued 566,018,680 564,851,848
Preferred stock, par value per share (in dollars per share) $ 0.01 $ 0.01
Preferred stock, shares authorized 200,000,000 200,000,000
Preferred stock, shares issued 5,700 5,700
Preferred stock, shares outstanding 5,700 5,700
Preferred stock, liquidation preference (in dollars) $ 570,000,000 $ 570,000,000
Treasury stock, shares 246,543,201 233,406,005
[1]
Available-for-sale investment securities are reported at fair value.
v3.19.2
Condensed Consolidated Statements of Income - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
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 (in dollars per share) $ 2.32 $ 1.91 $ 4.46 $ 3.73
Diluted earnings per common share (in dollars per share) $ 2.32 $ 1.91 $ 4.46 $ 3.72
v3.19.2
Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
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 0 0 1 1
Other comprehensive income 53 6 73 19
Comprehensive income $ 806 $ 675 $ 1,552 $ 1,354
v3.19.2
Condensed Consolidated Statements of Changes in Stockholders' Equity - USD ($)
$ in Millions
Total
Preferred Stock [Member]
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Loss [Member]
Treasury Stock [Member]
Preferred stock, shares outstanding, balance at beginning of period (in shares) at Dec. 31, 2017   6,000          
Common stock, shares outstanding, balance at beginning of period (in shares) at Dec. 31, 2017     563,498,000        
Stockholders' equity, balance at beginning of period at Dec. 31, 2017 $ 10,892 $ 563 $ 6 $ 4,042 $ 16,687 $ (152) $ (10,254)
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Cumulative effect of ASU No. 2018-02 adoption 0       29 (29) [1]  
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 (in shares)     45,000        
Common stock issued under employee benefit plans 3   $ 0 3      
Common stock issued and stock-based compensation expense (in shares)     1,015,000        
Common stock issued and stock-based compensation expense 44   $ 0 44      
Dividends — common stock (248)       (248)    
Dividends — preferred stock (16)       (16)    
Preferred stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2018   6,000          
Common stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2018     564,558,000        
Stockholders' equity, balance at end of period at Jun. 30, 2018 10,889 $ 563 $ 6 4,089 17,787 (162) (11,394)
Preferred stock, shares outstanding, balance at beginning of period (in shares) at Mar. 31, 2018   6,000          
Common stock, shares outstanding, balance at beginning of period (in shares) at Mar. 31, 2018     564,510,000        
Stockholders' equity, balance at beginning of period at Mar. 31, 2018 10,871 $ 563 $ 6 4,068 17,211 (139) (10,838)
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Cumulative effect of ASU No. 2018-02 adoption 0       29 (29) [1]  
Net income 669       669    
Other comprehensive income 6         6  
Purchases of treasury stock (556)           (556)
Common stock issued under employee benefit plans (in shares)     22,000        
Common stock issued under employee benefit plans 1   $ 0 1      
Common stock issued and stock-based compensation expense (in shares)     26,000        
Common stock issued and stock-based compensation expense 20   $ 0 20      
Dividends — common stock (122)       (122)    
Dividends — preferred stock 0            
Preferred stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2018   6,000          
Common stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2018     564,558,000        
Stockholders' equity, balance at end of period at Jun. 30, 2018 $ 10,889 $ 563 $ 6 4,089 17,787 (162) (11,394)
Preferred stock, shares outstanding, balance at beginning of period (in shares) at Dec. 31, 2018 5,700 6,000          
Common stock, shares outstanding, balance at beginning of period (in shares) at Dec. 31, 2018     564,852,000        
Stockholders' equity, balance at beginning of period at Dec. 31, 2018 $ 11,130 $ 563 $ 6 4,130 18,906 (156) (12,319)
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 1,479       1,479    
Other comprehensive income 73         73  
Purchases of treasury stock (948)           (948)
Common stock issued under employee benefit plans (in shares)     51,000        
Common stock issued under employee benefit plans 3   $ 0 3      
Common stock issued and stock-based compensation expense (in shares)     1,116,000        
Common stock issued and stock-based compensation expense 34   $ 0 34      
Dividends — common stock (262)       (262)    
Dividends — preferred stock $ (16)       (16)    
Preferred stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2019 5,700 6,000          
Common stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2019     566,019,000        
Stockholders' equity, balance at end of period at Jun. 30, 2019 $ 11,493 $ 563 $ 6 4,167 20,107 (83) (13,267)
Preferred stock, shares outstanding, balance at beginning of period (in shares) at Mar. 31, 2019   6,000          
Common stock, shares outstanding, balance at beginning of period (in shares) at Mar. 31, 2019     565,973,000        
Stockholders' equity, balance at beginning of period at Mar. 31, 2019 11,259 $ 563 $ 6 4,148 19,484 (136) (12,806)
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 753       753    
Other comprehensive income 53         53  
Purchases of treasury stock (461)           (461)
Common stock issued under employee benefit plans (in shares)     24,000        
Common stock issued under employee benefit plans 1   $ 0 1      
Common stock issued and stock-based compensation expense (in shares)     22,000        
Common stock issued and stock-based compensation expense 18   $ 0 18      
Dividends — common stock (130)       (130)    
Dividends — preferred stock $ 0            
Preferred stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2019 5,700 6,000          
Common stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2019     566,019,000        
Stockholders' equity, balance at end of period at Jun. 30, 2019 $ 11,493 $ 563 $ 6 $ 4,167 $ 20,107 $ (83) $ (13,267)
[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.
v3.19.2
Condensed Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - $ / shares
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Statement of Stockholders' Equity [Abstract]        
Dividends declared, common stock (dollars per share) $ 0.4 $ 0.35 $ 0.80 $ 0.7
Dividends declared, preferred stock (dollars per share) $ 0 $ 0 $ 2,750 $ 2,750
v3.19.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
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) 0
Maturities of available-for-sale investment securities 70 86
Purchases of available-for-sale investment securities (4,115) 0
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
v3.19.2
Background and Basis of Presentation
6 Months Ended
Jun. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Background and Basis of Presentation
Background and Basis of Presentation
Description of Business
Discover Financial Services ("DFS" or the "Company") is a direct banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 as well as a financial holding company under the Gramm-Leach-Bliley Act and therefore is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Company provides direct banking products and services and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home equity loans and deposit products. The Company also operates the Discover Network, the PULSE network ("PULSE") and Diners Club International ("Diners Club"). The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as merchant acceptance throughout the U.S. for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded charge cards and/or provide card acceptance services.
The Company's business activities are managed in two segments, Direct Banking and Payment Services, based on the products and services provided. For a detailed description of the operations of each segment, as well as the allocation conventions used in business segment reporting, see Note 15: Segment Disclosures.
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 which are necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with the Company's 2018 audited consolidated financial statements filed with the Company's annual report on Form 10-K for the year ended December 31, 2018.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss model with the current expected credit loss ("CECL") approach. For loans carried at amortized cost, the allowance for loan losses will be based on management's current estimate of all expected credit losses over the remaining contractual term of the loans. Upon the origination of a loan, the Company will have to record its estimate of all expected credit losses on that loan through an immediate charge to earnings. Updates to that estimate each period will be recorded through provision expense. The CECL estimate is to be based on historical experience, current conditions and reasonable and supportable forecasts.
The CECL approach is expected to increase the Company's allowance for loan losses as a result of: (1) recording reserves for expected losses, not simply those deemed to be already incurred, (2) extending the loss estimate period over the entire life of the loan and (3) reclassification of the credit loss component of the purchased credit-impaired ("PCI") loan portfolio out of loan carrying value and into the allowance for loan losses. The allowance for loan losses on all loans carried at amortized cost, including PCI loans and loans modified in a troubled debt restructuring ("TDR") will be measured under the CECL approach. Existing specialized measurement guidance for PCI loans, which the ASU refers to as purchased credit-deteriorated ("PCD"), and TDRs will be eliminated, although certain separate disclosure guidance will be retained. Measurement of credit impairment of available-for-sale debt securities will generally remain unchanged under the new rules, but any such impairment will be recorded through an allowance, rather than a direct write-down of the security.
The ASU is effective for the Company on January 1, 2020. A cross-functional governance structure is in place to oversee the implementation of the standard. The Company continues to refine loss forecasting models and technological solutions, and advance processes and controls in support of the new standard. Management is also finalizing key accounting interpretations, the time period over which losses can be reasonably estimated and the reversion method for periods beyond the reasonable and supportable forecast period. Upon adoption, the allowance for loan losses is expected to increase with an offsetting adjustment, net of taxes, to retained earnings. Additionally, there will be an immaterial increase to the carrying value of PCD loans. Adoption of the standard will materially impact stockholders' equity, regulatory capital and the Company's consolidated financial condition. In addition, the Company's results of operations may be subject to more volatility. The extent of the impact upon adoption will depend on the characteristics of the Company's loan portfolio and economic conditions at that date, as well as forecasted conditions thereafter.
v3.19.2
Investments
6 Months Ended
Jun. 30, 2019
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments
The Company's other short-term investments and investment securities consist of the following (dollars in millions):
 
June 30,
2019
 
December 31,
2018
Certificates of deposit(1)
$
1,000

 
$

Total other short-term investments
$
1,000

 
$

 
 
 
 
U.S. Treasury securities(2)
$
6,835

 
$
2,586

Residential mortgage-backed securities - Agency(3)
746

 
784

Total investment securities
$
7,581

 
$
3,370

 
 
 
 

(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.
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 June 30, 2019
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
6,686

 
$
149

 
$

 
$
6,835

Residential mortgage-backed securities - Agency
488

 
2

 
(2
)
 
488

Total available-for-sale investment securities
$
7,174

 
$
151

 
$
(2
)
 
$
7,323

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency(3)
$
258

 
$
3

 
$
(1
)
 
$
260

Total held-to-maturity investment securities
$
258

 
$
3

 
$
(1
)
 
$
260

 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
2,559

 
$
27

 
$

 
$
2,586

Residential mortgage-backed securities - Agency
559

 

 
(12
)
 
547

Total available-for-sale investment securities
$
3,118

 
$
27

 
$
(12
)
 
$
3,133

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency(3) 
$
237

 
$

 
$
(4
)
 
$
233

Total held-to-maturity investment securities
$
237

 
$

 
$
(4
)
 
$
233

 
 
 
 
 
 
 
 
(1)
Available-for-sale investment securities are reported at fair value.
(2)
Held-to-maturity investment securities are reported at amortized cost.
(3)
Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.
The following table provides information about investment securities with aggregate gross unrealized losses and the length of time that individual investment securities have been in a continuous unrealized loss position (dollars in millions):
 
Number of Securities in a Loss Position
 
Less than 12 months
 
More than 12 months
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
At June 30, 2019
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
13

 
$
39

 
$

 
$
176

 
$
(2
)
Held-to-Maturity Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
51

 
$
4

 
$

 
$
78

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
31

 
$
110

 
$
(1
)
 
$
437

 
$
(11
)
Held-to-Maturity Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
90

 
$
101

 
$
(1
)
 
$
83

 
$
(3
)
 
 
 
 
 
 
 
 
 
 

There were no losses related to other-than-temporary impairments and no proceeds from sales or recognized gains and losses on available-for-sale securities during the three and six months ended June 30, 2019 and 2018. See Note 7: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three and six months ended June 30, 2019 and 2018.
Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the following table (dollars in millions):
At June 30, 2019
One Year
or
Less
 
After One
Year
Through
Five Years
 
After Five
Years
Through
Ten Years
 
After Ten
Years
 
Total
Available-for-Sale Investment Securities—Amortized Cost
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
372

 
$
5,563

 
$
751

 
$

 
$
6,686

Residential mortgage-backed securities - Agency(1)

 
110

 
378

 

 
488

Total available-for-sale investment securities
$
372

 
$
5,673

 
$
1,129

 
$

 
$
7,174

Held-to-Maturity Investment Securities—Amortized Cost
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency(1)
$

 
$

 
$

 
$
258

 
$
258

Total held-to-maturity investment securities
$

 
$

 
$

 
$
258

 
$
258

Available-for-Sale Investment Securities—Fair Values
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
374

 
$
5,694

 
$
767

 
$

 
$
6,835

Residential mortgage-backed securities - Agency(1)

 
110

 
378

 

 
488

Total available-for-sale investment securities
$
374

 
$
5,804

 
$
1,145

 
$

 
$
7,323

Held-to-Maturity Investment Securities—Fair Values
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency(1)
$

 
$

 
$

 
$
260

 
$
260

Total held-to-maturity investment securities
$

 
$

 
$

 
$
260

 
$
260

 
 
 
 
 
 
 
 
 
 

(1)
Maturities of residential mortgage-backed securities 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 as stimulate economic development in low to moderate 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. These investments are not consolidated as the Company does not have a controlling financial interest in the entities. As of June 30, 2019 and December 31, 2018, the Company had outstanding investments in these entities of $310 million and $295 million, respectively, and related contingent liabilities of $65 million and $49 million, respectively. Of the above outstanding equity investments, the Company had $290 million and $271 million of investments related to affordable housing projects as of June 30, 2019 and December 31, 2018, respectively, which had $59 million and $30 million related contingent liabilities, respectively.
v3.19.2
Loan Receivables
6 Months Ended
Jun. 30, 2019
Loans and Leases Receivable Disclosure [Abstract]  
Loan Receivables
Loan Receivables
The Company has three loan portfolio segments: credit card loans, other loans and PCI loans.
The Company's classes of receivables within the three portfolio segments are depicted in the following table (dollars in millions):
 
June 30,
2019
 
December 31,
2018
Credit card loans(1)
$
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(2)
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)
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.
Credit Quality Indicators
The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for loan losses.
Information related to the delinquent and non-accruing loans in the Company's loan portfolio is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions):
  
30-89 Days
Delinquent
 
90 or
More Days
Delinquent
 
Total Past
Due
 
90 or
More Days
Delinquent
and
Accruing
 
Total
Non-accruing(1)
At 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.



Information related to the net charge-offs in the Company's loan portfolio is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions):
 
For the Three Months Ended June 30,
 
2019
 
2018
  
Net
Charge-offs
 
Net 
Charge-off
Rate
(1)
 
Net
Charge-offs
 
Net 
Charge-off
Rate
(1)
Credit card loans
$
623

 
3.49
%
 
$
555

 
3.34
%
Other loans
 
 
 
 
 
 
 
Personal loans
80

 
4.33
%
 
72

 
3.97
%
Private student loans (excluding PCI)
15

 
0.73
%
 
21

 
1.16
%
Other

 
%
 
1

 
0.34
%
Total other loans
95

 
2.31
%
 
94

 
2.48
%
Net charge-offs (excluding PCI)
$
718

 
3.27
%
 
$
649

 
3.18
%
Net charge-offs (including PCI)
$
718

 
3.22
%
 
$
649

 
3.11
%
 
 
 
 
 
 
 
For the Six Months Ended June 30,
 
2019
 
2018
  
Net
Charge-offs
 
Net 
Charge-off
Rate
(1)
 
Net
Charge-offs
 
Net 
Charge-off
Rate
(1)
Credit card loans
$
1,239

 
3.50
%
 
$
1,095

 
3.33
%
Other loans
 
 
 
 
 
 
 
Personal loans
164

 
4.43
%
 
145

 
4.00
%
Private student loans (excluding PCI)
30

 
0.76
%
 
43

 
1.17
%
Other

 
%
 
1

 
0.23
%
Total other loans
194

 
2.38
%
 
189

 
2.50
%
Net charge-offs (excluding PCI)
$
1,433

 
3.29
%
 
$
1,284

 
3.18
%
Net charge-offs (including PCI)
$
1,433

 
3.23
%
 
$
1,284

 
3.10
%
 
 
 
 
 
 
 
 

(1)
Net charge-off rate represents net charge-off dollars (annualized) divided by average loans for the reporting period.
As part of credit risk management activities, on an ongoing basis, the Company reviews information related to the performance of a customer's account with the Company as well as information from credit bureaus, such as FICO or other credit scores, relating to the customer's broader credit performance. FICO scores are generally obtained at origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that a significant portion of delinquent accounts have FICO scores below 660.
The following table provides the most recent FICO scores available for the Company’s customers as a percentage of each class of loan receivables:
 
Credit Risk Profile
by FICO Score
 
660 and 
Above
 
Less than 660
or No Score
At June 30, 2019
 
 
 
Credit card loans
81
%
 
19
%
Personal loans
94
%
 
6
%
Private student loans (excluding PCI)(1)
94
%
 
6
%
 
 
 
 
At December 31, 2018
 
 
 
Credit card loans
81
%
 
19
%
Personal loans
94
%
 
6
%
Private student loans (excluding PCI)(1)
94
%
 
6
%
 
 
 
 

(1)
PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."
For private student loans, additional credit risk management activities include monitoring the amount of loans in forbearance. Forbearance allows borrowers experiencing temporary financial difficulties and willing to make payments, the ability to temporarily suspend payments. Eligible borrowers have a lifetime cap on forbearance of 12 months. At June 30, 2019 and December 31, 2018, there were $41 million and $37 million, respectively, of private student loans, including those classified as PCI, in forbearance, representing 0.7% of total student loans in repayment and forbearance.
Allowance for Loan Losses
The following tables provide changes in the Company's allowance for loan losses (dollars in millions): 
 
For the Three Months Ended June 30, 2019
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
2,622

 
$
338

 
$
168

 
$
6

 
$
3,134

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
692

 
80

 
15

 

 
787

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(789
)
 
(91
)
 
(18
)
 

 
(898
)
Recoveries
166

 
11

 
3

 

 
180

Net charge-offs
(623
)
 
(80
)
 
(15
)
 

 
(718
)
Other(2)

 

 
(1
)
 

 
(1
)
Balance at end of period
$
2,691

 
$
338

 
$
167

 
$
6

 
$
3,202

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2018
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
2,252

 
$
301

 
$
170

 
$
13

 
$
2,736

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
637

 
84

 
22

 
(1
)
 
742

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(684
)
 
(80
)
 
(24
)
 
(1
)
 
(789
)
Recoveries
129

 
8

 
3

 

 
140

Net charge-offs
(555
)
 
(72
)
 
(21
)
 
(1
)
 
(649
)
Other(2)

 

 
(1
)
 

 
(1
)
Balance at end of period
$
2,334

 
$
313

 
$
170

 
$
11

 
$
2,828

 
 
 
 
 
 
 
 
 
 
(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 tables provide changes in the Company's allowance for loan losses (dollars in millions): 
 
For the Six Months Ended June 30, 2019
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
2,528

 
$
338

 
$
169

 
$
6

 
$
3,041

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
1,402

 
164

 
30

 

 
1,596

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(1,563
)
 
(185
)
 
(37
)
 

 
(1,785
)
Recoveries
324

 
21

 
7

 

 
352

Net charge-offs
(1,239
)
 
(164
)
 
(30
)
 

 
(1,433
)
Other(2)

 

 
(2
)
 

 
(2
)
Balance at end of period
$
2,691

 
$
338

 
$
167

 
$
6

 
$
3,202

 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2018
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
2,147

 
$
301

 
$
162

 
$
11

 
$
2,621

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
1,282

 
157

 
53

 
1

 
1,493

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(1,347
)
 
(161
)
 
(49
)
 
(1
)
 
(1,558
)
Recoveries
252

 
16

 
6

 

 
274

Net charge-offs
(1,095
)
 
(145
)
 
(43
)
 
(1
)
 
(1,284
)
Other(2)

 

 
(2
)
 

 
(2
)
Balance at end of period
$
2,334

 
$
313

 
$
170

 
$
11

 
$
2,828

 
 
 
 
 
 
 
 
 
 
(1)
Includes both PCI and non-PCI private student loans.
(2)
Net change in reserves on PCI pools having no remaining non-accretable difference.
Net charge-offs of principal are recorded against the allowance for loan losses, as shown in the preceding table. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions): 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)
$
128

 
$
110

 
$
255

 
$
219

Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)
$
30

 
$
28

 
$
61

 
$
55

 
 
 
 
 
 
 
 

The following tables provide additional detail of the Company's allowance for loan losses and recorded investment in its loan portfolio by impairment methodology (dollars in millions):
 
Credit Card
 
Personal
Loans
 
Student
Loans(1)
 
Other
Loans
 
Total
At June 30, 2019
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with
ASC 450-20
$
2,265

 
$
282

 
$
116

 
$
4

 
$
2,667

Evaluated for impairment in accordance with
ASC 310-10-35(2)(3)
426

 
56

 
28

 
2

 
512

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30

 

 
23

 

 
23

Total allowance for loan losses
$
2,691

 
$
338

 
$
167

 
$
6

 
$
3,202

Recorded investment in loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with
ASC 450-20
$
69,583

 
$
7,233

 
$
7,715

 
$
994

 
$
85,525

Evaluated for impairment in accordance with
ASC 310-10-35(2)(3)
2,810

 
181

 
228

 
53

 
3,272

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30

 

 
1,432

 

 
1,432

Total recorded investment
$
72,393

 
$
7,414

 
$
9,375

 
$
1,047

 
$
90,229

 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with
ASC 450-20
$
2,229

 
$
292

 
$
121

 
$
4

 
$
2,646

Evaluated for impairment in accordance with
ASC 310-10-35(2)(3)
299

 
46

 
23

 
2

 
370

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30