Introduction and Overview
COVID-19 Pandemic
For a discussion on how the risks related to the COVID-19 pandemic may affect our businesses, results of operations and financial condition, see “Risk Factors” in our annual report on Form 10-K for the year ended
Quarter Highlights
The highlights below compare results as of and for the three months ended
•Net income was
•Total loans grew
•Credit card loans grew
•The net charge-off rate for credit card loans increased 27 basis points to 1.92% and the delinquency rate for credit card loans over 30 days past due increased 63 basis points to 2.11%.
•Direct-to-consumer deposits grew
•Payment Services transaction volume for the segment was
Outlook
The outlook below provides our current expectations for our financial results based on market conditions, the regulatory and legal environment and our business strategies.
•We expect elevated loan growth based on the current expectations of sales trends and recent account growth.
•Based on the current interest rate environment, net interest margin is expected to increase in comparison to 2021.
•We expect the total net charge-off rate to remain relatively flat, in comparison to the prior year, resulting from lower than expected losses year-to-date.
Regulatory Environment and Developments
Banking
Capital Standards and Stress Testing
London Interbank Offered Rate
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Data Security and Privacy
Environmental, Social and Governance Matters
In particular, in
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Segments
We manage our business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. For a detailed description of the operations of each segment, as well as the allocation conventions used in our business segment reporting, see Note 16: Segment Disclosures to our condensed consolidated financial statements.
The following table presents segment data (dollars in millions):
1,402
(2)Represents gross Discover card sales volume on the Discover Network.
(3)Represents Discover card activity related to sales net of returns, balance transfers, cash advances and other activity.
(4)Represents Discover card activity related to sales net of returns.
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Digital Banking
Payment Services
Critical Accounting Estimates
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Allowance for Credit Losses
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Earnings Summary
The following table outlines changes in our condensed consolidated statements of income (dollars in millions):
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Net Interest Income
•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;
•The effectiveness of interest rate swaps in our interest rate risk management program.
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(1)Average balances of loan receivables and yield calculations include non-accruing loans. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.
(5)Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the three and nine months ended
(7)Includes the impact of terminated derivatives formerly designated as fair value hedges for the three and nine months ended
(9)Net interest margin represents net interest income as a percentage of average total loan receivables.
(10)Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
(11)Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
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Loan Quality
Impact of the COVID-19 Pandemic on the Loan Portfolio
(1)Accounts that entered into a loan modification on or after
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Table of Contents The number and balance of new private student loan modifications decreased during the three and nine months ended
(1)Includes balances charged off at the end of the month the account exited the temporary loan modification program. The balances charged off were not meaningful for the three and nine months ended
Loan receivables consist of the following (dollars in millions):
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Provision and Allowance for Credit Losses
•Increases or decreases in outstanding loan balances, including:
•Changes in consumer spending, payment and credit utilization behaviors;
•The level of originations and maturities; and
•Changes in the overall mix of accounts and products within the portfolio;
•The credit quality of the loan portfolio, which reflects our credit granting practices and the effectiveness of collection efforts, among other factors;
•The level and direction of historical losses; and
•Regulatory changes or new regulatory guidance.
Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” and Note 3: Loan Receivables to our condensed consolidated financial statements for more details on how we estimate the allowance for credit losses.
The following tables provide changes in our allowance for credit losses (dollars in millions):
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For the Three Months Ended
Private
Additions
For the Three Months Ended
Private
Additions
For the Nine Months Ended
Private
Additions
For the Nine Months Ended
Private
Additions
Net Charge-offs
Our net charge-offs include the principal amount of losses charged off less principal recoveries and exclude charged-off and recovered interest and fees and fraud losses. Charged-off and recovered interest and fees are recorded in interest income and loan fee income, respectively, which is effectively a reclassification of the provision for credit losses, while fraud losses are recorded in other expense.
The following table presents amounts and rates of net charge-offs of key loan products (dollars in millions):
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Delinquencies
Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.
(6)Personal loans restructured in TDR programs include
The balance of credit card and private student loans reported as TDRs increased at
The following table provides the balance of loan receivables restructured through a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act (dollars in millions):
Modified and Restructured Loans
Employee compensation and benefits
Income Tax Expense
The following table presents the calculation of the effective income tax rate (dollars in millions):
Liquidity and Capital Resources
Funding and Liquidity
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Credit Card Securitization Financing
Scheduled maturities of borrowings – owed to credit card securitization investors
Federal Home Loan Bank Advances
Other Long-Term Borrowings-Private Student Loans
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Other Long-Term Borrowings-Corporate and Bank Debt
$ 500
Short-Term Borrowings
Additional Funding Sources
Private Asset-Backed Securitizations
Funding Uses
Our primary uses of funds include the extensions of loans and credit to customers, primarily through
Guarantees
Credit Ratings
The table below reflects our current credit ratings and outlooks:
(1)An “sf” in the rating denotes rating agency identification for structured finance product ratings.
Liquidity
61,508
(1)Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes.
(3)See “- Additional Funding Sources” for additional information.
Bank Holding Company Liquidity
Capital
At
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Table of Contents The following table reconciles total common stockholders’ equity (a GAAP financial measure) to tangible common equity (dollars in millions):
(1)Total common stockholders’ equity is calculated as total stockholders’ equity less preferred stock.
(1)The dividend includes
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