10-Q 1 dfs930201510q.htm 10-Q 10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to 
                    
Commission File Number 001-33378
DISCOVER FINANCIAL SERVICES
(Exact name of registrant as specified in its charter) 
Delaware
 
36-2517428
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2500 Lake Cook Road,
Riverwoods, Illinois 60015
 
(224) 405-0900
(Address of principal executive offices, including zip code)
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o (Do not check if a  smaller reporting company)    
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x
As of October 23, 2015, there were 427,483,802 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
 



DISCOVER FINANCIAL SERVICES
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015
TABLE OF CONTENTS
Except as otherwise indicated or unless the context otherwise requires, “Discover Financial Services,” “Discover,” “DFS,” “we,” “us,” “our,” and “the Company” refer to Discover Financial Services and its subsidiaries.
We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to: Discover®, PULSE®, Cashback Bonus®, Discover Cashback Checking®, Discover it®, Freeze ItSM, Discover® Network and Diners Club International®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.



Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Financial Condition
 
September 30,
2015
 
December 31,
2014
 
(unaudited)
(dollars in millions,
except share amounts)
Assets
 
 
 
Cash and cash equivalents
$
10,250

 
$
7,284

Restricted cash
98

 
106

Investment securities (includes $3,178 and $3,847 at fair value at September 30, 2015 and December 31, 2014, respectively)
3,302

 
3,949

Loan receivables
 
 
 
Loan receivables (includes $1 and $122 at fair value at September 30, 2015 and December 31, 2014, respectively)
70,078

 
69,969

Allowance for loan losses
(1,743
)
 
(1,746
)
Net loan receivables
68,335

 
68,223

Premises and equipment, net
684

 
670

Goodwill
255

 
257

Intangible assets, net
169

 
176

Other assets
2,518

 
2,461

Total assets
$
85,611

 
$
83,126

Liabilities and Stockholders’ Equity
 
 
 
Deposits
 
 
 
Interest-bearing deposit accounts
$
46,246

 
$
45,792

Non-interest bearing deposit accounts
359

 
297

Total deposits
46,605

 
46,089

Short-term borrowings

 
113

Long-term borrowings
23,800

 
22,544

Accrued expenses and other liabilities
3,903

 
3,246

Total liabilities
74,308

 
71,992

Commitments, contingencies and guarantees (Notes 9, 12 and 13)

 

Stockholders’ Equity:
 
 
 
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 560,637,020 and 558,194,324 shares issued at September 30, 2015 and December 31, 2014, respectively
5

 
5

Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 575,000 shares issued and outstanding and aggregate liquidation preference of $575 at September 30, 2015 and December 31, 2014
560

 
560

Additional paid-in capital
3,868

 
3,790

Retained earnings
12,880

 
11,467

Accumulated other comprehensive loss
(180
)
 
(138
)
Treasury stock, at cost; 131,119,784 and 109,006,038 shares at September 30, 2015 and December 31, 2014, respectively
(5,830
)
 
(4,550
)
Total stockholders’ equity
11,303

 
11,134

Total liabilities and stockholders’ equity
$
85,611

 
$
83,126

 
 
 
 
The table below presents the carrying amounts of certain assets and liabilities of Discover Financial Services’ consolidated variable interest entities ("VIEs") which are included in the condensed consolidated statements of financial condition above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated VIEs. The liabilities in the table below include third-party liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts for which creditors have recourse to the general credit of Discover Financial Services.
 
September 30,
2015
 
December 31,
2014
 
(unaudited)
(dollars in millions)
Assets
 
 
 
Restricted cash
$
98

 
$
102

Loan receivables
$
29,980

 
$
32,304

Allowance for loan losses allocated to securitized loan receivables
$
(776
)
 
$
(833
)
Other assets
$
34

 
$
37

Liabilities
 
 
 
Long-term borrowings
$
15,866

 
$
17,395

Accrued expenses and other liabilities
$
11

 
$
11

 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
1



DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Income
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 (unaudited)
(dollars in millions, except per share amounts)
Interest income
 
 
 
 
 
 
 
Credit card loans
$
1,676

 
$
1,613

 
$
4,902

 
$
4,710

Other loans
314

 
291

 
926

 
848

Investment securities
11

 
17

 
36

 
50

Other interest income
7

 
5

 
20

 
14

Total interest income
2,008

 
1,926

 
5,884

 
5,622

Interest expense
 
 
 
 
 
 
 
Deposits
157

 
153

 
464

 
457

Short-term borrowings

 

 
1

 
1

Long-term borrowings
166

 
135

 
469

 
374

Total interest expense
323

 
288

 
934

 
832

Net interest income
1,685

 
1,638

 
4,950

 
4,790

Provision for loan losses
332

 
354

 
1,028

 
986

Net interest income after provision for loan losses
1,353

 
1,284

 
3,922

 
3,804

Other income
 
 
 
 
 
 
 
Discount and interchange revenue, net
288

 
295

 
854

 
876

Protection products revenue
62

 
78

 
201

 
239

Loan fee income
87

 
85

 
248

 
248

Transaction processing revenue
39

 
46

 
121

 
136

Gain on investments

 

 
8

 
4

Gain on origination and sale of mortgage loans
2

 
19

 
68

 
57

Other income
25

 
29

 
84

 
90

Total other income
503

 
552

 
1,584

 
1,650

Other expense
 
 
 
 
 
 
 
Employee compensation and benefits
337

 
320

 
994

 
928

Marketing and business development
168

 
182

 
549

 
519

Information processing and communications
84

 
87

 
262

 
258

Professional fees
160

 
111

 
440

 
322

Premises and equipment
24

 
23

 
71

 
68

Other expense
109

 
104

 
366

 
313

Total other expense
882

 
827

 
2,682

 
2,408

Income before income tax expense
974

 
1,009

 
2,824

 
3,046

Income tax expense
362

 
365

 
1,027

 
1,127

Net income
$
612

 
$
644

 
$
1,797

 
$
1,919

Net income allocated to common stockholders
$
599

 
$
630

 
$
1,758

 
$
1,878

Basic earnings per common share
$
1.38

 
$
1.37

 
$
3.99

 
$
4.03

Diluted earnings per common share
$
1.38

 
$
1.37

 
$
3.98

 
$
4.02

Dividends declared per common share
$
0.28

 
$
0.24

 
$
0.80

 
$
0.68

 
 
 
 
 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
2



DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Comprehensive Income
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 (unaudited)
(dollars in millions)
Net income
$
612

 
$
644

 
$
1,797

 
$
1,919

Other comprehensive (loss) income, net of taxes
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale investment securities, net of tax
3

 
(9
)
 
(7
)
 
1

Unrealized (loss) gain on cash flow hedges, net of tax
(22
)
 
12

 
(34
)
 
(2
)
Foreign currency translation adjustments, net of tax
(1
)
 
(1
)
 
(1
)
 
(1
)
Other comprehensive (loss) income
(20
)
 
2

 
(42
)
 
(2
)
Comprehensive income
$
592

 
$
646

 
$
1,755

 
$
1,917

 
 
 
 
 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
3



DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Loss
 
Treasury
Stock
 
Total
Stockholders’
Equity
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(unaudited)
(dollars in millions, shares in thousands)
Balance at December 31, 2013
575

 
$
560

 
555,350

 
$
5

 
$
3,687

 
$
9,611

 
$
(68
)
 
$
(2,986
)
 
$
10,809

Net income

 

 

 

 

 
1,919

 

 

 
1,919

Other comprehensive loss

 

 

 

 

 

 
(2
)
 

 
(2
)
Purchases of treasury stock

 

 

 

 

 

 

 
(1,165
)
 
(1,165
)
Common stock issued under employee benefit plans

 

 
45

 

 
3

 

 

 

 
3

Common stock issued and stock-based compensation expense

 

 
2,766

 

 
85

 

 

 

 
85

Dividends — common stock

 

 

 

 

 
(320
)
 

 

 
(320
)
Dividends — preferred stock

 

 

 

 

 
(28
)
 

 

 
(28
)
Balance at September 30, 2014
575

 
$
560

 
558,161

 
$
5

 
$
3,775

 
$
11,182

 
$
(70
)
 
$
(4,151
)
 
$
11,301

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
575

 
$
560

 
558,194

 
$
5

 
$
3,790

 
$
11,467

 
$
(138
)
 
$
(4,550
)
 
$
11,134

Net income

 

 

 

 

 
1,797

 

 

 
1,797

Other comprehensive loss

 

 

 

 

 

 
(42
)
 

 
(42
)
Purchases of treasury stock

 

 

 

 

 

 

 
(1,280
)
 
(1,280
)
Common stock issued under employee benefit plans

 

 
61

 

 
3

 

 

 

 
3

Common stock issued and stock-based compensation expense

 

 
2,382

 

 
75

 

 

 

 
75

Dividends — common stock

 

 

 

 

 
(356
)
 

 

 
(356
)
Dividends — preferred stock

 

 

 

 

 
(28
)
 

 

 
(28
)
Balance at September 30, 2015
575

 
$
560

 
560,637

 
$
5

 
$
3,868

 
$
12,880

 
$
(180
)
 
$
(5,830
)
 
$
11,303

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
4



DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Cash Flows
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
(unaudited)
(dollars in millions)
Cash flows from operating activities
 
 
 
Net income
$
1,797

 
$
1,919

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,028

 
986

Depreciation and amortization
291

 
274

Amortization of deferred revenues and accretion of accretable yield on acquired loans
(329
)
 
(358
)
Net gain on origination and sale of loans, investments and other assets
(39
)
 
(42
)
Proceeds from sale of mortgage loans originated for sale
2,713

 
1,962

Net principal disbursed on mortgage loans originated for sale
(2,519
)
 
(1,903
)
Other, net
18

 
122

Changes in assets and liabilities:
 
 
 
Increase in other assets
(145
)
 
(94
)
Decrease in accrued expenses and other liabilities
(5
)
 
(40
)
Net cash provided by operating activities
2,810

 
2,826

 
 
 
 
Cash flows from investing activities
 
 
 
Maturities and sales of available-for-sale investment securities
1,330

 
1,395

Purchases of available-for-sale investment securities

 
(390
)
Maturities of held-to-maturity investment securities
13

 
9

Purchases of held-to-maturity investment securities
(36
)
 
(31
)
Net principal disbursed on loans originated for investment
(953
)
 
(2,243
)
Purchases of other investments
(32
)
 
(42
)
Decrease in restricted cash
8

 
79

Proceeds from sale of premises and equipment
1

 

Purchases of premises and equipment
(119
)
 
(102
)
Net cash provided by (used for) investing activities
212

 
(1,325
)
 
 
 
 
Cash flows from financing activities
 
 
 
Net decrease in short-term borrowings
(113
)
 
(1
)
Proceeds from issuance of securitized debt
1,750

 
3,849

Maturities and repayment of securitized debt
(3,303
)
 
(4,590
)
Proceeds from issuance of other long-term borrowings
2,759

 
1,147

Proceeds from issuance of common stock
3

 
4

Purchases of treasury stock
(1,280
)
 
(1,165
)
Net increase in deposits
513

 
431

Dividends paid on common and preferred stock
(385
)
 
(348
)
Net cash used for financing activities
(56
)
 
(673
)
Net increase in cash and cash equivalents
2,966

 
828

Cash and cash equivalents, at beginning of period
7,284

 
6,554

Cash and cash equivalents, at end of period
$
10,250

 
$
7,382

 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
5



Notes to the Condensed Consolidated Financial Statements
(unaudited)
1.
Background and Basis of Presentation
Description of Business
Discover Financial Services (“DFS” or the “Company”) is a 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 cards and also provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as point-of-sale terminals at retail locations 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 segments are Direct Banking and Payment Services. The Direct Banking segment includes consumer banking and lending products, specifically 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, prepaid cards, other consumer lending and deposit products, and home loans until the closing of the mortgage origination business as described in Note 2: Business Dispositions. 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.
The Payment Services segment includes PULSE, Diners Club and the Company’s Network Partners business, which provides payment transaction processing and settlement services on the Discover Network. This segment also includes the business operations of Diners Club Italy, which primarily consist of issuing Diners Club charge cards. The majority of Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue (included in other income) from Diners Club.
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 2014 audited consolidated financial statements filed with the Company’s annual report on Form 10-K for the calendar year ended December 31, 2014.
Recently Issued Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU addresses whether a cloud computing arrangement contains a software license. Under the new guidance, a cloud computing arrangement contains a software license if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and provided it is feasible for the customer to either host the software internally or with an external party unrelated to the original vendor. Upon meeting both of these criteria, a customer should account for the software license within a cloud computing arrangement in a manner consistent with the acquisition of other software licenses. If a cloud computing arrangement does not meet both criteria, a

6


customer will account for the arrangement entirely as a service contract. The new guidance will become effective for the Company on January 1, 2016. Management is in the process of evaluating existing contractual arrangements to determine whether any will be impacted by the ASU.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The guidance in this update makes the presentation of debt issuance costs consistent with that of debt discounts and premiums. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new guidance will become effective for the Company on January 1, 2016 and is not expected to have a material impact to the financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The guidance in this update was issued to improve targeted areas of the accounting rules for consolidation. The ASU changes the analysis companies will use to determine if certain types of legal entities should be consolidated. In addition, it modifies the determination of whether a limited partnership (“LP”) should be evaluated as a variable interest entity ("VIE") or a voting interest entity and eliminates the presumption that a general partner should consolidate a LP. The amendments will primarily trigger a review of the Company’s tax credit investments, which typically utilize limited liability entities. Management is in the process of reviewing those and all other involvements with potential VIEs to determine if its prior conclusions about consolidation or non-consolidation of those entities continue to be appropriate in light of the amended guidance. The new guidance will become effective for the Company on January 1, 2016.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes existing revenue recognition requirements in Topic 605, Revenue Recognition, including an assortment of transaction-specific and industry-specific rules. The ASU establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. ASU Topic 606 does not apply to rights or obligations associated with financial instruments (for example, interest income from loans or investments, or interest expense on debt), and therefore the Company’s net interest income should not be affected. The Company’s revenue from discount and interchange, protection products, transaction processing and certain fees are within the scope of these rules. Management has not yet completed its evaluation of the impact, if any, of the new guidance on these revenues. As issued, the new revenue recognition rules were to become effective January 1, 2017. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU No. 2014-09 to January 1, 2018. Upon adoption in 2018, the Company will record any necessary adjustment to retained earnings as of the beginning of the year of initial application, which can be either the earliest comparative period presented, with all periods presented under the new rules, or January 1, 2018, without restating prior periods presented. Management has not yet determined which transition reporting option it will apply.
2.
Business Dispositions
On June 16, 2015, the Company announced that it is closing the mortgage origination business it acquired in 2012, which is part of its Direct Banking segment. The disposition represents the exiting of an ancillary business that will not have a major impact on the Company’s operations. As part of the restructuring, the Company incurred approximately $3 million and $26 million of exit expenses for the three and nine months ended September 30, 2015, respectively, recorded in other expense within the condensed consolidated statements of income, and expects to incur exit expenses of approximately $5 million through the end of the wind-down period of the business over the remainder of 2015.

7


3.
Investments
The Company’s investment securities consist of the following (dollars in millions):
 
September 30,
2015
 
December 31,
2014
U.S. Treasury securities(1)
$
1,282

 
$
1,330

U.S. government agency securities
622

 
1,033

States and political subdivisions of states
7

 
10

Residential mortgage-backed securities - Agency(2)
1,391

 
1,576

Total investment securities
$
3,302

 
$
3,949

 
 
 
 
(1)
Includes $4 million and $16 million of U.S. Treasury securities pledged as swap collateral in lieu of cash as of September 30, 2015 and December 31, 2014, respectively.
(2)
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 September 30, 2015
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,277

 
$
4

 
$

 
$
1,281

U.S. government agency securities
618

 
4

 

 
622

Residential mortgage-backed securities - Agency
1,258

 
18

 
(1
)
 
1,275

Total available-for-sale investment securities
$
3,153

 
$
26

 
$
(1
)
 
$
3,178

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
U.S. Treasury securities(3)
$
1

 
$

 
$

 
$
1

States and political subdivisions of states
7

 

 

 
7

Residential mortgage-backed securities - Agency(4)
116

 
2

 

 
118

Total held-to-maturity investment securities
$
124

 
$
2

 
$

 
$
126

 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,317

 
$
12

 
$

 
$
1,329

U.S. government agency securities
1,021

 
12

 

 
1,033

Residential mortgage-backed securities - Agency
1,473

 
13

 
(1
)
 
1,485

Total available-for-sale investment securities
$
3,811

 
$
37

 
$
(1
)
 
$
3,847

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
U.S. Treasury securities(3)
$
1

 
$

 
$

 
$
1

States and political subdivisions of states
10

 

 

 
10

Residential mortgage-backed securities - Agency(4) 
91

 
2

 

 
93

Total held-to-maturity investment securities
$
102

 
$
2

 
$

 
$
104

 
 
 
 
 
 
 
 
(1)
Available-for-sale investment securities are reported at fair value.
(2)
Held-to-maturity investment securities are reported at amortized cost.
(3)
Amount represents securities pledged as collateral to a government-related merchant for which transaction settlement occurs beyond the normal 24-hour period.
(4)
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.

8


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 September 30, 2015
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
6

 
$
189

 
$
(1
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
8

 
$
97

 
$

 
$
225

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
There were no losses related to other-than-temporary impairments during the three and nine months ended September 30, 2015 and 2014, respectively.
The following table provides information about proceeds from sales, recognized gains and losses and net unrealized gains and losses on available-for-sale securities (dollars in millions):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Proceeds from the sales of available-for-sale investment securities
$

 
$

 
$
899

 
$
1,220

Gain on sales of available-for-sale investment securities
$

 
$

 
$
8

 
$
4

Net unrealized gain (loss) recorded in other comprehensive income, before-tax
$
4

 
$
(15
)
 
$
(12
)
 
$
1

Net unrealized gain (loss) recorded in other comprehensive income, after-tax
$
3

 
$
(9
)
 
$
(7
)
 
$
1

 
 
 
 
 
 
 
 

9


Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the table below (dollars in millions):
 
One Year
or
Less
 
After One
Year
Through
Five Years
 
After Five
Years
Through
Ten Years
 
After Ten
Years
 
Total
At September 30, 2015
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities—Amortized Cost
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
600

 
$
677

 
$

 
$

 
$
1,277

U.S. government agency securities
618

 

 

 

 
618

Residential mortgage-backed securities - Agency

 

 
408

 
850

 
1,258

Total available-for-sale investment securities
$
1,218

 
$
677

 
$
408

 
$
850

 
$
3,153

Held-to-Maturity Investment Securities—Amortized Cost
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1

 
$

 
$

 
$

 
$
1

State and political subdivisions of states

 

 

 
7

 
7

Residential mortgage-backed securities - Agency

 

 

 
116

 
116

Total held-to-maturity investment securities
$
1

 
$

 
$

 
$
123

 
$
124

Available-for-Sale Investment Securities—Fair Values
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
604

 
$
677

 
$

 
$

 
$
1,281

U.S. government agency securities
622

 

 

 

 
622

Residential mortgage-backed securities - Agency

 

 
412

 
863

 
1,275

Total available-for-sale investment securities
$
1,226

 
$
677

 
$
412

 
$
863

 
$
3,178

Held-to-Maturity Investment Securities—Fair Values
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1

 
$

 
$

 
$

 
$
1

State and political subdivisions of states

 

 

 
7

 
7

Residential mortgage-backed securities - Agency

 

 

 
118

 
118

Total held-to-maturity investment securities
$
1

 
$

 
$

 
$
125

 
$
126

 
 
 
 
 
 
 
 
 
 
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 is recorded in other expense within the condensed consolidated statements of income. 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 September 30, 2015 and December 31, 2014, the Company had outstanding investments in these entities of $294 million and $325 million, respectively, and related contingent liabilities of $28 million and $51 million, respectively. Of the above outstanding equity investments, the Company had $196 million and $201 million, respectively, of investments related to affordable housing projects, which had $28 million and $38 million related contingent liabilities as of September 30, 2015 and December 31, 2014, respectively.

10


4.
Loan Receivables
The Company has three loan portfolio segments: credit card loans, other loans and purchased credit-impaired ("PCI") loans.
The Company's classes of receivables within the three portfolio segments are depicted in the table below (dollars in millions):
 
September 30,
2015
 
December 31,
2014
Loan receivables
 
 
 
Credit card loans(1)
$
55,655

 
$
56,128

Other loans
 
 
 
Personal loans
5,425

 
5,007

Private student loans
5,520

 
4,850

Mortgage loans held for sale(2)
1

 
122

Other(3)
228

 
202

Total other loans
11,174

 
10,181

Purchased credit-impaired loans(4)
3,249

 
3,660

Total loan receivables
70,078

 
69,969

Allowance for loan losses
(1,743
)
 
(1,746
)
Net loan receivables
$
68,335

 
$
68,223

 
 
 
 
(1)
Amounts include $20.2 billion and $21.7 billion underlying investors’ interest in trust debt at September 30, 2015 and December 31, 2014 and $8.0 billion and $8.6 billion in seller's interest at September 30, 2015 and December 31, 2014, respectively. See Note 5: Credit Card and Student Loan Securitization Activities for further information.
(2)
On June 16, 2015, the Company announced that it is closing the mortgage origination business, as disclosed in Note 2: Business Dispositions. Pursuant to that announcement, the Company has sold substantially all mortgage loans held for sale in its portfolio and ceased originating new mortgages.
(3)
Other includes home equity loans.
(4)
Amounts include $1.7 billion and $2.0 billion of loans pledged as collateral against the notes issued from the Student Loan Corporation ("SLC") securitization trusts at September 30, 2015 and December 31, 2014, respectively. See Note 5: Credit Card and Student Loan Securitization Activities.
Credit Quality Indicators
The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for loan losses.

11


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 mortgage loans held for sale and 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 September 30, 2015
 
 
 
 
 
 
 
 
 
Credit card loans(2)
$
482

 
$
437

 
$
919

 
$
384

 
$
188

Other loans
 
 
 
 


 
 
 
 
Personal loans(3)
31

 
13

 
44

 
12

 
7

Private student loans (excluding PCI)(4)
76

 
28

 
104

 
28

 

Other

 
3

 
3

 

 
21

Total other loans (excluding PCI)
107

 
44

 
151

 
40

 
28

Total loan receivables (excluding PCI)
$
589

 
$
481

 
$
1,070

 
$
424

 
$
216

 
 
 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
 
 
Credit card loans(2)
$
491

 
$
480

 
$
971

 
$
442

 
$
157

Other loans
 
 
 
 


 
 
 
 
Personal loans(3)
29

 
11

 
40

 
10

 
5

Private student loans (excluding PCI)(4)
62

 
25

 
87

 
25

 

Other
1

 
1

 
2

 

 
21

Total other loans (excluding PCI)
92

 
37

 
129

 
35

 
26

Total loan receivables (excluding PCI)
$
583

 
$
517

 
$
1,100

 
$
477

 
$
183

 
 
 
 
 
 
 
 
 
 
 
(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 $8 million and $7 million for the three months ended September 30, 2015 and 2014, respectively, and $21 million and $20 million for the nine months ended September 30, 2015 and 2014, 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 $38 million and $43 million of loans accounted for as troubled debt restructurings at September 30, 2015 and December 31, 2014, respectively.
(3)
Personal loans that are 90 or more days delinquent and accruing interest include $3 million of loans accounted for as troubled debt restructurings at September 30, 2015 and December 31, 2014.
(4)
Private student loans that are 90 or more days delinquent and accruing interest include $4 million and $5 million of loans accounted for as troubled debt restructurings at September 30, 2015 and December 31, 2014, respectively.

12


Information related to the net charge-offs in the Company's loan portfolio is shown below by each class of loan receivables except for mortgage loans held for sale and PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions):
 
For the Three Months Ended September 30,
 
2015
 
2014
  
Net
Charge-offs
 
Net 
Charge-off
Rate
 
Net
Charge-offs
 
Net 
Charge-off
Rate
Credit card loans
$
285

 
2.04
%
 
$
289

 
2.16
%
Other loans
 
 
 
 
 
 
 
Personal loans
26

 
1.99
%
 
23

 
1.92
%
Private student loans (excluding PCI)
13

 
0.94
%
 
12

 
1.14
%
Other

 
%
 

 
0.60
%
Total other loans (excluding PCI)
39

 
1.44
%
 
35

 
1.50
%
Net charge-offs as a percentage of total loans (excluding PCI)
$
324

 
1.94
%
 
$
324

 
2.06
%
Net charge-offs as a percentage of total loans (including PCI)
$
324

 
1.85
%
 
$
324

 
1.94
%
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
2015
 
2014
  
Net
Charge-offs
 
Net 
Charge-off
Rate
 
Net
Charge-offs
 
Net 
Charge-off
Rate
Credit card loans
$
911

 
2.24
%
 
$
883

 
2.27
%
Other loans
 
 
 
 
 
 
 
Personal loans
81

 
2.10
%
 
66

 
1.98
%
Private student loans (excluding PCI)
39

 
0.99
%
 
40

 
1.25
%
Other

 
%
 
1

 
0.88
%
Total other loans (excluding PCI)
120

 
1.51
%
 
107

 
1.58
%
Net charge-offs as a percentage of total loans (excluding PCI)
$
1,031

 
2.12
%
 
$
990

 
2.16
%
Net charge-offs as a percentage of total loans (including PCI)
$
1,031

 
2.01
%
 
$
990

 
2.03
%
 
 
 
 
 
 
 
 
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 proportion 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 September 30, 2015
 
 
 
Credit card loans
83
%
 
17
%
Personal loans
96
%
 
4
%
Private student loans (excluding PCI)(1)
96
%
 
4
%
 
 
 
 
At December 31, 2014
 
 
 
Credit card loans
83
%
 
17
%
Personal loans
96
%
 
4
%
Private student loans (excluding PCI)(1)
96
%
 
4
%
 
 
 
 
(1)
PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."

13


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 September 30, 2015 and December 31, 2014, there were $39 million and $49 million of private student loans, including PCI, in forbearance, respectively, which as a percentage of student loans in repayment and forbearance were 0.7% and 0.8%, respectively.
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 September 30, 2015
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,441

 
$
131

 
$
143

 
$
20

 
$
1,735

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
303

 
30

 

 
(1
)
 
332

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(394
)
 
(31
)
 
(15
)
 

 
(440
)
Recoveries
109

 
5

 
2

 

 
116

Net charge-offs
(285
)
 
(26
)
 
(13
)
 

 
(324
)
Balance at end of period
$
1,459

 
$
135

 
$
130

 
$
19

 
$
1,743

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2014
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,359

 
$
109

 
$
128

 
$
18

 
$
1,614

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
318

 
22

 
16

 
(2
)
 
354

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(400
)
 
(26
)
 
(14
)
 

 
(440
)
Recoveries
111

 
3

 
2

 

 
116

Net charge-offs
(289
)
 
(23
)
 
(12
)
 

 
(324
)
Balance at end of period
$
1,388

 
$
108

 
$
132

 
$
16

 
$
1,644

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

14


The following tables provide changes in the Company’s allowance for loan losses (dollars in millions): 
 
For the Nine Months Ended September 30, 2015
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,474

 
$
120

 
$
135

 
$
17

 
$
1,746

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
896

 
96

 
34

 
2

 
1,028

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(1,245
)
 
(93
)
 
(45
)
 

 
(1,383
)
Recoveries
334

 
12

 
6

 

 
352

Net charge-offs
(911
)
 
(81
)
 
(39
)
 

 
(1,031
)
Balance at end of period
$
1,459

 
$
135

 
$
130

 
$
19

 
$
1,743

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2014
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,406

 
$
112

 
$
113

 
$
17

 
$
1,648

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
865

 
62

 
59

 

 
986

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(1,223
)
 
(74
)
 
(44
)
 
(1
)
 
(1,342
)
Recoveries
340

 
8

 
4

 

 
352

Net charge-offs
(883
)
 
(66
)
 
(40
)
 
(1
)
 
(990
)
Balance at end of period
$
1,388

 
$
108

 
$
132

 
$
16

 
$
1,644

 
 
 
 
 
 
 
 
 
 
(1)
Includes both PCI and non-PCI private student loans.
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 September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)
$
65

 
$
69

 
$
210

 
$
211

Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)
$
16

 
$
16

 
$
53

 
$
50

 
 
 
 
 
 
 
 

15


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(3)
 
Other
Loans(4)
 
Total
At September 30, 2015
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with ASC 450-20
$
1,302

 
$
130

 
$
88

 
$
1

 
$
1,521

Evaluated for impairment in accordance with
ASC 310-10-35(1)(2)
157

 
5

 
14

 
18

 
194

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

 

 
28

 

 
28

Total allowance for loan losses
$
1,459

 
$
135

 
$
130

 
$
19

 
$
1,743

Recorded investment in loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with ASC 450-20
$
54,647

 
$
5,361

 
$
5,475

 
$
168

 
$
65,651

Evaluated for impairment in accordance with
ASC 310-10-35(1)(2)
1,008

 
64

 
45

 
60