0001393612-18-000051.txt : 20181031 0001393612-18-000051.hdr.sgml : 20181031 20181031164830 ACCESSION NUMBER: 0001393612-18-000051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 104 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181031 DATE AS OF CHANGE: 20181031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Discover Financial Services CENTRAL INDEX KEY: 0001393612 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 362517428 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33378 FILM NUMBER: 181150937 BUSINESS ADDRESS: STREET 1: 2500 LAKE COOK ROAD CITY: RIVERWOODS STATE: IL ZIP: 60015 BUSINESS PHONE: 224-405-0900 MAIL ADDRESS: STREET 1: 2500 LAKE COOK ROAD CITY: RIVERWOODS STATE: IL ZIP: 60015 10-Q 1 dfs930201810q.htm 10-Q Document
 
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, 2018
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o     
Smaller reporting company  o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of October 26, 2018, there were 335,964,673 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, 2018
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, College Covered®, and Diners Club International®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.



Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Financial Condition
 
September 30,
2018
 
December 31,
2017
 
(unaudited)
(dollars in millions,
except share amounts)
Assets
 
 
 
Cash and cash equivalents
$
16,019

 
$
13,306

Restricted cash
590

 
81

Investment securities (includes $1,559 and $1,395 at fair value at September 30, 2018 and December 31, 2017, respectively)
1,801

 
1,568

Loan receivables
 
 
 
Loan receivables
86,894

 
84,248

Allowance for loan losses
(2,927
)
 
(2,621
)
Net loan receivables
83,967

 
81,627

Premises and equipment, net
896

 
825

Goodwill
255

 
255

Intangible assets, net
162

 
163

Other assets
2,152

 
2,262

Total assets
$
105,842

 
$
100,087

Liabilities and Stockholders’ Equity
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Interest-bearing deposit accounts
$
63,034

 
$
58,165

Non-interest bearing deposit accounts
640

 
599

Total deposits
63,674

 
58,764

Long-term borrowings
26,998

 
26,326

Accrued expenses and other liabilities
4,154

 
4,105

Total liabilities
94,826

 
89,195

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; 564,614,022 and 563,497,702 shares issued at September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017
563

 
563

Additional paid-in capital
4,107

 
4,042

Retained earnings
18,354

 
16,687

Accumulated other comprehensive loss
(160
)
 
(152
)
Treasury stock, at cost; 226,694,149 and 205,577,507 shares at September 30, 2018 and December 31, 2017, respectively
(11,854
)
 
(10,254
)
Total stockholders’ equity
11,016

 
10,892

Total liabilities and stockholders’ equity
$
105,842

 
$
100,087

 
 
 
 

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,
2018
 
December 31,
2017
 
(unaudited)
(dollars in millions)
Assets
 
 
 
Restricted cash
$
590

 
$
81

Loan receivables
$
32,504

 
$
31,781

Allowance for loan losses allocated to securitized loan receivables
$
(1,125
)
 
$
(998
)
Other assets
$
5

 
$
5

Liabilities
 
 
 
Long-term borrowings
$
15,715

 
$
16,536

Accrued expenses and other liabilities
$
15

 
$
16

 
 
 
 

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,
 
2018
 
2017
 
2018
 
2017
 
 (unaudited)
(dollars in millions, except per share amounts)
Interest income
 
 
 
 
 
 
 
Credit card loans
$
2,258

 
$
2,026

 
$
6,487

 
$
5,818

Other loans
437

 
400

 
1,275

 
1,146

Investment securities
10

 
6

 
23

 
20

Other interest income
76

 
44

 
201

 
108

Total interest income
2,781

 
2,476

 
7,986

 
7,092

Interest expense
 
 
 
 
 
 
 
Deposits
329

 
218

 
878

 
608

Long-term borrowings
229

 
208

 
656

 
604

Total interest expense
558

 
426

 
1,534

 
1,212

Net interest income
2,223

 
2,050

 
6,452

 
5,880

Provision for loan losses
742

 
674

 
2,235

 
1,900

Net interest income after provision for loan losses
1,481

 
1,376

 
4,217

 
3,980

Other income
 
 
 
 
 
 
 
Discount and interchange revenue, net
280

 
258

 
797

 
769

Protection products revenue
51

 
55

 
154

 
169

Loan fee income
103

 
95

 
294

 
267

Transaction processing revenue
47

 
43

 
132

 
124

Other income
20

 
24

 
73

 
74

Total other income
501

 
475

 
1,450

 
1,403

Other expense
 
 
 
 
 
 
 
Employee compensation and benefits
408

 
371

 
1,213

 
1,101

Marketing and business development
218

 
203

 
627

 
563

Information processing and communications
89

 
78

 
257

 
235

Professional fees
166

 
163

 
482

 
466

Premises and equipment
26

 
25

 
76

 
73

Other expense
108

 
108

 
312

 
307

Total other expense
1,015

 
948

 
2,967

 
2,745

Income before income tax expense
967

 
903

 
2,700

 
2,638

Income tax expense
247

 
301

 
645

 
926

Net income
$
720

 
$
602

 
$
2,055

 
$
1,712

Net income allocated to common stockholders
$
699

 
$
589

 
$
2,008

 
$
1,672

Basic earnings per common share
$
2.05

 
$
1.59

 
$
5.77

 
$
4.42

Diluted earnings per common share
$
2.05

 
$
1.59

 
$
5.77

 
$
4.42

Dividends declared per common share
$
0.40

 
$
0.35

 
$
1.10

 
$
0.95

 
 
 
 
 
 
 
 

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,
 
2018
 
2017
 
2018
 
2017
 
 (unaudited)
(dollars in millions)
Net income
$
720

 
$
602

 
$
2,055

 
$
1,712

Other comprehensive income, net of taxes
 
 
 
 
 
 
 
Unrealized (losses) gains on available-for-sale investment securities, net of tax
(2
)
 
1

 
(10
)
 
2

Unrealized gains on cash flow hedges, net of tax
4

 
1

 
30

 
11

Unrealized pension and post-retirement plan gains, net of tax

 

 
1

 

Other comprehensive income
2

 
2

 
21

 
13

Comprehensive income
$
722

 
$
604

 
$
2,076

 
$
1,725

 
 
 
 
 
 
 
 

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, 2016
575

 
$
560

 
562,414

 
$
5

 
$
3,962

 
$
15,130

 
$
(161
)
 
$
(8,173
)
 
$
11,323

Net income

 

 

 

 

 
1,712

 

 

 
1,712

Other comprehensive income

 

 

 

 

 

 
13

 

 
13

Purchases of treasury stock

 

 

 

 

 

 

 
(1,526
)
 
(1,526
)
Common stock issued under employee benefit plans

 

 
63

 

 
4

 

 

 

 
4

Common stock issued and stock-based compensation expense

 

 
999

 
1

 
50

 

 

 

 
51

Dividends — common stock

 

 

 

 

 
(362
)
 

 

 
(362
)
Dividends — preferred stock

 

 

 

 

 
(28
)
 

 

 
(28
)
Balance at September 30, 2017
575

 
$
560

 
563,476

 
$
6

 
$
4,016

 
$
16,452

 
$
(148
)
 
$
(9,699
)
 
$
11,187

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
6

 
$
563

 
563,498

 
$
6

 
$
4,042

 
$
16,687

 
$
(152
)
 
$
(10,254
)
 
$
10,892

Cumulative effect of ASU No. 2018-02 adoption

 

 

 

 

 
29

 
(29
)
 

 

Net income

 

 

 

 

 
2,055

 

 

 
2,055

Other comprehensive income

 

 

 

 

 

 
21

 

 
21

Purchases of treasury stock

 

 

 

 

 

 

 
(1,600
)
 
(1,600
)
Common stock issued under employee benefit plans

 

 
70

 

 
5

 

 

 

 
5

Common stock issued and stock-based compensation expense

 

 
1,046

 

 
60

 

 

 

 
60

Dividends — common stock

 

 

 

 

 
(386
)
 

 

 
(386
)
Dividends — preferred stock

 

 

 

 

 
(31
)
 

 

 
(31
)
Balance at September 30, 2018
6

 
$
563

 
564,614

 
$
6

 
$
4,107

 
$
18,354

 
$
(160
)
 
$
(11,854
)
 
$
11,016

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
2018
 
2017
 
(unaudited)
(dollars in millions)
Cash flows from operating activities
 
 
 
Net income
$
2,055

 
$
1,712

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Provision for loan losses
2,235

 
1,900

Depreciation and amortization
326

 
289

Amortization of deferred revenues and accretion of accretable yield on acquired loans
(302
)
 
(299
)
Net loss on investments and other assets
33

 
42

Other, net
(122
)
 
(42
)
Changes in assets and liabilities
 
 
 
Decrease (increase) in other assets
43

 
(59
)
Increase in accrued expenses and other liabilities
162

 
41

Net cash provided by operating activities
4,430

 
3,584

 
 
 
 
Cash flows from investing activities
 
 
 
Maturities of available-for-sale investment securities
802

 
154

Purchases of available-for-sale investment securities
(983
)
 

Maturities of held-to-maturity investment securities
13

 
12

Purchases of held-to-maturity investment securities
(82
)
 
(40
)
Net principal disbursed on loans originated for investment
(4,318
)
 
(4,455
)
Proceeds from returns of investment

 
17

Purchases of other investments
(20
)
 
(31
)
Purchases of premises and equipment
(177
)
 
(161
)
Net cash used for investing activities
(4,765
)
 
(4,504
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
3,076

 
4,242

Maturities and repayment of securitized debt
(3,888
)
 
(3,715
)
Proceeds from issuance of other long-term borrowings
2,235

 
1,098

Maturities and repayment of other long-term borrowings
(756
)
 
(403
)
Proceeds from issuance of common stock
5

 
4

Purchases of treasury stock
(1,600
)
 
(1,526
)
Net increase in deposits
4,886

 
4,129

Dividends paid on common and preferred stock
(401
)
 
(390
)
Net cash provided by financing activities
3,557

 
3,439

Net increase in cash, cash equivalents and restricted cash
3,222

 
2,519

Cash, cash equivalents and restricted cash, at beginning of period
13,387

 
12,009

Cash, cash equivalents and restricted cash, at end of period
$
16,609

 
$
14,528

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
Cash and cash equivalents
$
16,019

 
$
13,249

Restricted cash
590

 
1,279

Cash, cash equivalents and restricted cash, at end of period
$
16,609

 
$
14,528

 
 
 
 

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 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 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 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 2017 audited consolidated financial statements filed with the Company’s annual report on Form 10-K for the year ended December 31, 2017.
Recently Issued Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of this ASU is to simplify the test for goodwill impairment by eliminating Step 2 of the current impairment test. Under the current rules, if the reporting unit’s carrying value exceeds its fair value (Step 1), goodwill impairment is measured as the difference between the carrying value of goodwill and its implied fair value. To compute the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new standard, the Company will perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU apply to the Company’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU apply on a prospective basis. All of the Company’s recorded goodwill is associated with its PULSE debit business. This ASU has no impact on cash flows, and its adoption is not expected to have any impact on the Company’s condensed consolidated financial condition or results of operations because the estimated fair value of the PULSE reporting unit is well in excess of its carrying value. The Company did not early adopt this standard, but is still evaluating whether it will prior to the 2020 effective date.

6


In June 2016, the FASB issued 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. No specific method for estimating credit loss is mandated, permitting companies to use judgment in selecting the approach that is most appropriate in their circumstances.
The CECL approach is expected to affect the Company’s allowance for loan losses as a result of: (1) encompassing 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. 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 beginning January 1, 2020, with early adoption permitted no sooner than January 1, 2019. Management is not considering early adoption at this time. On the date of adoption, the allowance for loan losses will be adjusted to the CECL estimate for loans held at that date with an offsetting adjustment to retained earnings. Additionally, the carrying value of PCD loans will be increased through an offsetting addition to the allowance for loan losses for the CECL estimate on those loans. The CECL allowance will be re-evaluated in subsequent periods and adjusted through provision expense as needed. The Company is actively engaged in cross-functional implementation efforts and planning for loss modeling requirements consistent with lifetime expected loss estimates. The Company has also been involved in efforts to identify and resolve various implementation issues specific to the application of the standard to credit card receivables. Adoption of the standard has the potential to materially impact stockholders' equity and regulatory capital as well as the Company's financial condition and results of operations. The extent of the impact upon adoption will likely depend on the characteristics of the Company's loan portfolio and economic conditions at that date, as well as forecasted conditions thereafter.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance will require lessees to capitalize most leases on their balance sheet whereas under current GAAP only capital leases are recognized on the lessee’s balance sheet. Leases which today are identified as capital leases will generally be identified as financing leases under the new guidance but otherwise their accounting treatment will remain relatively unchanged. Leases identified today as operating leases will generally remain in that category under the new standard, but both a right-of-use asset and a liability for remaining lease payments will now be required to be recognized on the balance sheet for this type of lease. The manner in which expenses associated with all leases are reported on the income statement will remain mostly unchanged. Lessor accounting also remains substantially unchanged by the new standard. The new guidance will become effective on January 1, 2019, and the Company is prepared to implement the standard on that date. Management does not expect the standard to have a material impact on the Company's condensed consolidated financial statements.

7


2.
Investments
The Company’s investment securities consist of the following (dollars in millions):
 
September 30,
2018
 
December 31,
2017
U.S. Treasury securities(1)
$
981

 
$
672

States and political subdivisions of states

 
1

Residential mortgage-backed securities - Agency(2)
820

 
895

Total investment securities
$
1,801

 
$
1,568

 
 
 
 
(1)
Includes $35 million and $48 million of U.S. Treasury securities pledged as swap collateral as of September 30, 2018 and December 31, 2017, 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, 2018
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
984

 
$

 
$
(3
)
 
$
981

Residential mortgage-backed securities - Agency
597

 

 
(19
)
 
578

Total available-for-sale investment securities
$
1,581

 
$

 
$
(22
)
 
$
1,559

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency(3)
$
242

 
$

 
$
(5
)
 
$
237

Total held-to-maturity investment securities
$
242

 
$

 
$
(5
)
 
$
237

 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
675

 
$

 
$
(3
)
 
$
672

Residential mortgage-backed securities - Agency
728

 
1

 
(6
)
 
723

Total available-for-sale investment securities
$
1,403

 
$
1

 
$
(9
)
 
$
1,395

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
States and political subdivisions of states
$
1

 
$

 
$

 
$
1

Residential mortgage-backed securities - Agency(3) 
172

 
1

 
(1
)
 
172

Total held-to-maturity investment securities
$
173

 
$
1

 
$
(1
)
 
$
173

 
 
 
 
 
 
 
 
(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.

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, 2018
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
8

 
$
981

 
$
(3
)
 
$

 
$

Residential mortgage-backed securities - Agency
31

 
$
289

 
$
(8
)
 
$
288

 
$
(11
)
Held-to-Maturity Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
102

 
$
145

 
$
(2
)
 
$
66

 
$
(3
)
 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
1

 
$

 
$

 
$
672

 
$
(3
)
Residential mortgage-backed securities - Agency
27

 
$
457

 
$
(3
)
 
$
132

 
$
(3
)
Held-to-Maturity Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
45

 
$
56

 
$

 
$
38

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
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 nine months ended September 30, 2018 and 2017. See Note 7: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three and nine months ended September 30, 2018 and 2017.
Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the following table (dollars in millions):
At September 30, 2018
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
$

 
$
984

 
$

 
$

 
$
984

Residential mortgage-backed securities - Agency(1)

 
101

 
472

 
24

 
597

Total available-for-sale investment securities
$

 
$
1,085

 
$
472

 
$
24

 
$
1,581

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

 
$

 
$

 
$
242

 
$
242

Total held-to-maturity investment securities
$

 
$

 
$

 
$
242

 
$
242

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

 
$
981

 
$

 
$

 
$
981

Residential mortgage-backed securities - Agency(1)

 
99

 
456

 
23

 
578

Total available-for-sale investment securities
$

 
$
1,080

 
$
456

 
$
23

 
$
1,559

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

 
$

 
$

 
$
237

 
$
237

Total held-to-maturity investment securities
$

 
$

 
$

 
$
237

 
$
237

 
 
 
 
 
 
 
 
 
 
(1)
Maturities of residential mortgage-backed securities are reflective of the contractual maturities of the investment.

9


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 September 30, 2018 and December 31, 2017, the Company had outstanding investments in these entities of $263 million and $297 million, respectively, and related contingent liabilities of $47 million and $66 million, respectively. Of the above outstanding equity investments, the Company had $262 million and $288 million of investments related to affordable housing projects as of September 30, 2018 and December 31, 2017, respectively, which had $47 million and $66 million related contingent liabilities, respectively.
3.
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):
 
September 30,
2018
 
December 31,
2017
Credit card loans(1)
$
69,253

 
$
67,291

Other loans
 
 
 
Personal loans
7,545

 
7,374

Private student loans
7,668

 
7,076

Other
693

 
423

Total other loans
15,906

 
14,873

PCI loans(2)
1,735

 
2,084

Total loan receivables
86,894

 
84,248

Allowance for loan losses
(2,927
)
 
(2,621
)
Net loan receivables
$
83,967

 
$
81,627

 
 
 
 
(1)
Amounts include carrying values of $21.8 billion and $21.2 billion in underlying investors’ interest in trust debt at September 30, 2018 and December 31, 2017, respectively, and $10.4 billion and $9.9 billion in seller's interest at September 30, 2018 and December 31, 2017, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.
(2)
Amounts include carrying values of $380 million and $762 million in loans pledged as collateral against the notes issued from the Student Loan Corporation ("SLC") securitization trusts at September 30, 2018 and December 31, 2017, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.

10


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 September 30, 2018
 
 
 
 
 
 
 
 
 
Credit card loans(2)
$
831

 
$
777

 
$
1,608

 
$
706

 
$
232

Other loans
 
 
 
 


 
 
 
 
Personal loans(3)
84

 
34

 
118

 
32

 
12

Private student loans (excluding PCI)(4)
123

 
41

 
164

 
40

 
9

Other
2

 
2

 
4

 

 
22

Total other loans (excluding PCI)
209

 
77

 
286

 
72

 
43

Total loan receivables (excluding PCI)
$
1,040

 
$
854

 
$
1,894

 
$
778

 
$
275

 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
Credit card loans(2)
$
781

 
$
751

 
$
1,532

 
$
693

 
$
203

Other loans
 
 
 
 


 
 
 
 
Personal loans(3)
73

 
30

 
103

 
28

 
10

Private student loans (excluding PCI)(4)
134

 
33

 
167

 
33

 
2

Other
3

 
1

 
4

 

 
18

Total other loans (excluding PCI)
210

 
64

 
274

 
61

 
30

Total loan receivables (excluding PCI)
$
991

 
$
815

 
$
1,806

 
$
754

 
$
233

 
 
 
 
 
 
 
 
 
 
 
(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 $9 million for the three months ended September 30, 2018 and 2017 and $28 million and $26 million for the nine months ended September 30, 2018 and 2017, 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 $93 million and $72 million of loans accounted for as TDRs at September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, respectively.
(4)
Private student loans that are 90 or more days delinquent and accruing interest include $7 million and $5 million of loans accounted for as TDRs at September 30, 2018 and December 31, 2017, respectively.


11


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 September 30,
 
2018
 
2017
  
Net
Charge-offs
 
Net 
Charge-off
Rate
(1)
 
Net
Charge-offs
 
Net 
Charge-off
Rate
(1)
Credit card loans
$
543

 
3.14
%
 
$
439

 
2.80
%
Other loans
 
 
 
 
 
 
 
Personal loans
77

 
4.09
%
 
58

 
3.19
%
Private student loans (excluding PCI)
22

 
1.19
%
 
30

 
1.52
%
Total other loans
99

 
2.54
%
 
88

 
2.33
%
Net charge-offs (excluding PCI)
$
642

 
3.03
%
 
$
527

 
2.71
%
Net charge-offs (including PCI)
$
642

 
2.97
%
 
$
527

 
2.63
%
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
2018
 
2017
  
Net
Charge-off
Dollars
 
Net 
Charge-off
Rate
(1)
 
Net
Charge-off
Dollars
 
Net 
Charge-off
Rate
(1)
Credit card loans
$
1,638

 
3.27
%
 
$
1,306

 
2.86
%
Other loans
 
 
 
 
 
 
 
Personal loans
222

 
4.03
%
 
163

 
3.18
%
Private student loans (excluding PCI)
65

 
1.17
%
 
64

 
1.17
%
Other
1

 
0.13
%
 
3

 
1.09
%
Total other loans
288

 
2.52
%
 
230

 
2.16
%
Net charge-offs (excluding PCI)
$
1,926

 
3.13
%
 
$
1,536

 
2.73
%
Net charge-offs (including PCI)
$
1,926

 
3.06
%
 
$
1,536

 
2.65
%
 
 
 
 
 
 
 
 
(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 September 30, 2018
 
 
 
Credit card loans
81
%
 
19
%
Personal loans
94
%
 
6
%
Private student loans (excluding PCI)(1)
95
%
 
5
%
 
 
 
 
At December 31, 2017
 
 
 
Credit card loans
82
%
 
18
%
Personal loans
95
%
 
5
%
Private student loans (excluding PCI)(1)
95
%
 
5
%
 
 
 
 
(1)
PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."

12


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, 2018 and December 31, 2017, there were $30 million and $29 million, respectively, of private student loans, including PCI, in forbearance, representing 0.6% and 0.5%, respectively, 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 September 30, 2018
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
2,334

 
$
313

 
$
170

 
$
11

 
$
2,828

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
633

 
87

 
22

 

 
742

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(674
)
 
(86
)
 
(25
)
 

 
(785
)
Recoveries
131

 
9

 
3

 

 
143

Net charge-offs
(543
)
 
(77
)
 
(22
)
 

 
(642
)
Other(2)

 

 
(1
)
 

 
(1
)
Balance at end of period
$
2,424

 
$
323

 
$
169

 
$
11

 
$
2,927

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2017
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,980

 
$
235

 
$
159

 
$
10

 
$
2,384

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
550

 
91

 
34

 
(1
)
 
674

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(555
)
 
(64
)
 
(32
)
 

 
(651
)
Recoveries
116

 
6

 
2

 

 
124

Net charge-offs
(439
)
 
(58
)
 
(30
)
 

 
(527
)
Balance at end of period
$
2,091

 
$
268

 
$
163

 
$
9

 
$
2,531

 
 
 
 
 
 
 
 
 
 
(1) Includes both PCI and non-PCI private student loans.
(2) Net change in reserves on PCI pools having no remaining non-accretable difference.
 
 
 
 
 
 
 
 
 
 

13


The following tables provide changes in the Company’s allowance for loan losses (dollars in millions): 
 
For the Nine Months Ended September 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
1,915

 
244

 
75

 
1

 
2,235

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(2,021
)
 
(247
)
 
(74
)
 
(1
)
 
(2,343
)
Recoveries
383

 
25

 
9

 

 
417

Net charge-offs
(1,638
)
 
(222
)
 
(65
)
 
(1
)
 
(1,926
)
Other(2)

 

 
(3
)
 

 
(3
)
Balance at end of period
$
2,424

 
$
323

 
$
169

 
$
11

 
$
2,927

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2017
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,790

 
$
200

 
$
158

 
$
19

 
$
2,167

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
1,607

 
231

 
69

 
(7
)
 
1,900

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(1,651
)
 
(182
)
 
(71
)
 
(3
)
 
(1,907
)
Recoveries
345

 
19

 
7

 

 
371

Net charge-offs
(1,306
)
 
(163
)
 
(64
)
 
(3
)
 
(1,536
)
Balance at end of period
$
2,091

 
$
268

 
$
163

 
$
9

 
$
2,531

 
 
 
 
 
 
 
 
 
 
(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 September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)
$
109

 
$
87

 
$
328

 
$
258

Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)
$
26

 
$
20

 
$
81

 
$
65

 
 
 
 
 
 
 
 

14


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 September 30, 2018
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with
ASC 450-20
$
2,154

 
$
282

 
$
121

 
$
4

 
$
2,561

Evaluated for impairment in accordance with
ASC 310-10-35(2)(3)
270

 
41

 
22

 
7

 
340

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

 

 
26

 

 
26

Total allowance for loan losses
$
2,424

 
$
323

 
$
169

 
$
11

 
$
2,927

Recorded investment in loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with
ASC 450-20
$
67,316

 
$
7,407

 
$
7,498

 
$
637

 
$
82,858

Evaluated for impairment in accordance with
ASC 310-10-35(2)(3)
1,937

 
138

 
170

 
56

 
2,301

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

 

 
1,735

 

 
1,735

Total recorded investment
$
69,253

 
$
7,545

 
$
9,403

 
$
693

 
$
86,894

 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with
ASC 450-20
$
1,921

 
$
269

 
$
112

 
$
4

 
$
2,306

Evaluated for impairment in accordance with
ASC 310-10-35(2)(3)
226

 
32

 
21

 
7

 
286

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

 

 
29

 

 
29

Total allowance for loan losses
$
2,147

 
$
301

 
$
162

 
$
11

 
$
2,621

Recorded investment in loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with
ASC 450-20
$
65,975

 
$
7,263