dfs-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ 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

(State or other jurisdiction of incorporation or organization)

36-2517428

(I.R.S. Employer Identification No.)

2500 Lake Cook Road, Riverwoods, Illinois 60015

(Address of principal executive offices, including zip code)

(224) 405-0900

(Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act
Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	DFS	New York Stock Exchange

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 ☒ No ☐

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 ☒ No ☐

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

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 21, 2022, there were 273,225,765 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, 2022

TABLE OF CONTENTS


Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	73
Item 4.	Controls and Procedures	74
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	76
Item 1A.	Risk Factors	76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 3.	Defaults Upon Senior Securities	77
Item 4.	Mine Safety Disclosures	77
Item 5.	Other Information	77
Item 6.	Exhibits	77

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. See Glossary of Acronyms, located after Part I — Item 4, for terms and abbreviations used throughout the quarterly report.

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 it®, 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.

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Financial Condition (unaudited)

(dollars in millions, except for share amounts)


	September 30, 2022		December 31, 2021

Assets
Cash and cash equivalents	$	10,004	$	8,750
Restricted cash	1,866		2,582

Investment securities (includes available-for-sale securities of $6,681 and $6,700 reported at fair value with associated amortized cost of $6,876 and $6,549 at September 30, 2022 and December 31, 2021, respectively)	6,897		6,904
Loan receivables
Loan receivables	104,908		93,684
Allowance for credit losses	(7,061)		(6,822)
Net loan receivables	97,847		86,862
Premises and equipment, net	1,015		983
Goodwill	255		255

Other assets	4,002		3,906
Total assets	$	121,886	$	110,242
Liabilities and Stockholders' Equity
Liabilities
Deposits
Interest-bearing deposit accounts	$	81,373	$	70,818
Non-interest bearing deposit accounts	1,524		1,575
Total deposits	82,897		72,393
Short-term borrowings	—		1,750
Long-term borrowings	20,177		18,477
Accrued expenses and other liabilities	4,526		4,214
Total liabilities	107,600		96,834
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; 569,637,306 and 568,830,897 shares issued at September 30, 2022 and December 31, 2021, respectively	6		6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively	1,056		1,056
Additional paid-in capital	4,444		4,369
Retained earnings	27,585		24,766
Accumulated other comprehensive loss	(353)		(94)
Treasury stock, at cost; 296,412,179 and 280,502,577 shares at September 30, 2022 and December 31, 2021, respectively	(18,452)		(16,695)
Total stockholders' equity	14,286		13,408
Total liabilities and stockholders' equity	$	121,886	$	110,242

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, 2022		December 31, 2021
Assets
Restricted cash	$	1,866	$	2,582
Loan receivables	$	24,885	$	25,449
Allowance for credit losses allocated to securitized loan receivables	$	(1,153)	$	(1,371)
Other assets	$	6	$	4
Liabilities
Short- and long-term borrowings	$	11,092	$	9,539
Accrued expenses and other liabilities	$	13	$	6

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Income (unaudited)

(dollars in millions, except for share amounts)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Interest income
Credit card loans	$	2,783	$	2,193	$	7,475	$	6,452
Other loans	476		433		1,343		1,301
Investment securities	35		45		104		142
Other interest income	63		3		86		14
Total interest income	3,357		2,674		9,008		7,909
Interest expense
Deposits	345		156		658		519
Short-term borrowings	1		—		2		—
Long-term borrowings	168		113		416		356
Total interest expense	514		269		1,076		875
Net interest income	2,843		2,405		7,932		7,034
Provision for credit losses	773		185		1,476		(45)
Net interest income after provision for credit losses	2,070		2,220		6,456		7,079
Other income
Discount and interchange revenue, net	346		299		1,056		879
Protection products revenue	42		43		128		129
Loan fee income	168		121		450		333
Transaction processing revenue	65		58		183		167
Unrealized (losses) gains on equity investments	(37)		(167)		(394)		562
Realized gains on equity investments	33		—		186		—
Other income	19		18		64		47
Total other income	636		372		1,673		2,117
Other expense
Employee compensation and benefits	551		483		1,566		1,487
Marketing and business development	276		210		722		539
Information processing and communications	124		121		370		375
Professional fees	241		198		607		567
Premises and equipment	22		23		70		69
Other expense	174		155		406		456
Total other expense	1,388		1,190		3,741		3,493
Income before income taxes	1,318		1,402		4,388		5,703
Income tax expense	312		311		1,029		1,321
Net income	$	1,006	$	1,091	$	3,359	$	4,382
Net income allocated to common stockholders	$	967	$	1,055	$	3,277	$	4,289
Basic earnings per common share	$	3.54	$	3.54	$	11.74	$	14.17
Diluted earnings per common share	$	3.54	$	3.54	$	11.73	$	14.16

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(dollars in millions)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	1,006	$	1,091	$	3,359	$	4,382
Other comprehensive loss, net of tax
Unrealized losses on available-for-sale investment securities, net of tax	(100)		(29)		(262)		(115)
Unrealized (losses) gains on cash flow hedges, net of tax	(2)		—		3		2

Other comprehensive loss	(102)		(29)		(259)		(113)
Comprehensive income	$	904	$	1,062	$	3,100	$	4,269

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited)

(dollars in millions, shares in thousands)


							Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Stockholders' Equity
	Preferred Stock			Common Stock
	Shares	Amount		Shares	Amount
For the Three Months Ended September 30, 2021
Balance at June 30, 2021	11	$	1,056	568,693	$	6	$	4,319	$	22,936	$	(39)	$	(15,107)	$	13,171
Net income	—	—		—	—		—		1,091		—		—		1,091
Other comprehensive loss	—	—		—	—		—		—		(29)		—		(29)
Purchases of treasury stock	—	—		—	—		—		—		—		(815)		(815)
Common stock issued under employee benefit plans	—	—		21	—		2		—		—		—		2
Common stock issued and stock-based compensation expense	—	—		47	—		24		—		—		—		24

Dividends — common stock ($0.50 per share)	—	—		—	—		—		(151)		—		—		(151)
Dividends — Series C preferred stock ($2,750 per share)	—	—		—	—		—		(15)		—		—		(15)
Dividends — Series D preferred stock ($3,062.50 per share)	—	—		—	—		—		(15)		—		—		(15)
Balance at September 30, 2021	11	$	1,056	568,761	$	6	$	4,345	$	23,846	$	(68)	$	(15,922)	$	13,263

For the Three Months Ended September 30, 2022
Balance at June 30, 2022	11	$	1,056	569,564	$	6	$	4,417	$	26,776	$	(251)	$	(18,240)	$	13,764
Net income	—	—		—	—		—		1,006		—		—		1,006
Other comprehensive loss	—	—		—	—		—		—		(102)		—		(102)
Purchases of treasury stock	—	—		—	—		—		—		—		(212)		(212)
Common stock issued under employee benefit plans	—	—		31	—		2		—		—		—		2
Common stock issued and stock-based compensation expense	—	—		42	—		25		—		—		—		25

Dividends — common stock ($0.60 per share)	—	—		—	—		—		(166)		—		—		(166)
Dividends — Series C preferred stock ($2,750 per share)	—	—		—	—		—		(15)		—		—		(15)
Dividends — Series D preferred stock ($3,062.50 per share)	—	—		—	—		—		(16)		—		—		(16)
Balance at September 30, 2022	11