EDGAR 10-K Filing

Company CIK: 1393612
Filing Year: 2023
Filename: 1393612_10-K_2023_0001393612-23-000007.json

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ITEM 1. BUSINESS
Item 1.
Business

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
You should carefully consider each of the following risks described below and all of the other information in this annual report on Form 10-K in evaluating us. Our business, financial condition, cash flows and/or results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks. This annual report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this annual report on Form 10-K. See “Special Note Regarding Forward-Looking Statements,” which immediately follows the risks below.
Summary
The following is a summary of the most important risks that could materially adversely affect our business, financial condition, cash flows and/or results of operations, and should be read together with the more detailed description of risks that follow:
•Economic and Regulatory: As a consumer financial services and payment services company, we are subject to risks stemming from new laws and regulations and an uncertain economic environment.
•Strategic: We must successfully compete against firms that are larger than we are and have more resources than we do as well as firms that are smaller and potentially disruptive to our industry as we manage the unique risks associated with each of our product offerings.
•Credit, Market and Liquidity: We must effectively manage our desire to grow our loan portfolio against the risk that those loans will not be repaid, while ensuring that we manage the underlying cost of the funds we use to make those loans and sources of funding we rely on to fund those loans.
•Operational and Other Risks: We must remain operationally effective and manage operational and reputational risks such as fraud and cybersecurity, while continuing to monitor and effectively respond to an external environment that may negatively impact the utilization or desirability of our products and services.
Current Economic and Regulatory Environment
Economic conditions could have a material adverse effect on our business, results of operations and financial condition.
As a provider of consumer financial services, our business, results of operations and financial condition are subject to the U.S. and global economic environment. A customer’s ability and willingness to repay us can be impacted by not only economic conditions but also a customer’s other payment obligations.
Economic conditions also can reduce the usage of credit cards in general and the average purchase amount of transactions industry-wide, including our cards, which reduces interest income and transaction fees. We rely heavily on interest income from our credit card business to generate earnings. Our interest income from credit card loans was $10.6 billion for the year ended December 31, 2022, which was 80% of net revenues (defined as net interest income plus other income), compared to $8.7 billion for the year ended December 31, 2021, which was 72% of net revenues. Economic conditions combined with a competitive marketplace could slow loan growth, resulting in reduced revenue growth from our core digital banking business.
Financial regulatory developments have had an impact and will continue to significantly impact the environment for the financial services industry, which could adversely impact our business, results of operations and financial condition.
The final rules implementing the tailoring requirements of 2018’s EGRRCPA became effective in December 2019. Under the final rules, DFS is considered a Category IV institution and therefore subject to the least stringent category of enhanced prudential standards for domestic bank holding companies with at least $100 billion in total assets. However, many of the core components of the regulations implementing enhanced prudential standards remain in place. Since 2020, DFS has been subject to slightly more tailored requirements for capital stress testing, liquidity risk management and resolution planning.
Meanwhile, the majority of the provisions of the Dodd-Frank Act were unchanged by the EGRRCPA and remain in effect, including provisions governing the practices and oversight of institutions engaged in financial services activities. The impact of the evolving regulatory environment on our business and operations depends upon a number of
factors, including (i) the legislative priorities of the U.S. Congress, (ii) priorities and actions of the Federal Reserve, FDIC and Consumer Financial Protection Bureau (“CFPB”), (iii) implications resulting from our competitors and other marketplace participants and (iv) changing consumer behavior. For additional information regarding bank regulatory matters impacting us, see “Business - Supervision and Regulation.”
Regulatory and legislative developments, findings and actions have had and could continue to have a negative impact on our business strategies or require us to: limit, exit or modify our business practices and product offerings; restructure our products in unanticipated ways; invest more management time and resources in compliance efforts; limit the fees we charge for services; impact the value of our assets; or limit our ability to pursue certain innovations and business opportunities and obtain related required regulatory approvals. For additional information regarding bank regulatory limitations on acquisitions and investments, see “Business - Supervision and Regulation - Acquisitions and Investments.” Furthermore, see Note 19: Litigation and Regulatory Matters to our consolidated financial statements for more information on recent matters affecting us. It is possible that any new regulatory measures or legislation may disproportionately affect us due to our size, structure or product offerings, among other things.
Compliance expectations and expenditures have steadily and significantly increased for us and the same is true for other financial services firms, and we expect this trend to continue as regulators escalate their focus on adequacy of controls to support business operations. We may face compliance and regulatory risks if we introduce new or changed products and services or enter into new business arrangements with third-party service providers, alternative payment providers, or other industry participants. Heightened regulatory expectations and increased volume of regulatory changes may generate additional expenses or require significant time and resources to maintain compliance.
For more information regarding the regulatory environment and developments potentially impacting us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment and Developments.”
Strategic Business Risk
We face competition in the credit card market from other consumer financial services providers and we may not be able to compete effectively, which could result in fewer customers and lower account balances and could materially adversely affect our financial condition, cash flows and results of operations.
The consumer financial services business is highly competitive. We compete with other consumer financial services providers, including non-traditional providers of financing and payment services such as financial technology firms, based on several factors, including brand, reputation, customer service, product offerings, incentives, pricing, e-commerce and digital wallet participation and other terms. Competition in credit cards is also based on merchant acceptance and the value provided to the customer by rewards programs and other innovations. Many credit card issuers have instituted rewards programs that are similar to ours and, in some cases, could be viewed as more attractive to customers than our programs. These competitive factors affect our ability to attract and retain customers, increase usage of our products and maximize the revenue generated by our products. In addition, because most domestically-issued credit cards, other than those issued by American Express, are issued on the Visa and MasterCard networks, most other card issuers benefit from the dominant position and marketing and pricing power of Visa and MasterCard. The competitive marketplace could result in slower loan growth, resulting in reduced revenue growth from our core digital banking business. If we are unable to compete successfully, or if competing successfully requires us to take aggressive actions in response to competitors’ actions, our financial condition, cash flows and results of operations could be materially adversely affected.
We incur considerable costs in competing with other consumer financial services providers and many of our competitors have greater financial resources than we do, which may place us at a competitive disadvantage and negatively affect our financial results.
We incur considerable costs in competing with other consumer financial services providers to attract and retain customers and increase usage of our products. A substantial portion of this cost relates to marketing expenditures and rewards programs. Since 2013 our rewards rate, which represents rewards cost divided by Discover Card sales volume, has increased from less than 1% to 1.41% in 2022. We expect the competitive intensity in the rewards space to continue, which could result in a continued increase in the cost of our rewards programs. Our consumer financial services products compete primarily based on pricing, terms and service. Because of the highly competitive nature of the credit card-issuing business, a primary method of competition among credit card issuers, including us, has been to offer rewards programs, low introductory interest rates, attractive standard purchase rates and balance transfer programs
that offer a favorable annual percentage rate or other financial incentives for a specified length of time on account balances transferred from another credit card.
Competition is intense in the credit card industry and customers may frequently switch credit cards or transfer their balances to another card. We expect to continue to invest in initiatives to remain competitive in the consumer financial services industry, including the launch of new cards and features, brand awareness initiatives, targeted marketing, online and mobile enhancements, e-wallet participation, customer service improvements, credit risk management and operations enhancements and infrastructure efficiencies. However, there can be no assurance that any of the costs we incur or incentives we offer to attempt to acquire and maintain accounts and increase usage of our products will be effective. In addition, to the extent that we offer new products, features or services to remain competitive, we may be subject to increased operational or other risks.
Furthermore, many of our competitors are larger than we are, have greater financial resources than we do, have more breadth in banking products, have lower funding costs than we have and expect to have and have assets, such as branch locations and co-brand relationships, that may be appealing to certain customers. For example, larger credit card issuers, which have greater resources than we do, may be better positioned to fund appealing rewards, marketing and advertising programs. We may be at a competitive disadvantage as a result of the greater financial resources, diversification and scale of many of our competitors.
Our costs directly affect our earnings results. Many factors can influence the amount of our costs, as well as how quickly it may increase. Our ongoing investments in infrastructure, which may be necessary to maintain a competitive business, integrate newly-acquired businesses and establish scalable operations, increase our costs. In addition, as our business develops, changes or expands, additional costs can arise as a result of a reevaluation of business strategies, management of outsourced services, asset purchases, structural reorganization, compliance with new laws or regulations or the acquisition of new businesses. If we are unable to manage our costs successfully, our financial results will be negatively affected.
The inability to compete against other operators of payment networks and alternative payment providers could result in reduced transaction volume, limited merchant acceptance of our cards, limited issuance of cards on our networks by third parties and materially reduced earnings from our payment services business.
We face substantial and increasingly intense competition in the payments industry, both from traditional players and new, emerging alternative payment providers. For example, we compete with other payment networks to attract network partners to issue credit and debit cards and other card products on the Discover, PULSE and Diners Club networks, collectively the Discover Global Network. Competition with other operators of payment networks is generally based on issuer fees, fees paid to networks (including switch fees), merchant acceptance, network size and functionality, technological capabilities and other economic terms. Competition is also based on customer perception of service quality, brand image, reputation and market share. Further, we are facing ongoing competition from alternative payment providers, who may create innovative network or other arrangements with our primary competitors, large merchants or other industry participants, which could adversely impact our costs, transaction volume and ability to grow our business.
Many of our competitors are well established, larger than we are and/or have greater financial resources or scale than we do. These competitors have provided financial incentives to card issuers, such as large cash signing bonuses for new programs, funding for and sponsorship of marketing programs and other bonuses. Visa and MasterCard each enjoy greater merchant acceptance and broader global brand recognition than we do. Although we have made progress in merchant acceptance, we have not achieved global market parity with Visa and MasterCard. In addition, Visa and MasterCard have entered into long-term arrangements with many financial institutions that may have the effect of discouraging those institutions from issuing cards on the Discover Network or issuing debit cards on the PULSE network. Some of these arrangements are exclusive, or nearly exclusive, which further limits our ability to conduct material amounts of business with these institutions. If we are unable to remain competitive on issuer fees and other incentives, we may be unable to offer adequate pricing to network partners while maintaining sufficient net revenues.
We also face competition as merchants put pressure on transaction fees. Increasing merchant fees or acquirer fees could adversely affect our effort to increase merchant acceptance of credit cards issued on the Discover Global Network and may cause merchant acceptance to decrease. This, in turn, could adversely affect our ability to attract and retain network partners who may seek out more cost-effective alternatives from both traditional and non-traditional payment services providers, which may limit our ability to maintain or grow revenues from our proprietary network. In
addition, competitors’ settlements with merchants and related actions, including pricing pressures and/or surcharging, could negatively impact our business practices. Competitor actions related to the structure of merchant and acquirer fees and merchant and acquirer transaction routing strategies have adversely affected and are expected to continue to adversely affect our PULSE network’s business practices, network transaction volume, revenue and prospects for future growth and entry into new product markets. Visa has entered into arrangements with some merchants and acquirers that have, and are expected to continue to have, the effect of discouraging those merchants and acquirers from routing debit transactions to PULSE. In addition, the Dodd-Frank Act’s network participation requirements and competitor actions negatively impact PULSE’s ability to enter into exclusivity arrangements, which affects PULSE’s business practices and may materially adversely affect its network transaction volume and revenue. PULSE has a pending lawsuit against Visa with respect to these competitive concerns. PULSE’s transaction processing revenue was $249 million and $227 million for the years ended December 31, 2022 and 2021, respectively.
American Express is also a strong competitor, with international acceptance, high transaction fees and an upscale brand image. Internationally, American Express competes in the same market segments as Diners Club. We may face challenges in increasing international acceptance on our networks, particularly if third parties that we rely on to issue Diners Club cards, increase card acceptance and market our brands do not perform to our expectations.
In addition, if we are unable to maintain sufficient network functionality to be competitive with other networks, or if our competitors develop better data security solutions or more innovative products and services than we do, our ability to retain and attract network partners and maintain or increase the revenues generated by our proprietary card-issuing business or our PULSE business may be materially adversely affected. Additionally, competitors may develop data security solutions, which as a consequence of the competitors’ market power, we may be forced to use. In that case, our business may be adversely affected as they may be better positioned to absorb the costs over higher volumes or a larger customer base.
Our business depends upon relationships with issuers, merchant acquirers, other payment enablers and licensees, many of whom are financial institutions. The economic and regulatory environment and increased consolidation in the financial services industry decrease our opportunities for new business and may result in the termination of existing business relationships if a business partner is acquired or goes out of business. In addition, as a result of this environment, financial institutions may have decreased interest in engaging in new card issuance opportunities or expanding existing card issuance relationships, which would inhibit our ability to grow our payment services business. We continue to face substantial and intense competition in the payments industry, which impacts our revenue margins, transaction volume and business strategies.
If we are unsuccessful in maintaining our international network business and achieving meaningful global card acceptance, we may be unable to grow our international network business.
We continue to make progress toward, but have not completed, achieving global card acceptance for the Discover Global Network since we acquired the Diners Club network and related assets in 2008. Achieving global card acceptance would allow our customers, including third-party issuers leveraging the network, to use their cards at merchant and ATM locations around the world.
Our international network business depends upon the cooperation, support and continuous operation of the network licensees that issue Diners Club cards and that maintain a merchant acceptance network. As is the case for other card payment networks, our Diners Club network does not issue cards or determine the terms and conditions of cards issued by the network licensees. If we are unable to continue our relationships with network licensees or if the network licensees are unable to continue their relationships with merchants, our ability to maintain or increase revenues and to remain competitive would be adversely affected due to the potential deterioration in customer relationships and related demand that could result. If one or more licensees were to experience a significant impairment of their business or were to cease doing business for economic, regulatory or other reasons, we would face the adverse effects of business interruption in a particular market, including loss of volume, acceptance and revenue and exposure to potential reputational risk. If such conditions arise in the future, we may deploy resources and incur expenses in order to sustain network acceptance. Additionally, interruption of network licensee relationships could have an adverse effect on the acceptance of Discover cards when they are used on the Diners Club network outside of North America.
The long-term success of our international network business depends upon achieving meaningful global card acceptance, which has included and may continue to include higher overall costs or longer timeframes than anticipated.
The failure to manage the risks of our student loan portfolio and the student lending environment could result in our inability to sustain and grow our student loan portfolio.
The long-term success of our student loan strategy depends upon our ability to manage the credit risk, pricing, funding, operations, including the transition away from London Interbank Offered Rate (“LIBOR”), and expenses of our student loan portfolio, as well as the growth of our student loan originations. Our student loan strategy is also impacted by external factors such as the overall economic environment, a competitive marketplace and a challenging regulatory environment for private student loans and student loans generally. For more information on the regulatory environment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment and Developments” and Note 19: Litigation and Regulatory Matters to our consolidated financial statements.
There are several challenges to managing and growing our private student loan business in the future, including (i) economic weakness, (ii) new changes from federal and state legislation or prudential regulations, or other government and regulatory focus on higher education costs, student lending and student loan servicing; and (iii) competitive factors, such as competition from non-traditional lenders including financial technology firms. Examples of these challenges include the recent legislative focus on federal student loan debt forgiveness in bankruptcy and legislative proposals in a number of states and the District of Columbia imposing new requirements on student loan servicing. These challenges may require us to restructure our private student loan products in ways we may not currently anticipate. In addition, changes that adversely affect the private student loan market generally may negatively impact the profitability and growth of our student loan portfolio.
Acquisitions or strategic investments that we pursue may not be successful and could disrupt our business, harm our financial condition or reduce our earnings.
We may consider or undertake strategic acquisitions of, or material investments in, businesses, products, portfolios of loans or technologies in the future. We may not be able to identify suitable acquisition or investment candidates, or even if we do identify suitable candidates, they may be difficult to finance, expensive to fund and there is no guarantee that we can obtain any necessary regulatory approvals or complete the transactions on terms that are favorable to us. We generally must receive federal regulatory approvals before we can acquire a bank, bank holding company, deposits or certain assets or businesses. For additional information regarding bank regulatory limitations on acquisitions and investments, see “Business - Supervision and Regulation - Acquisitions and Investments.”
To the extent we pay the purchase price of any strategic acquisition or investment in cash, it may have an adverse effect on our financial condition. Similarly, if the purchase price is paid with our stock, it may be dilutive to our stockholders. In addition, we may assume liabilities associated with a business acquisition or investment, including unrecorded liabilities that are not discovered at the time of the transaction. The repayment or settlement of those liabilities may have an adverse effect on our financial condition.
We may not be able to successfully integrate the personnel, operations, businesses, products, or technologies of an acquisition or investment. Integration may be particularly challenging if we enter into a line of business that we have limited experience and the business operates in a difficult legal, regulatory or competitive environment. We may find that we do not have adequate operations or expertise to manage the new business. The integration of any acquisition or investment may divert management’s time and resources from our core business, which could impair our relationships with our current employees, customers and strategic partners and disrupt our operations. Additionally, any acquisition or investment may expose us to increased information security risk as we integrate new systems that we may not be as familiar with or bring them in line with the requirements of our information security and business continuity programs. Acquisitions and investments also may not perform to our expectations for various reasons, including the loss of key personnel, customers or vendors. If we fail to integrate acquisitions or investments or realize the expected benefits, we may lose the return on these acquisitions or investments or incur additional transaction costs. As a result, our business, reputation and financial condition may be harmed.
Credit, Market and Liquidity Risk
The failure to successfully manage credit risk, which may result in high delinquency and charge-off rates, could materially adversely affect our business, profitability and financial condition.
As a lender, we are exposed to the risk that our borrowers will be unable or unwilling to repay the principal of, or interest on, loans in accordance with their terms. We seek to grow our loan receivables while maintaining quality credit performance. Our success depends on our ability to manage credit risk while attracting new customers with
profitable usage patterns. We select customers, manage their accounts and establish terms and credit limits using externally developed and proprietary scoring models and other analytical techniques designed to set terms and credit limits to appropriately compensate us for the credit risk we accept, while encouraging customers to use their available credit. The models and approaches we use may not accurately predict future charge-offs due to, among other things, inaccurate assumptions. While we continually seek to improve our assumptions and models, we may make modifications that unintentionally cause them to be less predictive or incorrectly interpret the data produced by these models in setting our credit policies.
At December 31, 2022 and 2021, $1.3 billion, or 1.14%, and $800 million, or 0.85%, of our loan receivables were non-performing (defined as loans over 90 days delinquent and accruing interest, plus loans not accruing interest). Our ability to manage credit risk and avoid high charge-off rates may be adversely affected by household, business, economic and market conditions that may be difficult to predict. When these conditions deteriorate, we may experience reduced demand for credit and increased delinquencies or defaults, including loans which we have securitized and in which we retain a residual interest. The level of nonperforming loans, charge-offs and delinquencies could rise and require additional provision for credit losses. There can be no assurance that our underwriting and portfolio management strategies will permit us to avoid high charge-off levels or that our allowance for credit losses will be sufficient to cover actual losses.
A customer’s ability and willingness to repay us can be impacted by changes in their employment status, increases in their payment obligations to other lenders and by restricted availability of credit to consumers generally. Our collection operations may not compete effectively to secure more of customers’ diminished cash flow than our competitors. In addition, we may fail to quickly identify customers who are likely to default on their payment obligations and reduce our exposure by closing credit lines and restricting authorizations, which could adversely impact our financial condition and results of operations. Our ability to manage credit risk also may be adversely affected by legal or regulatory changes (such as restrictions on collections, bankruptcy laws, minimum payment regulations and re-age guidance), competitors’ actions and consumer behavior, as well as inadequate collections staffing, resources, techniques and models. There can be no assurance that we will be able to grow the loan receivables portfolio in accordance with our strategies or manage credit and other risks associated with the loan products. Our failure to manage credit and other risks may materially adversely affect profitability and the ability to grow the loan receivables portfolio and further diversify the business.
Adverse market conditions or an inability to effectively manage our liquidity risk could negatively impact our ability to meet our liquidity and funding needs, which could materially adversely impact our business, results of operations and overall financial condition.
We must effectively manage the liquidity risk to which we are exposed. We require liquidity in order to meet cash requirements such as day-to-day operating expenses, extensions of credit on our consumer loans and required payments of principal and interest on our borrowings. Our primary sources of liquidity and funding are payments on our loan receivables, deposits and proceeds from securitization transactions and securities offerings. We may maintain too much liquidity, which can be costly, or we may be too illiquid, which could limit financial flexibility and result in financial distress during a liquidity stress event. Our liquidity portfolio had a balance of approximately $19.8 billion as of December 31, 2022, compared to $15.0 billion as of December 31, 2021. Our total contingent liquidity sources amounted to $67.3 billion as of December 31, 2022, compared to $52.9 billion as of December 31, 2021. As of December 31, 2022, our total contingent liquidity sources consisted of $19.8 billion in our liquidity portfolio, $3.5 billion of undrawn capacity in private securitizations, $1.7 billion in borrowing capacity with the FHLB of Chicago and $42.3 billion in incremental Federal Reserve discount window capacity.
In the event that our current sources of liquidity do not satisfy our needs, we would be required to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit to the financial services industry, new regulatory restrictions and requirements and our credit ratings. Disruptions, uncertainty or volatility in the capital, credit or deposit markets may limit our ability to repay or replace maturing liabilities in a timely manner. As such, we may be forced to delay the acquisition of additional funding or be forced to issue or raise funding at undesirable terms and/or costs, which could decrease profitability and significantly reduce financial flexibility. Further, in disorderly financial markets or for other reasons, it may be difficult or impossible to liquidate some of our investments to meet our liquidity needs.
There can be no assurance that significant disruption and volatility in the financial markets will not occur in the future. Likewise, adverse developments with respect to financial institutions and other third parties with whom we maintain important financial relationships could negatively impact our funding and liquidity. If we are unable to
continue to fund our assets through deposits or access capital markets on favorable terms, or if we experience an increase in our borrowing costs or otherwise fail to manage our liquidity effectively, our liquidity, results of operations and financial condition may be materially adversely affected.
An inability to accept or maintain deposits in the future could materially adversely affect our liquidity position and our ability to fund our business.
A major source of our funds is customer deposits, primarily in the form of savings accounts, certificates of deposits, money market accounts and checking accounts. We obtain deposits from consumers either directly or through affinity relationships and through third-party securities brokerage firms that offer our deposits to their customers. We had $70.5 billion in deposits acquired directly or through affinity relationships and $21.1 billion in deposits originated through securities brokerage firms as of December 31, 2022, compared to $61.9 billion and $10.5 billion, respectively, as of December 31, 2021. Our ability to attract and maintain deposits, as well as our cost of funds, has been, and will continue to be, significantly affected by general economic conditions. Competition from other financial services firms that use deposit funding, the rates and services we offer on our deposit products and our ability to maintain a high-quality customer experience may affect deposit renewal rates, costs or availability. Changes we make to the rates offered on our deposit products may affect our profitability (through funding costs) and our liquidity (through volumes raised). In addition, our ability to maintain existing or obtain additional deposits may be impacted by various factors, including factors beyond our control, such as perceptions about our reputation, brand, or financial strength; quality of deposit servicing or branchless banking generally, which could reduce the number of consumers choosing to place deposits with us; third parties continuing or entering into affinity relationships or marketing arrangements with us; disruptions in technology services or the internet, generally; or third-party securities brokerage firms continuing to offer our deposit products. Furthermore, while there are limitations on withdrawal frequency on certain deposit accounts, customers may withdraw deposits to ensure that their deposits are fully insured or make investments that have a higher yield. If our customers withdraw their deposits, our funding costs may increase, which may reduce our net interest income and net income.
Our ability to obtain deposit funding and offer competitive interest rates on deposits is also dependent on capital levels of our bank subsidiary. In certain circumstances, the FDIA prohibits insured banks from accepting brokered deposits (as defined in the FDIA) and applies other restrictions, such as a cap on interest rates we may pay. See “Business - Supervision and Regulation” and Note 17: Capital Adequacy to our consolidated financial statements for more information. While our subsidiary, Discover Bank, met the FDIC’s definition of “well-capitalized” as of December 31, 2022 and has no restrictions regarding acceptance of brokered deposits or setting of interest rates, there can be no assurance that it will continue to meet this definition. Additionally, our regulators can adjust the requirements to be “well-capitalized” at any time and have authority to place limitations on our deposit businesses, including the interest rate we pay on deposits.
If we are unable to securitize our credit card receivables, it may have a material adverse effect on our liquidity, cost of funds and overall financial condition.
We use the securitization of credit card receivables as a significant source of funding as well as for contingent liquidity. The securitization of credit card receivables involves the transfer of credit card receivables to a trust, the transfer of the beneficial interest in those credit card receivables to a second trust through a special purpose entity and the issuance by the second trust of notes to third-party investors collateralized by the beneficial interest in the transferred credit card receivables. Our average level of credit card securitized borrowings from third parties was $9.0 billion and $9.5 billion for the years ended December 31, 2022 and 2021, respectively. There can be no assurance that we will be able to complete additional credit card securitization transactions if the credit card securitization market experiences significant and prolonged disruption or volatility.
Our ability to raise funding through the securitization market also depends, in part, on the credit ratings of the securities we issue from our securitization trusts. If we are not able to satisfy rating agency requirements to confirm the ratings of asset-backed securities issued by our trusts at the time of a new issuance of securities, it could limit our ability to access the securitization markets. Additional factors affecting the extent to which we may securitize our credit card receivables in the future include the overall credit quality of our credit card receivables, the costs of securitizing our credit card receivables, the demand for credit card asset-backed securities and the legal, regulatory, accounting or tax rules affecting securitization transactions and asset-backed securities, generally.
A prolonged inability to securitize our credit card receivables, or an increase in the costs of such issuances that would make such activities economically infeasible, may require us to seek alternative funding sources, which may be
less efficient and more expensive than raising capital via securitization transactions and may have a material adverse effect on our liquidity, cost of funds and overall financial condition.
The occurrence of events that result in the early amortization of our existing credit card securitization transactions or an inability to delay the accumulation of principal collections for our existing credit card securitization transactions would materially adversely affect our liquidity.
Our liquidity and cost of funds would be materially adversely affected by the occurrence of events that could result in the early amortization of our existing credit card securitization transactions. Our credit card securitization transactions are structured as “revolving transactions” that do not distribute to securitization investors their share of monthly principal payments received on the underlying receivables during the revolving period and instead use those principal payments to fund the purchase of new credit card receivables. The occurrence of an “early amortization event” may result in termination of the revolving periods of one or more of our securitization transactions, which would require us to repay the affected outstanding securitized borrowings out of principal collections without regard to the original payment schedule. Early amortization events include, for example, insufficient cash flows in the securitized pool of credit card receivables to meet contractual requirements (i.e., excess spread less than zero) and certain breaches of representations, warranties or covenants in the agreements relating to the securitization transactions. For more information on excess spread, see Note 5: Credit Card and Private Student Loan Securitization Activities to our consolidated financial statements. An early amortization event would negatively impact our liquidity and require us to rely on alternative funding sources, which may or may not be available at the time or may be less efficient and more expensive. An early amortization event also could impact our ability to access the undrawn secured credit facilities that we maintain for contingent liquidity purposes. Additionally, the occurrence of an early amortization event with respect to any of our securitization transactions may adversely impact investor demand for notes issued in our future credit card securitization transactions.
Our credit card securitization structure includes a requirement that we accumulate principal collections into a restricted account in the amount of scheduled maturities on a pro rata basis over the 12 months prior to a security’s maturity date. We have the option under our credit card securitization documents to shorten this accumulation period, subject to the satisfaction of certain conditions. Historically, we have exercised this option to shorten the accumulation period to a few months prior to maturity. If we were to determine that the payment rate on the underlying credit card receivables would not support a short accumulation period, we would need to begin accumulating principal cash flows earlier than we have historically. A lengthening of the accumulation period could negatively impact our liquidity, requiring management to implement mitigating measures. During periods of significant maturity levels, absent management actions, the lengthening of the accumulation period could materially adversely affect our financial condition.
A downgrade in the credit ratings of our or our subsidiaries’ securities could materially adversely affect our liquidity, results of operations and financial condition.
We, along with Discover Bank, are regularly evaluated by the ratings agencies. Their ratings for our long-term debt and other securities, including asset-backed securities issued by our securitization trusts, are based on a number of factors that may change from time to time, including our financial strength as well as factors that may not be within our control. Factors that affect our unsecured credit ratings include, but are not limited to, the macroeconomic environment in which we operate and the credit ratings of the U.S. government, the credit quality and performance of our assets, the amount and quality of our capital, the level and stability of our earnings and the structure and amount of our liquidity. In addition to these factors, the ratings of our asset-backed securities are also based on the quality of the underlying receivables and the credit enhancement structure of the trusts. Downgrades in our ratings, those of Discover Bank or our asset-backed securities could occur at any time and without notice by any of the rating agencies, which could, among other things, materially adversely affect our cost of funds, access to capital and funding and overall financial condition. There can be no assurance that we will be able to maintain our current credit ratings or that our credit ratings will not be lowered or withdrawn.
We may not be successful in managing the investments in our liquidity investment portfolio and investment performance may deteriorate due to market fluctuations, which would adversely affect our business and financial condition.
We must effectively manage the risks of the investments in our liquidity investment portfolio, which is composed of cash and cash equivalents and high-quality liquid investments. The value of our investments may be adversely affected by market fluctuations including changes in interest rates, prices, prepayment rates, credit risk premiums and overall
market liquidity. Also, investments backed by collateral could be adversely impacted by changes in the value of the underlying collateral. In addition, economic conditions may cause certain of the obligors, counterparties and underlying collateral on our investments to incur losses of their own or default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons, thereby increasing our credit risk exposure to these investments. These risks could result in a decrease in the value of our investments, which could negatively impact our financial condition. These risks could also restrict our access to funding. While the securities in our investment portfolio are currently limited to obligations of high-quality sovereign and government-sponsored issuers, we may choose to expand the range of our investments over time, which may result in greater fluctuations in market value. While we expect these investments to be readily convertible into cash and do not believe they present a material increase to our risk profile or will have a material impact on our risk-based capital ratios, they are subject to certain market fluctuations that may reduce the ability to fully convert them into cash.
Changes in the level of interest rates could materially adversely affect our earnings.
Changes in interest rates cause our net interest income to increase or decrease, as some of our assets and liabilities carry interest rates that fluctuate with market benchmarks. Benchmark interest rates rose materially during 2022 as the Federal Reserve raised its federal funds target rate range in an effort to combat high inflation. Financial market participants expect 2023 will be a transitional year for monetary policy and U.S. economic growth, thus raising uncertainty as to the direction of benchmark interest rates during 2023. Higher interest rates could negatively impact our customers as total debt service payments would increase, impede our ability to grow our consumer lending businesses and increase the cost of our funding, which would put us at a disadvantage as compared to some of our competitors that have less expensive funding sources.
Some of our consumer loan receivables bear interest at a fixed rate or do not earn interest and we are not able to increase the rate on those loans to offset any higher cost of funds, which could materially reduce earnings. At the same time, some of our variable-rate loan receivables may be subject to a cap, exposing us to interest-rate risk. In addition, we utilize a combination of fixed- and variable-rate funding from various sources, and we may use derivative instruments to hedge the liabilities. However, timing mismatches between loan receivable growth and funding procurement could expose us to interest-rate risk.
Additionally, we have a number of variable-rate student loans, interest rate swaps and capital markets securities with attributes that are either directly or indirectly dependent on LIBOR. In July 2017, the UK Financial Conduct Authority (“FCA”) announced that it would no longer encourage or compel banks to continue to contribute quotes and maintain LIBOR after 2021. In March 2021, the FCA announced the future cessation and loss of representativeness for all LIBOR benchmark settings. While non-U.S. dollar (“USD”) and several less frequently referenced USD LIBOR settings ceased publication immediately after December 31, 2021, commonly referenced USD LIBOR settings will cease publication immediately after June 30, 2023. This future cessation event will trigger fallback provisions in many financial contracts to convert their benchmark index from LIBOR to an alternative rate. In July 2021, the Alternative Reference Rates Committee (“ARRC”) announced its recommendation of forward-looking term rates based on Secured Overnight Financing Rate (“SOFR”) as additional alternative reference rate options. For more information regarding our transition from LIBOR to SOFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment and Developments - Banking - London Interbank Offered Rate.”
Interest rates may also adversely impact our delinquency and charge-off rates. Many consumer lending products bear interest rates that fluctuate with certain base lending rates published in the market, such as the prime rate and LIBOR. As a result, higher interest rates often lead to higher payment requirements by consumers under obligations to us and other lenders, which may reduce their ability to remain current on their obligations to us and thereby lead to loan delinquencies and additions to our credit loss provision, which could materially adversely affect our earnings.
We continually monitor interest rates and have a number of tools, including the composition of our loans and investments, liability terms and interest rate derivatives, to manage our interest rate risk exposure. Changes in market assumptions regarding future interest rates could significantly impact our interest rate risk strategy, our financial position and results of operations. If our interest rate risk management strategies are not appropriately monitored or executed, these activities may not effectively mitigate our interest rate sensitivity or have the desired impact on our results of operations or financial condition. For information related to interest rate risk sensitivities, see “Item 7A - Quantitative and Qualitative Disclosures About Market Risk.”
Operational and Other Risk
Our risk management framework and models for managing risks may not be effective in mitigating our risk of loss.
Our risk management framework seeks to identify and mitigate risk and appropriately balance risk and return. We have established processes and procedures intended to identify, measure, manage, monitor and report the types of risk to which we are subject, including credit risk, market risk, liquidity risk, operational risk, compliance and legal risk and strategic risk. We seek to monitor and control our risk exposure through a framework of policies, procedures, limits and reporting requirements.
Management of our risks in some cases depends upon the use of analytical and/or forecasting models. We use a variety of models to manage and inform decision-making with respect to customers and for the measurement of risk including credit, market and operational risks and for our finance and treasury functions. Models used by Discover can vary in their complexity and are designed to identify, measure and mitigate risks at various levels such as loan-level, portfolio segments, entire portfolios and products. These models use a set of computational rules to generate numerical estimates of uncertain values to be used for assessment of price, financial forecasts and estimates of credit, interest rate, market and operational risk. These models and the quality of their outputs are dependent on the quality and accuracy of the data loaded into the models. To the extent that the quality and integrity of that data is compromised, the models could result in inaccurate forecasts, ineffective risk management practices or inaccurate risk reporting. All models carry some level of uncertainty that introduces risks in the estimates.
If the models that we use to mitigate risks are inadequate or do not accurately predict future outcomes, we may incur increased losses. In addition, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. If our risk management framework and models do not effectively identify or mitigate our risks, we could suffer unexpected losses and our financial condition and results of operations could be materially adversely affected.
If the security of our systems, or the systems of third parties we rely upon, is compromised, our business could be disrupted and we may be subject to significant financial exposure, liability and damage to our reputation.
Our digital banking and network operations rely heavily on the secure processing, storage and transmission of confidential or sensitive information about us, our customers and third parties with whom we do business. Information security risks for financial institutions have increased and continue to increase in part because of the proliferation of new technologies, the use of the internet and cloud, mobile and telecommunications technologies to conduct financial transactions and the increased sophistication and activities of organized crime, activists, hackers, terrorist organizations, nation state actors and other external parties. Those parties may also attempt to fraudulently induce employees, customers or other users of our systems (including third parties) to disclose confidential or sensitive information in order to gain access to our data or that of our customers.
Our technologies, systems, networks and software, those of other financial institutions and other firms (such as hardware vendors, cloud providers and others), have been, and are likely to continue to be, the target of increasingly frequent cyber-attacks, malicious code, ransomware, denial of service attacks, phishing and other social engineering, other remote access attacks and physical attacks that could result in unauthorized access, misuse, loss, unavailability or destruction of data (including confidential customer information), account takeovers, identity theft and fraud, unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the part of external or internal parties or may result from technological failure or otherwise. Further, our vulnerability to these types of threats may be increased to the extent employees may continue to work remotely on a more frequent basis with the current trend toward hybrid work arrangements.
Despite our efforts to ensure the integrity of our systems through our information security and business continuity programs, we may not be able to anticipate or to implement effective preventive measures against all known and unknown security threats, attacks or breaches or events of these types, especially because the techniques used change frequently and are becoming increasingly more sophisticated or are not recognized until launched or vulnerabilities in software or hardware are unknown or are unable to be entirely addressed even after becoming known, and because:
•Security attacks can originate from a wide variety of sources and geographic locations and may be undetected for a period of time.
•We rely on many third-party service providers and network participants, including merchants, and, as such, a security breach or cyber-attack affecting one of these third parties could impact us. For example, the financial services industry continues to see attacks against the environments where personal and identifiable
information is handled. For additional information see the risk factor “- Failure to manage our relationships with third-party service providers could result in our revenue or results of operations being materially adversely affected.”
•Our customers may use computers and mobile devices that are beyond our security control systems to access our products and services.
We are subject to increasing risk related to information and data security as we increase acceptance of the Discover card internationally, expand our suite of online digital banking products, enhance our mobile payment technologies, acquire new or outsource some of our business operations, expand our internal usage of web-based products and applications, and otherwise attempt to keep pace with rapid technological changes in the financial services industry. Our efforts to mitigate this risk increase our expenses. While we continue to invest in our information security defenses (including cybersecurity defenses), if our security systems or those of third parties are penetrated or circumvented such that the confidentiality, integrity or availability of information about us, our customers, transactions processed on our networks or on third-party networks on our behalf or third parties with which we do business is compromised, we could be subject to significant liability that may not be covered by insurance, including significant legal and financial exposure, actions by our regulators, damage to our reputation, or a loss of confidence in the security of our systems, products and services that could materially adversely affect our business.
Cyber-attacks that are successful, or are perceived to be successful, in compromising the data or disrupting the services of other peer financial institutions, whether or not we are impacted, could lead to a general loss of customer confidence, which could negatively impact market perception of our products and services. Media reports of attempted cyber-attacks, service disruptions or vulnerabilities in our information systems or security procedures or those of any of the third-party service providers we engage, could cause significant legal and financial exposure, lead to regulatory and legislative intervention and cause an overall negative effect in our business. For additional information on risks in this area, see the risk factors below regarding fraudulent activity, the introduction of new products and services, the use of third parties for outsourcing, technology generally, and laws and regulations addressing consumer privacy and data use and security.
If we cannot remain organizationally effective, we will be unable to address the opportunities and challenges presented by our strategy and the increasingly dynamic and competitive economic and regulatory environment.
To remain organizationally effective, we must effectively empower, integrate and deploy our management and operational resources and incorporate global and local business, regulatory and consumer perspectives into our decisions and processes. In order to execute on our objective to be the leading consumer bank and payments partner, we must develop and implement innovative and efficient technology solutions and marketing initiatives while effectively managing legal, regulatory, compliance, security, operational and other risks as well as expenses. Examples include the implementation of a broader rollout of our checking product and a structure for a more competitive global network business. If we fail to develop and implement these solutions, we may be unable to expand quickly and the results of our expansion may be unsatisfactory. In addition, if we are unable to make decisions quickly, assess our opportunities and risks, execute our strategy and implement new governance, managerial and organizational processes as needed in this increasingly dynamic and competitive economic and regulatory environment, our financial condition, results of operations, relationships with our business partners, banking regulators, customers and shareholders, and ultimately our prospects for achieving our long-term strategies, may be negatively impacted.
We may be unable to increase or sustain Discover credit card usage, which could impair growth in, or lead to diminishing, average balances and total revenue.
A key element of our business strategy is to increase the usage of the Discover credit card by our customers, including making it their primary credit card, and thereby increase our revenue from transaction and service fees and interest income. However, our customers’ use and payment patterns may change because of social, legal and economic factors, and customers may decide to use debit cards or other payment products instead of credit cards, not increase credit card usage, or pay their balances within the grace period to avoid finance charges. We face challenges from competing card products in our attempts to increase credit card usage by our existing customers. Our ability to increase credit card usage also is dependent on customer satisfaction, which may be adversely affected by factors outside of our control, including competitors’ actions and legislative/regulatory changes. Existing legal and regulatory restrictions limit pricing changes that may impact an account throughout its lifecycle, which may reduce our capability to offer lower price promotions to drive account usage and customer engagement. As part of our strategy to increase usage, we have been increasing the number of merchants who accept credit cards issued on the Discover Network. If we are unable to continue increasing merchant acceptance or fail to improve awareness of existing merchant acceptance of our credit
cards, our ability to grow usage of Discover credit cards may be hampered. As a result of these factors, we may be unable to increase or sustain credit card usage, which could impair growth in or lead to diminishing average balances and total revenue.
A reduction in the number of large merchants that accept cards on the Discover Network or PULSE network or the rates they pay could materially adversely affect our business, financial condition, results of operations and cash flows.
Discover card net transaction dollar volume was concentrated among our top 100 merchants in 2022, with our largest merchant accounting for approximately 5% of that net transaction volume. Transaction volume on the PULSE network was also concentrated among the top 100 merchants in 2022, with our largest merchant accounting for approximately 19% of PULSE transaction volume. These merchants could seek to negotiate better pricing or other financial incentives by conditioning their continued participation in the Discover Network and/or PULSE network on a change in the terms of their economic participation. Loss of acceptance at our largest merchants would decrease transaction volume, negatively impact our brand and could cause customer attrition. In addition, some of our merchants, primarily our remaining small- and mid-size merchants, are not contractually committed to us for any period of time and may cease to participate in the Discover Network at any time on short notice.
Actual or perceived limitations on acceptance of credit cards issued on the Discover Network or debit cards issued on the PULSE network could adversely affect the use of Discover cards by existing customers and the attractiveness of Discover cards to prospective customers. Also, we may have difficulty attracting and retaining network partners if we are unable to add or retain acquirers or merchants who accept cards issued on the Discover or PULSE networks. As a result of these factors, a reduction in the number of our merchants or the rates they pay could materially adversely affect our business, financial condition, results of operations and cash flows.
Our business, financial condition and results of operations may be adversely affected by merchants’ increasing focus on the fees charged by credit card and debit card networks.
Merchant acceptance and fees are critical to the success of both our card-issuing and payment processing businesses. Merchants are concerned with the fees charged by credit card and debit card networks. They seek to negotiate better pricing or other financial incentives as a condition of continued participation in the Discover Network and PULSE network. During the past few years, merchants and their trade groups have filed numerous lawsuits against Visa, MasterCard, American Express and their card-issuing banks, claiming that their practices toward merchants, including issuer fees, violate federal antitrust laws. There can be no assurance that they will not in the future bring legal proceedings against other credit card and debit card issuers and networks, including us. Merchants also may promote forms of payment with lower fees, such as ACH-based payments, or seek to impose surcharges at the point of sale for use of credit or debit cards. Merchant groups have also promoted federal and state legislation that would restrict issuer practices or enhance the ability of merchants, individually or collectively, to negotiate more favorable fees. The heightened focus by merchants on the fees charged by credit card and debit card networks, together with the Dodd-Frank Act and recent industry litigation, which would allow merchants to encourage customers to use other payment methods or cards and may increase merchant surcharging, could lead to reduced transactions on, or merchant acceptance of, Discover Network or PULSE network cards or reduced fees, any of which could adversely affect our business, financial condition and results of operations.
Political, economic or other instability in a country or geographic region, or other unforeseen or catastrophic events, could adversely affect our business activities and reduce our revenue.
Geopolitical events, natural disasters, extreme weather-related events or other catastrophic events, including terrorist attacks and pandemics, may have a negative effect on our business and infrastructure, including our information technology systems. Climate change may exacerbate certain of these threats, including the frequency and severity of weather-related events and other natural disasters. Our Diners Club network, concentrated primarily on serving the global travel industry, could be adversely affected by a number of factors including international conditions, travel restrictions, pandemics or negative perceptions about the safety of travel that may result in an indefinite decline in consumer or business travel activity. Armed conflict, public health emergencies, natural disasters, political instability or terrorism may have a significant and prolonged negative effect on travel activity and related revenue. Although a regionalized event or condition may primarily affect one of our network participants, it may also affect our overall network and card activity and our resulting revenue. Overall network and card transaction activity may decline as a result of concerns about safety or disease or may be limited because of economic conditions that result in spending,
including on travel, to decline. The impact of such events and other catastrophes on the overall economy may also adversely affect our financial condition or results of operations.
Fraudulent activity associated with our products or our networks could cause our brands to suffer reputational damage, the use of our products to decrease and our fraud losses to be materially adversely affected.
We are subject to the risk of fraudulent activity associated with merchants, customers and other third parties handling customer information. The risk of fraud continues to increase for the financial services industry in general. Credit and debit card fraud, identity theft and electronic-transaction related crimes are prevalent and perpetrators are growing ever more sophisticated. While we have policies and procedures designed to address such risk, there can be no assurance that losses will not occur. Our resources, customer authentication methods and fraud prevention tools may be insufficient to accurately predict, prevent or detect fraud. We incurred fraud losses and other charges of $149 million and $92 million during the years ended December 31, 2022 and 2021, respectively.
Our risk of fraud continues to increase as third parties that handle confidential consumer information suffer security breaches, acceptance of the Discover card grows internationally and we expand our digital banking business and introduce new products and features. Our financial condition, the level of our fraud charge-offs and other results of operations could be materially adversely affected if fraudulent activity were to significantly increase. Furthermore, high-profile fraudulent activity could negatively impact our brand and reputation. In addition, significant increases in fraudulent activity could lead to regulatory intervention (such as mandatory card reissuance) and reputational and financial damage to our brands, which could negatively impact the use of our deposit accounts, cards and networks and thereby have a material adverse effect on our business. Further, fraudulent activity may result in lower license fee revenue from our Diners Club licensees.
The financial services and payment services industries are rapidly evolving and we may be unsuccessful in introducing new products or services on a large scale in response to these changes.
Technological changes continue to significantly impact the financial services and payment services industries. For example, we may be unsuccessful in deploying new technologies to strengthen our credit underwriting capabilities, enhance the effectiveness of our marketing efforts, ensure acceptance with new payment technologies, enhance customer service, drive efficiencies in back-office functions or reduce fraud. The increasingly competitive mobile, e-wallet and tokenization spaces are expected to continue to bring risks and opportunities to both our digital banking and payment services businesses.
The effect of technological changes on our business is both rapid and unpredictable. We depend, in part, on third parties for the development of and access to new technologies. We expect that new services and technologies relating to the payments business will continue to appear in the market and these new services and technologies may be superior to, or render obsolete, the technologies that we currently use in our products and services. Rapidly evolving technologies and new entrants in mobile and emerging payments pose a risk to us both as a card issuer and as a payments business. As a result, our future success may be dependent on our ability to identify and adapt to technological changes and evolving industry standards and to provide payment solutions for our customers, merchants and financial institution customers.
The process of developing new products and services or enhancing our existing products and services is complex, costly and uncertain. Difficulties or delays in the development, production, testing and marketing of new products or services may be caused by a number of factors including, among other things, operational, capital and regulatory constraints. The occurrence of such difficulties may affect the success of our products or services. Developing unsuccessful products and services could result in financial losses as well as decreased capital availability. In addition, the new products and services offered may not be adopted by consumers, merchants or financial institution customers. Also, the success of a new product or service may depend upon our ability to deliver it on a large scale, which may require a significant capital investment that we may not be in a position to make. If we are unable to successfully introduce and support new income-generating products and services while also managing our expenses, it may impact our ability to compete effectively and materially adversely affect our business, financial condition and results of operations.
Failure to manage our relationships with third-party service providers could result in our revenue or results of operations being materially adversely affected.
We depend on third-party service providers for many aspects of the operation of our business. For example, we depend on third parties for software and systems development, the timely transmission of information across our data
transportation network and for other telecommunications, processing, remittance, technology-related and other services in connection with our digital banking and payment services businesses. If a service provider fails to provide the services that we require or expect, or fails to meet contractual requirements, such as service levels, security requirements or compliance with applicable laws, the failure could negatively impact our business by adversely affecting our ability to process customers’ transactions in a secure, consistent, timely and accurate manner, otherwise hampering our ability to serve our customers, or subjecting us to litigation and regulatory risk for poor vendor oversight. Such a failure could adversely affect the perception of the reliability of our networks and services, and the quality of our brands, and could have a materially adverse effect on our reputation, revenues and/or our results of operations.
With the current trend toward hybrid work arrangements, we have become increasingly dependent on third-party service providers, including those with which we have no direct relationship, such as our employees’ internet service providers. If these third-parties experience service disruptions, our operations may be interrupted or negatively impacted.
If our key technology platforms become obsolete, or if we experience disruptions, including difficulties in our ability to process transactions, our revenue or results of operations could be materially adversely affected.
Our ability to deliver services to our customers and run our business in compliance with applicable laws and regulations may be affected by the functionality of our technology systems. The implementation of technology changes as well as patches and upgrades to maintain current and integrated systems may result in compliance issues and may, at least temporarily, cause disruptions to our business, including, but not limited to, systems interruptions, transaction processing errors and system conversion delays, all of which could have a negative impact on us. In addition, our transaction processing systems and other operational systems may encounter service interruptions at any time due to system or software failure, natural disaster or other reasons. Such services could be disrupted at any of our primary or back-up facilities or our other owned or leased facilities. Third parties to whom we outsource the maintenance and development of certain technological functionality may experience errors or disruptions that could adversely impact us and over which we may have limited control. In addition, there is no assurance that we will be able to sustain our investment in new technology to avoid obsolescence of critical systems and applications. A failure to maintain current technology, systems and facilities or to control third-party risk, could cause disruptions in the operation of our business, which could materially adversely affect our transaction volumes, revenues, reputation and/or our results of operations.
If we are unable to recruit, retain and motivate key officers and employees to drive our business, our business could be materially adversely affected.
Our success depends, in large part, on our ability to recruit, retain and motivate key officers and employees to manage and grow our business. Our senior management team has significant industry experience and would be difficult to replace. We believe we are in a critical period of competition in the financial services and payments industry. The market for qualified individuals is highly competitive and we may not be able to attract and retain qualified personnel or candidates to replace or succeed members of our senior management team or other key personnel or it may be expensive to do so. We may be subject to restrictions under future legislation or regulation limiting executive compensation. For example, the federal banking agencies have previously issued proposed rulemaking on incentive compensation practices for certain employees at banking organizations, including executives, and may issue additional rules relating to such activities in the future. These requirements could negatively impact our ability to compete with other companies in attracting, hiring and retaining key personnel and offer incentives that motivate our key personnel to perform and may require us to extensively restructure certain of our existing incentive compensation practices. Additionally, the market for individuals with skills in fields such as technology, advanced analytics, digital marketing and payments is increasingly competitive and we may not be able to attract and retain persons with the desired skill set or experience. If we are unable to recruit, retain and motivate key personnel to manage and grow our business well, our business could be materially adversely affected.
Merchant defaults may adversely affect our business, financial condition, cash flows and results of operations.
As an issuer and merchant acquirer in the U.S. on the Discover Network and as a holder of certain merchant agreements internationally for the Diners Club network, we may be contingently liable for certain disputed credit card sales transactions that arise between customers and merchants. If a dispute is resolved in the customer’s favor, we will cause a credit or refund of the amount to be issued to the customer and charge back the transaction to the merchant or merchant acquirer. If we are unable to collect this amount from the merchant or merchant acquirer, we will bear the loss for the amount credited or refunded to the customer. Where the purchased product or service is not provided until some
later date following the purchase, such as an airline ticket, the likelihood of potential liability increases. Losses related to merchant chargebacks were not material for the years ended December 31, 2022 and 2021.
Damage to our reputation could negatively affect our business and brand.
In recent years, financial services companies have experienced increased reputational risk as consumers protest and regulators scrutinize business and compliance practices of such companies. Maintaining a positive reputation is critical to attracting and retaining customers, investors and employees. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct; a breach of our or our service providers’ cybersecurity defenses; litigation or regulatory outcomes; failing to deliver minimum standards of service and quality; compliance failures; and the activities of customers, business partners and counterparties. Social media also can cause harm to our reputation. By its very nature, social media can reach a wide audience in a very short amount of time, which presents unique corporate communications challenges. Negative or otherwise undesirable publicity generated through unexpected social media coverage can damage our reputation and brand. Negative publicity regarding us, whether or not true, may result in customer attrition and other harm to our business prospects. There has also been increased focus on topics related to environmental, social and corporate governance policies, and criticism of our policies in these areas could also harm our reputation and/or potentially limit our access to some forms of capital or liquidity.
We may be unsuccessful in protecting or defending our brands or other intellectual property, or third parties may allege that we are infringing their intellectual property rights.
We rely on a multifaceted strategy to protect our intellectual property that takes advantage of protection such as patents, trademarks, copyrights, trade secrets and other restrictions on disclosure of confidential and proprietary information. We develop our intellectual property internally and in some cases license it from third parties.
In addition, the Discover, PULSE and Diners Club brands have substantial economic and intangible value. Our success is dependent on our ability to promote and protect these brands and our other intellectual property. Our ability to attract and retain customers is highly dependent upon the external perception of our Company and brands. We strategically license our trademarks to business partners and network participants, some of whom have contractual obligations to promote and develop our brands. For example, the Discover card brand is now being issued by certain Diners Club licensees in their local markets.
If our business partners or other third parties do not adhere to contractual standards, engage in improper business practices, or otherwise misappropriate, misuse or diminish the value of our brands or our other intellectual property, we may suffer reputational and financial damage. If we will not be able to adequately protect our brands, our proprietary information and other intellectual property, our business success may be adversely affected. In addition, third parties may allege that our developed or licensed marketing, processes or systems may infringe upon their intellectual property rights. Given the potential risks and uncertainties of such claims, our business could be adversely affected by having to pay significant monetary damages, technology development expenses or licensing fees, and we may have to alter our business practices or be prevented from competing effectively.
Laws, regulations and supervisory guidance and practices, or the application thereof, may adversely affect our business, financial condition and results of operations.
We must comply with an array of banking, consumer lending and payment services laws and regulations in all jurisdictions in which we operate as described more fully in “Business - Supervision and Regulation”, the risk factor entitled "- Financial regulatory developments have and will continue to significantly impact the environment for the financial services industry, which could adversely impact our business, results of operations and financial condition” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment and Developments.” In addition, we are subject to inquiries and enforcement actions from states’ attorney general offices and regulation by the Federal Trade Commission, state banking regulators and the U.S. Department of Justice, as well as the SEC and New York Stock Exchange in our capacity as a public company. We also are subject to the requirements of entities that set and interpret accounting standards (such as the Financial Accounting Standards Board (“FASB”), the SEC, banking regulators and our independent registered public accounting firm), which may add new requirements or change their interpretations on how standards should be applied. Guidance not yet issued could potentially have a material impact on business lines, as well as how we record and report our financial condition and results of operations, and could have an impact on regulatory capital.
Failure to comply with laws, regulations and standards could lead to adverse consequences such as financial, structural, reputational and operational penalties, including our bank subsidiary being placed in receivership, litigation exposure and disgorgement and fines (as described further below). For example, failure to comply with anti-bribery and anti-corruption laws, including the U.S. Foreign Corrupt Practices Act and other laws regarding corporate conduct, can expose us and/or individual employees to severe criminal and civil penalties.
Legislative, regulatory and tax code changes could impact the profitability of our business activities, alter consumer behavior in ways we did not anticipate, require us to limit or change our business practices or our product offerings, or expose us to additional costs (including increased compliance costs). Significant changes in laws and regulations may have a more adverse effect on our results of operations than on the results of our competitors or may disproportionately benefit our competitors.
Current and proposed laws and regulations addressing consumer privacy and data use and security could affect the competitiveness of our products and increase our costs.
Legal or regulatory pronouncements relating to consumer privacy, data use and security affect our business. We are subject to a number of laws concerning consumer privacy and data use and security such as the European Union’s General Data Protection Regulation and the California Consumer Privacy Act. Due to recent consumer data compromise events in the U.S., which resulted in unauthorized access to millions of customers’ data, these areas continue to be a focus of the U.S. Executive Branch and Congress, state legislators and attorneys general and other regulators. Developments in this area, such as new laws, regulations, regulatory guidance, litigation or enforcement actions, could result in new or different requirements on Discover and other card issuers or networks that could increase costs or adversely affect the competitiveness of our credit card or debit card products. See the discussion on recent security developments in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment and Developments” for more information. In addition, failure to comply with the privacy and data use and security laws and regulations to which we are subject, including by reason of inadvertent disclosure of confidential information or the failure to provide timely notification of a disclosure, could result in litigation, fines, sanctions, penalties or other adverse consequences and loss of consumer confidence, which could materially adversely affect our results of operations, overall business and reputation.
Litigation and regulatory actions could subject us to significant fines, penalties and/or requirements resulting in increased expenses, oversight and reputation risk.
Consumer banking and payment services institutions have historically been subject to significant legal actions, both from private and government litigants. In addition to regulatory actions, private litigants may include class action lawsuits and commercial, shareholder and patent litigation. Many of these actions have included claims for substantial compensatory, statutory or punitive damages. In addition, we have been and may again be involved in various actions or proceedings brought by governmental regulatory and enforcement agencies, which could cause reputational harm, require changes to business activities and product offerings, or subject us to significant fines, penalties, customer restitution or other requirements, resulting in increased expenses. See Note 19: Litigation and Regulatory Matters to our consolidated financial statements for more information on current matters affecting us.
Historically, we have offered customers an arbitration clause in agreements to quickly and economically resolve disputes. The arbitration clause has, in some cases, also limited our exposure to consumer class action litigation, while still being able to resolve individual customer disputes. However, there is no guarantee that we will be able to continue to offer arbitration clauses in the future or that we will be successful in enforcing the arbitration clause in court. Legal challenges to the enforceability of these clauses may cause us to discontinue their use. In addition to court enforceability uncertainty, there have been bills pending in the U.S. Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses in some or all consumer banking products.
We may be limited in our ability to pay dividends on and repurchase our stock.
We increased our quarterly common stock dividend in 2022 to $0.60 per share, an increase of $0.10 per share from the previous rate of $0.50 per share and repurchased approximately 7.5% of our outstanding common stock under our share repurchase program in 2022. The declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of our Board of Directors. The amount and size of any future dividends and share repurchases will depend upon regulatory limitations imposed by the Federal Reserve and our results of operations, financial condition, capital levels, cash requirements, future prospects, regulatory review and other factors as further described in “Business - Supervision and Regulation - Capital, Dividends and Share Repurchases.” Holders of our
shares of common stock are subject to the prior dividend rights of holders of our preferred stock or the depositary shares representing such preferred stock outstanding. No dividend may be declared or paid on or set aside for payment on our common stock if full dividends have not been declared and paid on all outstanding shares of our preferred stock in any dividend period. Banking laws and regulations and our banking regulators may limit or prohibit our payment of dividends on or our repurchase of our stock at any time. There can be no assurance that we will declare and pay any dividends on or repurchase our stock in the future.
We are a holding company and depend on payments from our subsidiaries.
Discover Financial Services, our parent holding company, depends on dividends, distributions and other payments from its subsidiaries, particularly Discover Bank, to fund its dividend payments, share repurchases, payments on its obligations, including debt obligations, and to provide funding and capital as needed to its operating subsidiaries. Banking laws and regulations and our banking regulators may limit or prohibit our transfer of funds freely, either to or from our subsidiaries, at any time. These laws, regulations and rules may hinder our ability to access funds that we may need to make payments on our obligations or otherwise achieve strategic objectives. For more information, see “Business - Supervision and Regulation - Capital, Dividends and Share Repurchases.”
Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K and materials we have filed or will file with the SEC (as well as information included in our other written or oral statements) contain or will contain certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” “forecasts,” and other similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could,” are intended to identify such forward-looking statements. You should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this annual report on Form 10-K, including those described under “Risk Factors.” The statements are only as of the date they are made and we undertake no obligation to update any forward-looking statement.
Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following:
•changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence and consumer debt and investor sentiment;
•the impact of current, pending and future legislation, regulation, supervisory guidance and regulatory and legal actions, including, but not limited to, those related to accounting guidance, tax reform, financial regulatory reform, consumer financial services practices, anti-corruption and funding, capital and liquidity;
•the actions and initiatives of current and potential competitors;
•our ability to manage our expenses;
•our ability to successfully achieve card acceptance across our networks and maintain relationships with network participants and merchants;
•our ability to sustain our card, private student loan and personal loan growth;
•our ability to increase or sustain Discover card usage or attract new customers;
•difficulty obtaining regulatory approval for financing, closing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies;
•our ability to manage our credit risk, market risk, liquidity risk, operational risk, compliance and legal risk and strategic risk;
•the availability and cost of funding and capital;
•access to deposit, securitization, equity, debt and credit markets;
•the impact of rating agency actions;
•the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices;
•losses in our investment portfolio;
•limits on our ability to pay dividends and repurchase our common stock;
•limits on our ability to receive payments from our subsidiaries;
•fraudulent activities or material security breaches of our or others’ key systems;
•our ability to remain organizationally effective;
•the effect of political, economic and market conditions, geopolitical events, climate change, pandemics and unforeseen or catastrophic events;
•our ability to introduce new products or services;
•our ability to manage our relationships with third-party vendors, as well as those with which we have no direct relationship such as our employees’ internet service providers;
•our ability to maintain current technology and integrate new and acquired systems and technology;
•our ability to collect amounts for disputed transactions from merchants and merchant acquirers;
•our ability to attract and retain employees;
•our ability to protect our reputation and our intellectual property;
•our ability to comply with regulatory requirements; and
•new lawsuits, investigations or similar matters or unanticipated developments related to current matters.
We routinely evaluate and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or our debt or equity securities.
The foregoing review of important factors should not be construed as exclusive and should be read in conjunction with the other cautionary statements that are included in this annual report on Form 10-K. These factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. Except for any ongoing obligations to disclose material information as required under U.S. federal securities laws, we do not have any intention or obligation to update forward-looking statements after we distribute this annual report on Form 10-K, whether as a result of new information, future developments or otherwise.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
Our principal properties are located in the U.S. and include our corporate headquarters, our call centers and a processing center. Our corporate headquarters is used by both our Digital Banking and Payment Services segments and the call centers and processing center largely support our Digital Banking segment. We also have various offices located outside the U.S. that primarily support our Payment Services segment.
We have begun to reconfigure certain locations as we continue to work to optimize our physical space. As a result, our call centers and processing center are being utilized to a reasonable capacity. We believe our facilities that support both our Digital Banking and Payment Services segments are suitable and adequate to meet our current and projected needs.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
For a description of legal proceedings, see Note 19: Litigation and Regulatory Matters to our consolidated financial statements.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
None.
Part II.
Part II | Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange (ticker symbol DFS). As of February 17, 2023, there were approximately 38,376 holders of record of our common stock.
Issuer Purchases of Equity Securities
The following table sets forth information regarding purchases of our common stock related to our share repurchase program and employee transactions made by us or on our behalf during the most recent quarter:
Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan or Program(1)
Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs(1)
October 1-31, 2022
Repurchase program(1)(2)
- $ - - $ 3,389,926,238
Employee transactions(3)
1,224 $ 97.44 N/A N/A
November 1-30, 2022
Repurchase program(1)
850,874 $ 107.77 850,874 $ 3,298,228,352
Employee transactions(3)
5,312 $ 103.84 N/A N/A
December 1-31, 2022
Repurchase program(1)
5,031,837 $ 101.08 5,031,837 $ 2,789,626,246
Employee transactions(3)
3,790 $ 105.09 N/A N/A
Total
Repurchase program(1)
5,882,711 $ 102.04 5,882,711 $ 2,789,626,246
Employee transactions(3)
10,326 $ 103.54 N/A N/A
(1)In April 2022, our Board of Directors approved a new share repurchase program authorizing the purchase of up to $4.2 billion of our outstanding shares of common stock through June 30, 2023. This share repurchase authorization replaced our prior $2.4 billion share repurchase program, that expired on March 31, 2022.
(2)In July 2022, share repurchases were suspended because of an internal investigation relating to our student loan servicing practices and related compliance matters. Share repurchases resumed in November 2022 with the completion of the investigation. See "- Liquidity and Capital Resources - Capital" for additional information.
(3)Reflects shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock options.
Stock Performance Graph
The following graph compares the cumulative total stockholder return of our common stock, the S&P 500 Financials Index and the S&P 500 Index for the period from December 31, 2017 through December 31, 2022. The graph assumes an initial investment of $100 on December 31, 2017. The cumulative returns include stock price appreciation and assume full reinvestment of dividends. This graph does not forecast future performance of our common stock.
December 31,
2017 2018 2019 2020 2021 2022
Discover Financial Services $ 100.00 $ 78.22 $ 114.94 $ 126.52 $ 164.21 $ 141.93
S&P 500 Financials Index $ 100.00 $ 86.96 $ 114.87 $ 112.85 $ 152.20 $ 136.11
S&P 500 Index $ 100.00 $ 95.61 $ 125.70 $ 148.81 $ 191.48 $ 156.77
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this annual report on Form 10-K particularly under “Risk Factors” and “Special Note Regarding Forward-Looking Statements,” which immediately follows “Risk Factors.” Unless otherwise specified, references to Notes to our consolidated financial statements are to the Notes to our audited consolidated financial statements as of December 31, 2022 and 2021 and for years ended December 31, 2022, 2021 and 2020.
Introduction and Overview
Discover Financial Services (“DFS”) is a digital banking and payment services company. We provide digital banking products and services and payment services through our subsidiaries. We offer our customers credit card loans, private student loans, personal loans, home loans and deposit products. We also operate the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”), collectively known as the Discover Global Network. 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 and merchant acceptance throughout the United States of America (“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 credit and charge cards and/or provide card acceptance services.
Our primary revenues consist of interest income earned on loan receivables and fees earned from customers, financial institutions, merchants and issuers. The primary expenses required to operate our business include funding costs (interest expense), credit loss provisions, customer rewards and expenses incurred to grow, manage and service our loan receivables and networks. Our business activities are funded primarily through consumer deposits, securitization of loan receivables and the issuance of unsecured debt.
2022 Highlights
The highlights below compare results as of and for the year ended December 31, 2022 against results as of and for the year ended December 31, 2021.
•Net income was $4.4 billion, or $15.50 per diluted share, compared to net income of $5.4 billion, or $17.83 per diluted share, in the prior year.
•Total loans grew $18.4 billion, or 20%, to $112.1 billion.
•Credit card loans grew $15.7 billion, or 21%, to $90.1 billion.
•The net charge-off rate for credit card loans decreased 4 basis points to 2.05% and the delinquency rate for credit card loans over 30 days past due increased 87 basis points to 2.53%.
•Direct-to-consumer deposits grew $8.6 billion, or 14%, to $70.5 billion.
•Payment Services transaction volume for the segment was $331.1 billion, up 5%.
Outlook
The outlook below provides our current expectations for our financial results based on market conditions, the regulatory and legal environment and our business strategies.
•We expect continued loan growth driven by recent account growth, moderation in the payment rate and our current expectations of sales trends.
•Based on the current interest rate environment, net interest margin is expected to modestly increase in comparison to 2022.
•We expect the total net charge-off rate to increase, in comparison to the prior year, driven by continued credit normalization and seasoning of recent vintages.
•Total expenses are expected to increase, driven by employee compensation and benefits expense from higher headcount and marketing and business development expense, and we remain committed to managing expenses while continuing to make investments in profitable long-term growth.
Regulatory Environment and Developments
Banking
Capital Standards and Stress Testing
As a bank holding company, DFS is subject to mandatory supervisory stress tests every other year and is required to submit annual capital plans to the Federal Reserve based on forward-looking internal analysis of income and capital levels under expected and stressful conditions. DFS is also subject to capital buffer requirements, including the Stress Capital Buffer ("SCB"), which requires maintenance of regulatory capital levels above a threshold established based on the results of supervisory stress tests after accounting for planned dividend payments.
In January 2021, the Federal Reserve finalized regulatory amendments that made targeted changes to the capital planning, regulatory reporting and SCB requirements for firms subject to Category IV standards, including DFS, to be consistent with the Federal Reserve’s regulatory tailoring framework. The final rules generally align to instructions the Federal Reserve previously provided to Category IV firms regarding their respective capital plan submissions. The amended rules also provide Category IV firms with the option to submit to supervisory stress tests during off years if they wish for the Federal Reserve to reset the stress test portion of their SCB requirement. The Federal Reserve also revised the scope of application of its existing regulatory guidance for capital planning to align with the tailoring framework. However, the timing and substance of any additional changes to existing guidance or new guidance are uncertain.
In June 2021, the Federal Reserve announced the results of its supervisory stress tests for the firms required to participate in the 2021 Comprehensive Capital Analysis and Review (“CCAR”) process. In accordance with the capital plan rule amendments, DFS elected not to participate in the 2021 supervisory stress tests. Nevertheless, DFS was required to submit a capital plan based on a forward-looking internal assessment of income and capital under baseline and stressful conditions. The Federal Reserve thereafter used our 2021 capital plan submission to assess its capital planning process and positions and, in August 2021, announced DFS' adjusted SCB requirement of 3.6% to reflect DFS' planned common stock dividends. This adjusted SCB is effective through October 1, 2022. Discover was a full participant in the 2022 CCAR process and submitted the 2022 Capital Plan to the Federal Reserve by the April 5, 2022 due date.
In June 2022, the Federal Reserve released results of the 2022 CCAR exercise. Discover’s results showed strong capital levels under stress, well above regulatory minimums. These results were used to set the new SCB effective October 1, 2022. In August 2022, the Federal Reserve established the new SCB for DFS is 2.5%, the lowest possible requirement.
London Interbank Offered Rate
In July 2017, the UK Financial Conduct Authority ("FCA") announced that it would no longer encourage or compel banks to continue to contribute quotes and maintain the London Interbank Offered Rate ("LIBOR") after 2021. To support a smooth transition away from LIBOR, the Federal Reserve and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee ("ARRC"), a group of private-market participants tasked with facilitating a successful transition from U.S. dollar ("USD") LIBOR to a more robust reference rate. The ARRC identified the Secured Overnight Financing Rate ("SOFR") as its recommended alternative reference rate for USD LIBOR. The ARRC has also established several priorities and milestones to support the use of SOFR and SOFR-based indices,
including developing contractual “fallback” language for capital markets and consumer products; providing clarity on legal, tax, accounting and regulatory matters; promoting broad outreach and education efforts around the LIBOR transition; and recommending spread adjustments for SOFR and SOFR-based indices, which will be of critical importance to market participants once USD LIBOR settings cease in 2023.
In March 2021, the FCA announced the future cessation and loss of representativeness for all LIBOR benchmark settings. While non-USD and several less frequently referenced USD LIBOR settings ceased publication immediately after December 31, 2021, commonly referenced USD LIBOR settings will cease publication immediately after June 30, 2023; this future cessation event will trigger fallback provisions in many financial contracts that require conversion of the benchmark index from LIBOR to an alternative rate. In July 2021, the ARRC announced its recommendation of forward-looking term rates based on SOFR as additional alternative reference rate options.
In December 2021, the Consumer Financial Protection Bureau (“CFPB”) finalized a rule to facilitate transition from LIBOR, which became effective on April 1, 2022. Specifically, this final rule provides guidance on LIBOR replacements and the LIBOR transition for purposes of Regulation Z. We have communicated with the CFPB regarding our plans for the LIBOR transition.
A cross-functional team is overseeing and managing our transition away from the use of LIBOR. This team assesses evolving industry and marketplace norms and conventions for LIBOR-indexed instruments, evaluates the impacts stemming from the future cessation of LIBOR publication and oversees and takes actions to transition our LIBOR exposures to alternative benchmark rates, usually SOFR. Our existing LIBOR exposures are limited to two instruments - variable-rate student loans and capital markets securities.
As of December 31, 2022, LIBOR-indexed variable-rate loans comprised approximately 39% of our private student loan portfolio and approximately 4% of our aggregate loan portfolio. These outstanding student loans indexed to LIBOR will convert to a SOFR index in 2023 when 3-month USD LIBOR ceases to be a representative reference rate. As of November 2021, we no longer originate new variable-rate student loans indexed to LIBOR. Instead, new originations of such loans are indexed solely to 3-month term SOFR published by the Chicago Mercantile Exchange.
We ceased entering into new LIBOR-indexed interest rate derivatives in 2018 and have since actively reduced LIBOR exposures in our derivatives portfolio. During the third quarter of 2021, we terminated our last LIBOR-indexed interest rate swap maturing after June 2023; our last LIBOR-indexed interest rate swap matured in January 2022.
Most of our capital markets securities indexed to USD LIBOR are floating-rate asset-backed securities. Beginning in 2018, we included fallback provisions in all newly-issued securities that will facilitate an orderly transition from LIBOR to an appropriate reference rate, which may be based on SOFR, once 1- and 3-month LIBOR cease to be published after June 2023. Approximately $1.5 billion of our capital markets securities that mature after June 2023 with no fallback provisions would be covered under federal legislation enacted in March 2022. This legislation would allow us to replace the LIBOR index with SOFR under a safe harbor provision. Approximately $500 million of our capital markets securities have a rate reset in August 2023 that contains a fallback provision that may not be covered under the federal LIBOR legislation; however, we may decide to exercise our right to call and redeem those securities on their reset date.
We have prepared for the cessation of USD LIBOR by taking steps to avoid new exposures and actively reduce our remaining exposures. We completed scheduled transition work before year-end 2021, including providing our stakeholders with information about the cessation of USD LIBOR and how it will affect their contracts with us. The transition process will continue through the end of 2023.
Consumer Financial Services
The CFPB regulates consumer financial products and services and examines certain providers of consumer financial products and services, including Discover. The CFPB’s authority includes rulemaking, supervisory and enforcement powers with respect to federal consumer protection laws; preventing “unfair, deceptive or abusive acts or practices” (“UDAAP”) and ensuring that consumers have access to fair, transparent and competitive financial products and services. Historically, the CFPB’s policy priorities focused on several financial products of the type we offer (e.g., credit cards and other consumer lending products). In addition, the CFPB is required by statute to undertake certain actions including its biennial review of the consumer credit card market.
Under Director Rohit Chopra’s leadership, the CFPB’s priorities have focused on and are expected to continue focusing on, among other things, increased enforcement of existing consumer protection laws, with a particular focus on
fees charged to consumers, UDAAP, fair lending, student lending and servicing, debt collection and credit reporting. Additionally, detection of repeat offenders, such as companies that violate a formal court or agency order, has become a priority for the CFPB. Director Chopra, in March 2022, identified, as repeat offenders, several companies that have had multiple enforcement actions, including us. The CFPB has recently taken action against financial institutions for violating prior enforcement actions. Enhanced regulatory requirements, potential supervisory findings, or enforcement actions and ratings could negatively impact our ability to implement certain consumer-focused enhancements to product features and functionality and business strategies, limit or change our business practices, limit our consumer product offerings, cause us to invest more management time and resources in compliance efforts or limit our ability to obtain related required regulatory approvals. The additional expense, time and resources needed to comply with ongoing or new regulatory requirements may adversely impact the cost of and access to credit for consumers and results of business operations.
In December 2020, certain of our subsidiaries entered into a consent order with the CFPB regarding identified private student loan servicing practices. See Note 19: Litigation and Regulatory Matters to our consolidated financial statements for more information.
Data Security and Privacy
Policymakers at the federal and state levels remain focused on enhancing data security and data breach incident response requirements. Furthermore, regulations and legislation at various levels of government have been proposed and enacted to augment consumer data privacy standards. The California Consumer Privacy Act ("CCPA") creates a broad set of privacy rights and remedies modeled in part on the European Union's General Data Protection Regulation. The CCPA went into effect in January 2020, and the California Attorney General’s final regulations became effective in August 2020, with enforcement beginning in July 2020. The California Privacy Rights Act ("CPRA"), a ballot measure led by the original proponent of the CCPA, passed in November 2020, with an effective date of January 1, 2023, and enforcement set to begin on July 1, 2023. The CPRA replaces the CCPA to enhance consumer privacy protections further and creates a new California Privacy Protection Agency (“CPPA”). The CPPA Board released a Notice of Proposed Rulemaking with final regulations still forthcoming. While the CPRA retains an exemption for information collected, processed, sold, or disclosed subject to the Gramm-Leach-Bliley Act, we continue to evaluate the impact of the CPRA on our businesses and other providers of consumer financial services.
Environmental, Social and Governance Matters
Environmental, social and governance (“ESG”) issues, including climate change, human capital and governance practices, are a significant area of focus by lawmakers at the state and federal levels, regulatory agencies, shareholders and other stakeholders. Proposed legislation and rulemakings have been issued or are being considered, including proposals to require disclosure of climate, cybersecurity and other ESG metrics and risk. The potential impact to us of these legislative and regulatory developments is uncertain at this time.
In particular, in March 2022, the Securities and Exchange Commission proposed climate-related disclosure requirements. Through an enterprise-wide working group, we continue to assess the potential impact of the proposed rules, if adopted.
Results of Operations
The discussion below provides a summary of our results of operations and information about our loan receivables as of and for the year ended December 31, 2022, compared to the year ended December 31, 2021. Refer to our annual report on Form 10-K for the year ended December 31, 2021, for discussion of our results of operations and loan receivables information as of and for the year ended December 31, 2021, compared to the year ended December 31, 2020.
Segments
We manage our business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. For a detailed description of the operations of each segment, as well as the allocation conventions used in our business segment reporting, see Note 22: Segment Disclosures to our consolidated financial statements.
The following table presents segment data (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Digital Banking
Interest income
Credit card loans $ 10,632 $ 8,717 $ 8,985
Private student loans 831 742 754
Personal loans 872 878 958
Other loans 167 114 106
Other interest income 362 200 292
Total interest income 12,864 10,651 11,095
Interest expense 1,865 1,134 1,865
Net interest income 10,999 9,517 9,230
Provision for credit losses 2,359 218 5,134
Other income 2,162 1,781 1,459
Other expense 5,069 4,549 4,292
Income before income tax expense 5,733 6,531 1,263
Payment Services
Other income 176 789 399
Other expense 167 256 227
Income before income tax expense 9 533 172
Total income before income tax expense $ 5,742 $ 7,064 $ 1,435
The following table presents information on transaction volume (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Network Transaction Volume
PULSE Network $ 253,072 $ 247,913 $ 212,081
Network Partners 44,542 40,707 31,917
Diners Club(1)
33,505 25,937 24,236
Total Payment Services 331,119 314,557 268,234
Discover Network - Proprietary(2)
218,738 188,960 148,754
Total Network Transaction Volume $ 549,857 $ 503,517 $ 416,988
Transactions Processed on Networks
Discover Network 3,617 3,259 2,624
PULSE Network 6,200 5,632 4,954
Total Transaction Processed on Networks 9,817 8,891 7,578
Credit Card Volume
Discover Card Volume(3)
$ 224,477 $ 192,755 $ 153,943
Discover Card Sales Volume(4)
$ 210,645 $ 182,125 $ 142,800
(1)Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment.
(2)Represents gross Discover card sales volume on the Discover Network.
(3)Represents Discover card activity related to sales net of returns, balance transfers, cash advances and other activity.
(4)Represents Discover card activity related to sales net of returns.
Digital Banking
Our Digital Banking segment reported pretax income of $5.7 billion for the year ended December 31, 2022, as compared to $6.5 billion for the year ended December 31, 2021.
Net interest income increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily driven by a higher average level of receivables and higher yield on loans, partially offset by higher funding costs. Interest income increased compared to the prior year primarily due to a higher average level of loan receivables and higher market rates. Interest expense increased compared to the prior year primarily due to higher funding costs driven by higher market rates and a larger funding base.
For the year ended December 31, 2022, the provision for credit losses increased as compared to the year ended December 31, 2021, primarily driven by continued loan growth. For a detailed discussion on provision for credit losses, see “- Loan Quality - Provision and Allowance for Credit Losses.”
Total other income for the Digital Banking segment increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to increases in net discount and interchange revenue and loan fee income. The increase in discount and interchange revenue was partially offset by an increase in rewards, both of which were driven by higher sales volume. Loan fee income increased primarily due to higher volume of late payments.
Total other expense increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to increases in marketing and business development, employee compensation and benefits and professional fees. The increase in marketing and business development was driven by growth investments in card and consumer banking. Employee compensation and benefits increased primarily from higher headcount. The increase in professional fees was due primarily to investments in technology and increased consulting costs.
Discover card sales volume was $210.6 billion for the year ended December 31, 2022, which was an increase of 15.7% as compared to the year ended December 31, 2021. This volume growth was primarily driven by higher consumer spending across all spending categories.
Payment Services
Our Payment Services segment reported pretax income of $9 million for the year ended December 31, 2022, as compared to pretax income of $533 million for the year ended December 31, 2021. The decrease in segment pretax income was primarily due to net losses on equity investments as a result of a decrease in the fair value of those investments.
Critical Accounting Estimates
In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”), management must make judgments and use estimates and assumptions about the effects of matters that are uncertain. For estimates that involve a high degree of judgment and subjectivity, it is possible that different estimates could reasonably be derived for the same period. For estimates that are particularly sensitive to changes in economic or market conditions, significant changes to the estimated amount from period to period are also possible. Management believes the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts in our consolidated financial statements, the resulting changes could have a material effect on our consolidated results of operations and, in certain cases, could have a material effect on our consolidated financial condition. Management has identified the estimates related to our allowance for credit losses as a critical accounting estimate.
Allowance for Credit Losses
The allowance for credit losses was $7.4 billion at December 31, 2022, which reflects a $552 million build from the amount of the allowance for credit losses at December 31, 2021. The allowance for credit losses represents management’s estimate of expected credit losses over the remaining expected life of our financial assets measured at amortized cost. Changes in the allowance for credit losses, and in the related provision for credit losses, can materially affect net income.
In estimating the expected credit losses, we use a combination of statistical models and qualitative analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced to estimate the allowance for credit losses. For more information on these judgments and our accounting policies and methodologies used to determine the allowance for credit losses, see "- Loan Quality," Note 4: Loan Receivables and Note 2: Summary of Significant Accounting Policies to our consolidated financial statements.
One of the key assumptions requiring significant judgment in estimating the current expected credit losses (“CECL”) on a quarterly basis is the determination of the macroeconomic forecasts used in the loss forecast models. For the reasonable and supportable loss forecast period, we consider forecasts of multiple economic scenarios that generally include a base scenario with one or more optimistic (upside) or pessimistic (downside) scenarios. These scenarios comprise a variety of macroeconomic variables, including annualized gross domestic product growth and unemployment rate. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal and third-party economists and industry trends. Assumptions about the macroeconomic environment are inherently uncertain and, as a result, actual changes in the allowance for credit losses may be different from the simulated scenario presented below.
To demonstrate the sensitivity of the estimated credit losses to the macroeconomic scenarios, we measured the impact of altering the weighting of macroeconomic scenarios used in our loss forecast. Our allowance for credit losses would increase by approximately $589 million at December 31, 2022 if we applied 100% weight to the most adverse scenario in our sensitivity analysis to reflect continued inflationary pressures, including persistent supply-chain disruptions and the influence of geopolitical events, as well as high interest rates.
The sensitivity disclosed above is hypothetical. It is difficult to estimate how potential changes in any one factor or input, such as the weighting of macroeconomic forecasts, might affect the overall allowance for credit losses because we consider a variety of factors and inputs in estimating the allowance for credit losses. The macroeconomic scenarios used are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. The inputs in the macroeconomic scenarios may not change at the same rate and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor or input may offset deterioration in others. As a result, the sensitivity analysis above does not necessarily reflect the nature and extent of
future changes in the allowance for credit losses. It is intended to provide insights into the impact of different judgments about the economy on our modeled loss estimates for the loan portfolio and does not imply any expectation of future losses. Furthermore, the hypothetical increase in our allowance for credit losses for loans does not incorporate the impact of management judgment for qualitative factors applied in the current allowance for credit losses, which may have a positive or negative effect on our actual financial condition and results of operations.
The overall economic environment directly impacts the macroeconomic variables that are used in the loss forecast models. If management used different assumptions about the economic environment in estimating expected credit losses, the impact to the allowance for credit losses could have a material effect on our consolidated financial condition and results of operations. In addition, if we experience significant instability in the economic environment, the uncertainty around the credit loss forecasts may increase, both due to the uncertainty of the economic forecasts and the challenges our models may have in incorporating them.
Earnings Summary
The following table outlines changes in our consolidated statements of income (dollars in millions):
For the Years Ended December 31, 2022 vs. 2021
Increase (Decrease) 2021 vs. 2020
(Decrease) Increase
2022 2021 2020 $ % $ %
Interest income $ 12,864 $ 10,651 $ 11,095 $ 2,213 21 % $ (444) (4) %
Interest expense 1,865 1,134 1,865 731 64 % (731) (39) %
Net interest income 10,999 9,517 9,230 1,482 16 % 287 3 %
Provision for credit losses 2,359 218 5,134 2,141 NM (4,916) (96) %
Net interest income after provision for credit losses 8,640 9,299 4,096 (659) (7) % 5,203 127 %
Other income 2,338 2,570 1,858 (232) (9) % 712 38 %
Other expense 5,236 4,805 4,519 431 9 % 286 6 %
Income before income tax expense 5,742 7,064 1,435 (1,322) (19) % 5,629 392 %
Income tax expense 1,350 1,615 294 (265) (16) % 1,321 449 %
Net income $ 4,392 $ 5,449 $ 1,141 $ (1,057) (19) % $ 4,308 378 %
Net income allocated to common stockholders $ 4,304 $ 5,351 $ 1,104 $ (1,047) (20) % $ 4,247 385 %
Net Interest Income
The tables that follow this section have been provided to supplement the discussion below and provide further analysis of net interest income, net interest margin and the impact of rate and volume changes on net interest income. Net interest income represents the difference between interest income earned on our interest-earning assets and the interest expense incurred to finance those assets. We analyze net interest income in total by calculating net interest margin (net interest income as a percentage of average total loan receivables) and net yield on interest-earning assets (net interest income as a percentage of average total interest-earning assets). We also separately consider the impact of the level of loan receivables and the related interest yield and the impact of the cost of funds related to each of our funding sources, along with the income generated by our liquidity portfolio, on net interest income.
Our interest-earning assets consist of: (i) cash and cash equivalents primarily related to amounts on deposit with the Federal Reserve Bank of Philadelphia, (ii) restricted cash, (iii) other short-term investments, (iv) investment securities and (v) loan receivables. Our interest-bearing liabilities consist primarily of deposits, both direct-to-consumer and brokered, and long-term borrowings, including amounts owed to securitization investors. The following factors influence net interest income:
•The level and composition of loan receivables, including the proportion of credit card loans to other loans, as well as the proportion of loan receivables bearing interest at promotional rates as compared to standard rates;
•The credit performance of our loans, particularly with regard to charge-offs of finance charges, which reduce interest income;
•The terms of long-term borrowings and certificates of deposit upon initial offering, including maturity and interest rate;
•The interest rates necessary to attract and maintain direct-to-consumer deposits;
•The level and composition of other interest-earning assets, including our liquidity portfolio, and interest-bearing liabilities;
•Changes in the interest rate environment, including the levels of interest rates and the relationships among interest rate indices, such as the prime rate, the federal funds rate, the interest rate on reserve balances, LIBOR and SOFR; and
•The effectiveness of interest rate swaps in our interest rate risk management program.
Net interest income increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily driven by a higher average level of receivables and higher yield on loans, partially offset by higher funding costs. Interest income increased compared to the prior year primarily due to a higher average level of loan receivables and higher market rates. Interest expense increased compared to the prior year primarily due to higher funding costs driven by higher market rates and a larger funding base.
Average Balance Sheet Analysis
(dollars in millions)
For the Years Ended December 31,
2022 2021 2020
Average Balance Yield/Rate Interest Average Balance Yield/Rate Interest Average
Balance Yield/Rate Interest
Assets
Interest-earning assets
Cash and cash equivalents $ 9,279 1.89 % $ 175 $ 14,236 0.13 % $ 18 $ 11,348 0.30 % $ 35
Restricted cash 515 1.48 % 8 695 0.03 % NM 438 0.45 % 2
Other short-term investments - - - 176 0.12 % NM 2,677 0.14 % 4
Investment securities 6,988 2.57 % 179 8,713 2.09 % 182 11,431 2.21 % 252
Loan receivables(1)
Credit card loans(2)(3)
79,243 13.42 % 10,632 69,365 12.57 % 8,717 71,447 12.58 % 8,985
Private student loans 10,240 8.11 % 831 10,057 7.38 % 742 9,890 7.63 % 754
Personal loans 7,295 11.95 % 872 6,945 12.64 % 878 7,406 12.93 % 958
Other 2,895 5.77 % 167 2,054 5.57 % 114 1,660 6.35 % 105
Total loan receivables 99,673 12.54 % 12,502 88,421 11.82 % 10,451 90,403 11.95 % 10,802
Total interest-earning assets 116,455 11.05 % 12,864 112,241 9.49 % 10,651 116,297 9.54 % 11,095
Allowance for credit losses (6,820) (7,351) (7,301)
Other assets 6,070 6,237 5,853
Total assets(4)
$ 115,705 $ 111,127 $ 114,849
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits $ 23,988 2.02 % 484 $ 23,928 1.84 % 440 $ 32,226 2.40 % 772
Money market deposits(5)
8,453 1.67 % 141 8,142 0.53 % 43 7,774 1.10 % 85
Other interest-bearing savings deposits 44,276 1.43 % 632 40,912 0.43 % 178 35,077 1.06 % 374
Total interest-bearing deposits 76,717 1.64 % 1,257 72,982 0.91 % 661 75,077 1.64 % 1,231
Borrowings
Short-term borrowings 225 0.70 % 2 72 0.18 % NM 1,024 3.10 % 32
Securitized borrowings(6)(7)(8)
9,060 2.41 % 219 9,627 1.06 % 102 12,521 1.44 % 181
Other long-term borrowings(7)(8)(9)
9,334 4.15 % 387 9,888 3.75 % 371 10,996 3.83 % 421
Total borrowings 18,619 3.26 % 608 19,587 2.42 % 473 24,541 2.58 % 634
Total interest-bearing liabilities 95,336 1.96 % 1,865 92,569 1.23 % 1,134 99,618 1.87 % 1,865
Other liabilities and stockholders’ equity(10)
20,369 18,558 15,231
Total liabilities and stockholders’ equity $ 115,705 $ 111,127 $ 114,849
Net interest income $ 10,999 $ 9,517 $ 9,230
Net interest margin(11)
11.04 % 10.76 % 10.21 %
Net yield on interest-earning assets(12)
9.45 % 8.48 % 7.94 %
Interest rate spread(13)
9.09 % 8.26 % 7.67 %
(1)Average balances of loan receivables and yield calculations include non-accruing loans. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.
(2)Interest income on credit card loans includes $365 million, $295 million and $298 million of amortization of balance transfer fees for the years ended December 31, 2022, 2021 and 2020, respectively.
(3)Includes the impact of interest rate swap agreements used to change a portion of floating-rate assets to fixed-rate assets for the years ended December 31, 2022, 2021 and 2020.
(4)The return on average assets, based on net income, was 3.80%, 4.90% and 0.99% for the years ended December 31, 2022, 2021 and 2020, respectively.
(5)Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding for the year ended December 31, 2020.
(6)Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the years ended December 31, 2022, 2021 and 2020.
(7)Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding for the years ended December 31, 2022, 2021 and 2020.
(8)Includes the impact of terminated derivatives formerly designated as fair value hedges for the years ended December 31, 2022 and 2021.
(9)Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding for the year ended December 31, 2022.
(10)The return on average stockholders’ equity, based on net income, was 31.00%, 43.12% and 11.28% for the years ended December 31, 2022, 2021 and 2020, respectively.
(11)Net interest margin represents net interest income as a percentage of average total loan receivables.
(12)Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
(13)Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
Rate/Volume Variance Analysis(1)
(dollars in millions)
Year Ended December 31, 2022 vs. Year Ended December 31, 2021 vs.
Year Ended December 31, 2021 Year Ended December 31, 2020
Volume Rate Total Volume Rate Total
Increase/(Decrease) in net interest income due to changes in:
Interest-earning assets
Cash and cash equivalents $ (9) $ 166 $ 157 $ 7 $ (24) $ (17)
Restricted cash - 8 8 1 (3) (2)
Other short-term investments - - - (3) (1) (4)
Investment securities (40) 37 (3) (57) (13) (70)
Loan receivables
Credit card loans 1,299 616 1,915 (261) (7) (268)
Private student loans 14 75 89 13 (25) (12)
Personal loans 43 (49) (6) (59) (21) (80)
Other 48 5 53 23 (14) 9
Total loan receivables 1,404 647 2,051 (284) (67) (351)
Total interest income 1,355 858 2,213 (336) (108) (444)
Interest-bearing liabilities
Interest-bearing deposits
Time deposits 1 43 44 (174) (158) (332)
Money market deposits 2 96 98 4 (46) (42)
Other interest-bearing savings deposits 15 439 454 54 (250) (196)
Total interest-bearing deposits 18 578 596 (116) (454) (570)
Borrowings
Short-term borrowings 1 1 2 (16) (16) (32)
Securitized borrowings (6) 123 117 (37) (42) (79)
Other long-term borrowings (22) 38 16 (42) (8) (50)
Total borrowings (27) 162 135 (95) (66) (161)
Total interest expense (9) 740 731 (211) (520) (731)
Net interest income $ 1,364 $ 118 $ 1,482 $ (125) $ 412 $ 287
(1) The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances between the years ended December 31, 2022, 2021 and 2020 based on the percentage of the rate or volume variance to the sum of the two absolute variances.
Loan Quality
Loan receivables consist of the following (dollars in millions):
December 31,
2022 2021
Credit card loans $ 90,113 $ 74,369
Other loans
Private student loans 10,308 10,113
Personal loans 7,998 6,936
Other loans 3,701 2,266
Total other loans 22,007 19,315
Total loan receivables 112,120 93,684
Allowance for credit losses (7,374) (6,822)
Net loan receivables $ 104,746 $ 86,862
Provision and Allowance for Credit Losses
Provision for credit losses is the expense related to maintaining the allowance for credit losses at an appropriate level to absorb the estimate of credit losses anticipated over the remaining expected life of loan receivables at each period end date. In deriving the estimate of expected credit losses, we consider the collectability of principal, interest and fees associated with our loan receivables. We also consider expected recoveries of amounts that were either previously charged-off or are expected to be charged-off. Establishing the estimate for expected credit losses requires significant management judgment. The factors that influence the provision for credit losses include:
•Increases or decreases in outstanding loan balances, including:
•Changes in consumer spending, payment and credit utilization behaviors;
•The level of new account and loan originations and loan maturities; and
•Changes in the overall mix of accounts and products within the portfolio;
•The credit quality of the loan portfolio, which reflects our credit granting practices and the effectiveness of collection efforts, among other factors;
•The impact of general economic conditions on the consumer, including national and regional conditions, unemployment levels, bankruptcy trends and interest rate movements;
•The level and direction of historical losses; and
•Regulatory changes or new regulatory guidance.
Refer to "- Critical Accounting Estimates - Allowance for Credit Losses" and Note 4: Loan Receivables to our consolidated financial statements for more details on how we estimate the allowance for credit losses.
The following tables provide changes in our allowance for credit losses (dollars in millions):
For the Year Ended December 31, 2022
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2021 $ 5,273 $ 843 $ 662 $ 44 $ 6,822
Additions
Provision for credit losses(1)
2,233 99 24 13 2,369
Deductions
Charge-offs (2,417) (126) (159) - (2,702)
Recoveries 794 23 68 - 885
Net charge-offs (1,623) (103) (91) - (1,817)
Balance at December 31, 2022 $ 5,883 $ 839 $ 595 $ 57 $ 7,374
For the Year Ended December 31, 2021
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2020 $ 6,491 $ 840 $ 857 $ 38 $ 8,226
Additions
Provision for credit losses(1)
229 67 (75) 6 227
Deductions
Charge-offs (2,255) (89) (190) - (2,534)
Recoveries 808 25 70 - 903
Net charge-offs (1,447) (64) (120) - (1,631)
Balance at December 31, 2021 $ 5,273 $ 843 $ 662 $ 44 $ 6,822
For the Year Ended December 31, 2020
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2019(2)
$ 2,883 $ 148 $ 348 $ 4 $ 3,383
Cumulative effect of ASU No. 2016-13 adoption(3)
1,667 505 265 24 2,461
Balance at January 1, 2020 4,550 653 613 28 5,844
Additions
Provision for credit losses(1)
4,379 251 476 11 5,117
Deductions
Charge-offs (3,101) (85) (289) (1) (3,476)
Recoveries 663 21 57 - 741
Net charge-offs (2,438) (64) (232) (1) (2,735)
Balance at December 31, 2020 $ 6,491 $ 840 $ 857 $ 38 $ 8,226
(1)Excludes a $10 million, $9 million and $17 million reclassification of the liability for expected credit losses on unfunded commitments for the years ended December 31, 2022, 2021 and 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in our consolidated statements of financial condition.
(2)Prior to the adoption of Accounting Standards Update (“ASU”) No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
(3)Represents the adjustment to the allowance for credit losses as a result of the adoption of ASU No. 2016-13 on January 1, 2020.
The allowance for credit losses was approximately $7.4 billion at December 31, 2022, which reflects a $552 million build from the amount of the allowance for credit losses at December 31, 2021. The build in the allowance for credit losses between December 31, 2022 and December 31, 2021, was primarily driven by loan growth.
In estimating the allowance at December 31, 2022, we used a macroeconomic forecast that resulted in the following weighted average amounts: (i) peak unemployment rate of 4.68%, decreasing to 4.63% by the end of 2023 and (ii) 1.05% annualized growth in the real gross domestic product in 2023.
In estimating expected credit losses, we considered the uncertainties associated with borrower behavior and payment trends, as well as higher consumer price inflation experienced during 2022 and the fiscal and monetary policy responses to that inflation. In 2022, the Federal Reserve raised its federal funds rate target range and financial market participants expect additional increases during 2023 in an effort to reduce inflation. In recognition of the risks related to the macroeconomic environment, the estimation of the allowance for credit losses has required significant management judgment.
The forecast period we deemed to be reasonable and supportable was 18 months for all periods presented. The 18-month reasonable and supportable forecast period was deemed appropriate given the current economic conditions. For all periods presented, we determined that a reversion period of 12 months was appropriate for the same reason. We applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented.
The provision for credit losses is the amount of expense realized after considering the level of net charge-offs in the period and the required amount of allowance for credit losses at the balance sheet date. For the year ended December 31, 2022, the provision for credit losses increased by $2.1 billion, as compared to the year ended December 31, 2021. The reserve build during the year ended December 31, 2022, was primarily driven by continued loan growth.
Net Charge-offs
Our net charge-offs include the principal amount of losses charged off less principal recoveries and exclude charged-off and recovered interest and fees and fraud losses. Charged-off and recovered interest and fees are recorded in interest income and loan fee income, respectively, which is effectively a reclassification of the provision for credit losses, while fraud losses are recorded in other expense.
The following table presents amounts and rates of net charge-offs of key loan products (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
$ % $ % $ %
Credit card loans $ 1,623 2.05 % $ 1,447 2.09 % $ 2,438 3.41 %
Private student loans $ 103 1.00 % $ 64 0.63 % $ 64 0.65 %
Personal loans $ 91 1.25 % $ 120 1.73 % $ 232 3.13 %
The net charge-offs on our credit card loans for the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, primarily due to continued credit normalization and the seasoning of vintages from the past two years. The net charge-off rate on credit card loans remained relatively flat for the year ended December 31, 2022, compared to the year ended December 31, 2021. The net charge-offs and net charge-off rate on private student loans for the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, primarily driven by credit normalization. The net charge-offs and net charge-off rate on personal loans for the year ended December 31, 2022, decreased when compared to the year ended December 31, 2021, due to continued benefit from tighter credit underwriting standards implemented in 2020.
Delinquencies
Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.
The following table presents the amounts and delinquency rates of key loan products that are 30 and 90 days or more delinquent, loan receivables that are not accruing interest regardless of delinquency and loans restructured in troubled debt restructuring (“TDR”) programs (dollars in millions):
December 31,
2022 2021
$ % $ %
Loans 30 or more days delinquent
Credit card loans $ 2,278 2.53 % $ 1,232 1.66 %
Private student loans $ 212 2.05 % $ 157 1.55 %
Personal loans $ 63 0.80 % $ 48 0.69 %
Total loan receivables $ 2,578 2.30 % $ 1,451 1.55 %
Loans 90 or more days delinquent(1)
Credit card loans $ 1,028 1.14 % $ 562 0.76 %
Private student loans $ 45 0.43 % $ 36 0.35 %
Personal loans $ 16 0.21 % $ 13 0.20 %
Total loan receivables $ 1,101 0.98 % $ 618 0.66 %
Loans not accruing interest $ 214 0.19 % $ 225 0.24 %
Troubled debt restructurings:
Credit card loans(2)(3)(4)
Currently enrolled $ 1,608 1.78 % $ 833 1.12 %
No longer enrolled 212 0.24 267 0.36
Total credit card loans $ 1,820 2.02 % $ 1,100 1.48 %
Private student loans(5)
$ 328 3.18 % $ 249 2.46 %
Personal loans(6)
$ 178 2.23 % $ 187 2.70 %
(1)Credit card loans that were 90 or more days delinquent at December 31, 2022 and 2021, included $55 million and $73 million, respectively, in loans that were previously enrolled in a modification program that was exempt from the TDR designation pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Within private student and personal loans that were 90 or more days delinquent at December 31, 2022 and 2021, the respective amounts associated with modifications exempt from the TDR designation under the CARES Act were immaterial.
(2)We estimate that interest income recognized on credit card loans restructured in TDR programs was $131 million, $105 million and $221 million for the years ended December 31, 2022, 2021 and 2020, respectively. We do not separately track interest income on loans in TDR programs. We estimate this amount by applying an average interest rate to the average loans in the various TDR programs.
(3)We estimate that the incremental interest income that would have been recorded in accordance with the original terms of credit card loans restructured in TDR programs was $148 million, $137 million and $181 million for the years ended December 31, 2022, 2021 and 2020, respectively. We do not separately track the amount of incremental interest income that would have been recorded if the loans in TDR programs had not been restructured and interest had instead been recorded in accordance with the original terms. We estimate this amount by applying the difference between the average interest rate earned on non-modified loans and the average interest rate earned on loans in the TDR programs to the average loans in the TDR programs.
(4)Credit card loans restructured in TDR programs include $123 million, $45 million and $94 million at December 31, 2022, 2021 and 2020, respectively, which are also included in loans 90 or more days delinquent.
(5)Private student loans restructured in TDR programs include $10 million, $7 million and $6 million at December 31, 2022, 2021 and 2020, respectively, which are also included in loans 90 or more days delinquent.
(6)Personal loans restructured in TDR programs include $4 million, $4 million and $6 million at December 31, 2022, 2021 and 2020, respectively, which are also included in loans 90 or more days delinquent.
The 30-day and 90-day delinquency rates in the table above include all loans, whether the TDR designation applies or not. The 30-day and 90-day delinquency rates for credit card and private student loans at December 31, 2022, increased compared to December 31, 2021, primarily driven by credit normalization. The increase in the 30-day and 90-day delinquency rates for credit card was also driven by the seasoning of prior vintages. The 30-day
delinquency rates for personal loans at December 31, 2022, increased compared to December 31, 2021, primarily driven by credit normalization and the seasoning of prior vintages. The 90-day delinquency rates for personal loans at December 31, 2022, remained relatively flat compared to December 31, 2021.
The balance of credit card and private student loans reported as TDRs increased at December 31, 2022, as compared to December 31, 2021, primarily due to the expiration of the CARES Act exemption for new modifications effective January 1, 2022. The balance of personal loans reported as TDRs decreased at December 31, 2022, compared to December 31, 2021, primarily due to continued benefit from tighter credit underwriting standards implemented in 2020, partially offset by enrollments in loan modification programs that are no longer exempt from the TDR designation under the CARES Act.
We believe loan modification programs are useful in assisting customers experiencing financial difficulties and help to prevent defaults. We plan to continue to use loan modification programs as a means to provide relief to customers experiencing financial difficulties.
Modified and Restructured Loans
Certain loan modifications made in 2021 were not reported as TDRs pursuant to accounting and financial reporting exemptions provided by the CARES Act. As a result, modifications reported as TDRs were favorably impacted for the year ended December 31, 2021. The CARES Act exemption ceased to apply after December 31, 2021, and, accordingly, modifications made after that date were reported as TDRs.
The table below reflects the number and balance of both new loan modifications reported as TDRs and new loan modifications excluded from the TDR designation pursuant to the CARES Act (dollars in millions)(1):
Accounts that entered a loan modification program and were classified as TDRs during the period Accounts that entered a loan modification program and were exempt from the TDR designation pursuant to the CARES Act(1)
Number of Accounts Balances Number of Accounts Balances
For the Year Ended December 31, 2022
Credit card loans 237,339 $ 1,545 - $ -
Private student loans 6,841 $ 127 - $ -
Personal loans 6,303 $ 86 - $ -
For the Year Ended December 31, 2021
Credit card loans 64,359 $ 399 127,878 $ 907
Private student loans 477 $ 8 8,844 $ 170
Personal loans 4,066 $ 51 1,378 $ 21
(1)Accounts that entered into a loan modification on or after January 1, 2022, are not eligible for this exemption.
The number and balance of new credit card and personal loan modifications increased during the year ended December 31, 2022, when compared to total modifications, including both TDRs and those exempt from the TDR designation, in the same period in 2021. The increase was primarily due to the expiration of government stimulus and disaster relief programs.
The number and balance of new private student loan modifications decreased during the year ended December 31, 2022, when compared to total modifications, including both TDRs and those exempt from the TDR designation, in the same period in 2021. The decrease was primarily due to heightened utilization of programs in the prior periods driven by the impacts of the COVID-19 pandemic on student loan borrowers.
The following table provides the number of accounts that exited a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act and corresponding outstanding balances along with the amount of the outstanding balances that were delinquent (30 or more days past due) upon exiting the temporary loan modification program (dollars in millions):(1)
Number of Accounts Outstanding Balances
Balances Delinquent(1)
For the Year Ended December 31, 2022
Credit card loans 101,273 $ 552 $ 110
Private student loans
3,897 $ 76 NM
Personal loans
649 $ 9 NM
For the Year Ended December 31, 2021
Credit card loans 198,506 $ 1,183 $ 166
Private student loans
8,788 $ 157 NM
Personal loans
4,809 $ 72 NM
(1)Includes balances charged-off at the end of the month the account exited the temporary loan modification program. The balances charged-off were not meaningful for the years ended December 31, 2022 and 2021.
The following table provides the balance of loan receivables restructured through a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act (dollars in millions):
December 31,
2022 2021
$ % $ %
Credit card loans $ 1,187 1.32 % $ 1,620 2.18 %
Private student loans $ 193 1.87 % $ 242 2.39 %
Personal loans $ 16 0.20 % $ 45 0.65 %
Our estimate of expected loss reflected in our allowance for credit losses includes the risk associated with all loans, including all modified loans. Refer to “- Delinquencies” and Note 4: Loan Receivables to our consolidated financial statements for additional details of our use of loan modification programs to provide relief to customers experiencing financial hardship, TDRs and the allowance for credit losses.
Maturities and Sensitivities of Loan Receivables to Changes in Interest Rates
Our loan portfolio had the following maturity distribution(1) (dollars in millions):
At December 31, 2022 Due One
Year or
Less Due After
One Year
Through
Five Years Due After
Five Years Through Fifteen Years Due After Fifteen Years Total
Credit card loans $ 26,846 $ 47,894 $ 14,926 $ 447 $ 90,113
Private student loans 345 2,131 7,129 703 10,308
Personal loans 2,224 5,364 410 - 7,998
Other loans 115 487 1,353 1,746 3,701
Total loan portfolio $ 29,530 $ 55,876 $ 23,818 $ 2,896 $ 112,120
(1) Because of the uncertainty regarding loan repayment patterns, the above amounts have been calculated using contractually required minimum payments. Historically, actual loan repayments have been higher than such minimum payments and, therefore, the above amounts may not necessarily be indicative of our actual loan repayments.
At December 31, 2022, approximately $51.0 billion of our loan portfolio due after one year had interest rates tied to an index and approximately $31.6 billion were fixed-rate loans.
Other Income
The following table presents the components of other income (dollars in millions):
For the Years Ended December 31, 2022 vs. 2021
Increase (Decrease) 2021 vs. 2020
Increase (Decrease)
2022 2021 2020 $ % $ %
Discount and interchange revenue, net(1)
$ 1,424 $ 1,224 $ 933 $ 200 16 % $ 291 31 %
Protection products revenue 172 165 180 7 4 % (15) (8) %
Loan fee income 632 464 414 168 36 % 50 12 %
Transaction processing revenue 249 227 195 22 10 % 32 16 %
(Losses) gains on equity investments (214) 424 80 (638) (150) % 344 430 %
Other income 75 66 56 9 14 % 10 18 %
Total other income $ 2,338 $ 2,570 $ 1,858 $ (232) (9) % $ 712 38 %
(1)Net of rewards, including Cashback Bonus rewards, of $3.0 billion, $2.5 billion and $1.9 billion for the years ended December 31, 2022, 2021 and 2020, respectively.
Total other income decreased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to net losses on equity investments partially offset by increases in net discount and interchange revenue and loan fee income. The net loss on equity investments was a result of a decrease in the fair value of those investments. The increase in discount and interchange revenue was partially offset by an increase in rewards, both of which were driven by higher sales volume. Loan fee income increased primarily due to higher volume of late payments.
Other Expense
The following table represents the components of other expense (dollars in millions):
For the Years Ended December 31, 2022 vs. 2021
Increase (Decrease) 2021 vs. 2020
Increase (Decrease)
2022 2021 2020 $ % $ %
Employee compensation and benefits $ 2,139 $ 1,986 $ 1,894 $ 153 8 % $ 92 5 %
Marketing and business development 1,035 810 659 225 28 % 151 23 %
Information processing and communications 513 500 540 13 3 % (40) (7) %
Professional fees 871 797 717 74 9 % 80 11 %
Premises and equipment 118 92 113 26 28 % (21) (19) %
Other expense 560 620 596 (60) (10) % 24 4 %
Total other expense $ 5,236 $ 4,805 $ 4,519 $ 431 9 % $ 286 6 %
Total other expense increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to increases in marketing and business development, employee compensation and benefits and professional fees. These increases were partially offset by a decrease in other expense. The increase in marketing and business development was driven by growth investments in card and consumer banking. Employee compensation and benefits increased primarily from higher headcount. The increase in professional fees was due primarily to investments in technology and increased consulting costs. The decrease in other expense was driven by certain one-time items in the prior period.
Income Tax Expense
The following table reconciles our effective tax rate to the U.S. federal statutory income tax rate (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
U.S. federal statutory income tax rate 21.0 % 21.0 % 21.0 %
U.S. state, local and other income taxes, net of U.S. federal income tax benefits 3.4 3.4 3.4
Tax credits (1.3) (1.2) (4.4)
Other 0.4 (0.3) 0.5
Effective income tax rate 23.5 % 22.9 % 20.5 %
Income tax expense $ 1,350 $ 1,615 $ 294
Liquidity and Capital Resources
Funding and Liquidity
We seek to maintain stable, diversified and cost-effective funding sources and a strong liquidity profile to fund our business and repay or refinance our maturing obligations under normal operating conditions and periods of economic or financial stress. In managing our liquidity risk, we seek to maintain a prudent liability maturity profile and ready access to an ample store of primary and contingent liquidity sources. Our primary funding sources include direct-to-consumer and brokered deposits, public term asset-backed securitizations and other short-term and long-term borrowings. Our primary liquidity sources include a portfolio composed of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities, as well as secured borrowing capacity through private term asset-backed securitizations and Federal Home Loan Bank (“FHLB”) advances. In addition, we have unused borrowing capacity at the Federal Reserve discount window, which provides another source of contingent liquidity.
Funding Sources
Deposits
We obtain deposits from consumers directly or through affinity relationships (“direct-to-consumer deposits”). Additionally, we obtain deposits through third-party securities brokerage firms that offer our deposits to their customers (“brokered deposits”). Direct-to-consumer deposit products include savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts. Brokered deposit products include certificates of deposit and sweep accounts. In accordance with the Federal Deposit Insurance Corporation’s (“FDIC”) final rule on revisions to its brokered deposits regulation, we no longer categorize certain retail deposit products such as affinity deposits and deposits generated through certain sweep deposit relationships as brokered for regulatory reporting purposes. At December 31, 2022, we had $70.5 billion of direct-to-consumer deposits and $21.1 billion of brokered deposits, of which there are $76.6 billion of deposit balances due in less than one year and $15.0 billion of deposit balances due in one year or thereafter.
Credit Card Securitization Financing
We securitize credit card receivables as a source of funding. We access the asset-backed securitization market using the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust (“DCENT”). In connection with our securitization transactions, credit card receivables are transferred to DCMT. DCMT has issued a certificate representing the beneficial interest in its credit card receivables to DCENT. We issue DCENT DiscoverSeries notes in public and private transactions, which are collateralized by the beneficial interest certificate held by DCENT. From time to time, we may add credit card receivables to DCMT to create sufficient funding capacity for future securitizations while managing seller’s interest. We retain significant exposure to the performance of the securitized credit card receivables through holding the seller’s interest and subordinated classes of DCENT DiscoverSeries notes. At December 31, 2022, we had $10.2 billion of outstanding public asset-backed securities and $3.3 billion of outstanding subordinated asset-backed securities that had been issued to our wholly-owned subsidiaries.
The securitization structures include certain features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements, the insufficiency of which triggers early repayment of the securities. We refer to this as “economic early amortization,” which is based on excess spread levels. Excess spread is the amount by which income received with respect to the securitized credit card receivables during a collection period including interest collections, fees and interchange, exceeds the fees and expenses of DCENT during such collection period, including interest expense, servicing fees and charged-off receivables. In the event of an economic early amortization, which would occur if the excess spread fell below 0% on a three-month rolling average basis, we would be required to repay all outstanding securitized borrowings using available collections received with respect to the securitized credit card receivables. For the three months ended December 31, 2022, the DiscoverSeries three-month rolling average excess spread was 14.73%. The period of ultimate repayment would be determined by the amount and timing of collections received.
Through our wholly-owned indirect subsidiary, Discover Funding LLC, we are required to maintain an interest in a contractual minimum level of receivables in DCMT in excess of the face value of outstanding investors’ interests. This minimum interest is referred to as the minimum seller’s interest. The required minimum seller’s interest in the pool of trust receivables is approximately 7% in excess of the total investors’ interests, which includes interests held by third parties as well as those interests held by us. If the level of receivables in DCMT were to fall below the required minimum, we would be required to add receivables from the unrestricted pool of receivables, which would increase the amount of credit card receivables restricted for securitization investors. A decline in the amount of the excess seller’s interest could occur if balance repayments and charge-offs exceeded new lending on the securitized accounts or as a result of changes in total outstanding investors’ interests. Seller’s interest exhibits seasonality as higher receivable balance repayments tend to occur in the first calendar year quarter. If we could not add enough receivables to satisfy the minimum seller’s interest requirement, an early amortization (or repayment) of investors’ interests would be triggered.
An early amortization event would impair our liquidity and may require us to utilize our available non-securitization related contingent liquidity or rely on alternative funding sources, which may or may not be available at the time. We have several strategies we can deploy to prevent an early amortization event. For instance, we could add receivables to DCMT, which would reduce our available borrowing capacity at the Federal Reserve discount window. As of December 31, 2022, there were $25.8 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization investors for the year ended December 31, 2022. Alternatively, we could employ structured discounting, which was used effectively in 2009 to bolster excess spread and mitigate early amortization risk.
The following table summarizes expected contractual maturities of the investors’ interests in credit card securitizations, excluding those that have been issued to our wholly-owned subsidiaries (dollars in millions):
At December 31, 2022 Total Less Than
One Year One Year and Thereafter
Scheduled maturities of borrowings - owed to credit card securitization investors $ 10,175 $ 1,472 $ 8,703
The “AAA(sf)” and “Aaa(sf)” ratings of the DCENT DiscoverSeries Class A Notes issued to date have been based, in part, on an FDIC rule, which created a safe harbor that provides that the FDIC, as conservator or receiver, will not use its power to disaffirm or repudiate contracts, seek to reclaim or recover assets transferred in connection with a securitization, or recharacterize assets transferred in connection with a securitization as assets of the insured depository institution, provided such transfer satisfies the conditions for sale accounting treatment under previous GAAP. Although the implementation of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 860, Transfers and Servicing, no longer qualified certain transfers of assets for sale accounting treatment, the FDIC approved a final rule that preserved the safe-harbor treatment applicable to revolving trusts and master trusts, including DCMT, so long as those trusts would have satisfied the original FDIC safe harbor if evaluated under GAAP pertaining to transfers of financial assets in effect prior to December 2009. However, other legislative and regulatory developments may impact our ability or desire to issue asset-backed securities in the future.
Federal Home Loan Bank Advances
Discover Bank is a member bank of the FHLB of Chicago, one of 11 FHLBs that, along with the Office of Finance, compose the FHLB System. The FHLBs are government-sponsored enterprises of the U.S. (“U.S. GSEs”) chartered to improve the availability of funds to support home ownership. As such, senior debt obligations of the FHLBs feature the same credit ratings as U.S. Treasury securities and are considered high-quality liquid assets for bank regulatory purposes. Consequently, the FHLBs benefit from consistent capital market access during nearly all macroeconomic and financial market conditions and low funding costs, which they pass on to their member banks when they borrow advances. Thus, we consider FHLB advances a stable and reliable funding source for Discover Bank for short-term contingent liquidity and long-term asset-liability management.
As a member of the FHLB of Chicago, Discover Bank has access to short- and long-term advance structures with maturities ranging from overnight to 30 years. As of December 31, 2022, we had total committed borrowing capacity of $2.2 billion based on the amount and type of assets pledged, of which $525 million of long-term advances were outstanding with the FHLB of Chicago. Under certain stressed conditions, we could pledge our liquidity portfolio securities and borrow against them at a modest reduction to their value.
Other Long-Term Borrowings - Private Student Loans
At December 31, 2022, $84 million of principal was outstanding on securitized debt assumed as part of our acquisition of The Student Loan Corporation. Principal and interest payments on the underlying private student loans will reduce the balance of these secured borrowings over time.
Other Long-Term Borrowings - Corporate and Bank Debt
The following table provides a summary of Discover Financial Services (Parent Company) and Discover Bank outstanding fixed-rate debt (dollars in millions):
At December 31, 2022 Principal Amount Outstanding
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2024-2032 $ 3,350
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing 2023-2031 $ 155
Discover Bank fixed-rate senior bank notes, maturing 2023-2030 $ 5,350
Discover Bank fixed-rate subordinated bank notes, maturing 2028 $ 500
At December 31, 2022, $585 million of interest on our fixed-rate debt is due in less than one year and $1.6 billion of interest is due in one year and thereafter. See Note 9: Long-Term Borrowings to our consolidated financial statements for more information on the maturities of our long-term borrowings. Certain DFS senior notes require us to offer to repurchase the notes at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change of control involving us and corresponding ratings downgrade below investment grade.
Short-Term Borrowings
As part of our regular funding strategy, we may, from time to time, borrow short-term funds in the federal funds market or the repurchase (“repo”) market through repurchase agreements. Federal funds are short-term, unsecured loans between banks or other financial entities with a Federal Reserve account. Funds borrowed in the repo market are short-term, collateralized loans, usually secured with highly-rated investment securities such as U.S. Treasury bills or notes, or mortgage bonds or debentures issued by government agencies or U.S. GSEs. At December 31, 2022, there were no outstanding balances in the federal funds market or under repurchase agreements. Additionally, we have access to short-term advance structures through the FHLB of Chicago and privately placed asset-backed securitizations. At December 31, 2022, there were no short-term advances outstanding from the FHLB and no private asset-backed securitizations.
Additional Funding Sources
Private Asset-Backed Securitizations
We have access to committed borrowing capacity through privately placed asset-backed securitizations. While we may utilize funding from these private securitizations from time to time for normal business operations, their
committed nature also makes them a reliable contingency funding source. Therefore, we reserve some undrawn capacity, informed by our liquidity stress test results, for potential contingency funding needs. At December 31, 2022, we had a total committed capacity of $3.5 billion, none of which was drawn. We seek to ensure the stability and reliability of these securitizations by staggering their maturity dates, renewing them approximately one year prior to their scheduled maturity dates and periodically drawing them for operational tests and seasonal funding needs.
Federal Reserve
Discover Bank has access to the Federal Reserve Bank of Philadelphia’s discount window. As of December 31, 2022, Discover Bank had $42.3 billion of available borrowing capacity through the discount window based on the amount and type of assets pledged, primarily consumer loans. As of December 31, 2022, we have no borrowings outstanding under the discount window and reserve this capacity as a source of contingent liquidity.
Funding Uses
Our primary uses of funds include the extensions of loans and credit to customers, primarily through Discover Bank; the maintenance of sufficient working capital for routine operations; the service of our debt and capital obligations, including interest, principal, and dividend payments; and the purchase of investment securities for our liquidity portfolio.
In addition to originating consumer loans to new customers, we also extend credit to existing customers, which primarily arises from agreements for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions established in the related agreement. At December 31, 2022, our unused credit arrangements were approximately $224.7 billion. These arrangements, substantially all of which we can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification.
In the normal course of business, we enter into various contracts for goods and services, such as consulting, outsourcing, data, sponsorships, software licenses, telecommunications, and global merchant acceptance, among other things. These contracts are legally binding and specify all significant terms, including any applicable fixed future cash payments.
As of December 31, 2022, we have debt obligations, common stock and preferred stock outstanding. Refer to “- Funding Sources” and “- Capital” for more information related to our debt obligations and capital service, respectively, and the timing of expected payments.
We assess funding uses and liquidity needs under stressed and normal operating conditions, considering primary uses of funding, such as on-balance sheet loans and contingent uses of funding, such as the need to post additional collateral for derivatives positions. To anticipate funding needs under stress, we conduct liquidity stress tests to assess the impact of idiosyncratic, systemic and hybrid (i.e., idiosyncratic and systemic) scenarios with varying levels of liquidity risk reflecting a range of stress severity. If we determine we have excess cash and cash equivalents, we may invest in highly liquid, unencumbered assets that we expect to be able to convert to cash quickly and with little loss of value using the repo market or outright sales.
Guarantees
Guarantees are contracts or indemnification agreements that may require us to make payments to a guaranteed party based on changes in an underlying asset, liability, or equity security of a guaranteed party, rate or index. Also included in guarantees are contracts that may require the guarantor to make payments to a guaranteed party based on another entity’s failure to perform under an agreement. Our guarantees relate to transactions processed on the Discover Network and certain transactions processed by PULSE and Diners Club. In the ordinary course of business, we guarantee payment on behalf of subsidiaries relating to contractual obligations with external parties. The activities of the subsidiaries covered by any such guarantees are included in our consolidated financial statements. See Note 18: Commitments, Contingencies and Guarantees to our consolidated financial statements for further discussion regarding our guarantees.
Credit Ratings
Our borrowing costs and capacity in certain funding markets, including those for securitizations and unsecured senior and subordinated debt, may be affected by the credit ratings of DFS, Discover Bank and the securitization trusts.
Downgrades in these credit ratings could result in higher interest expense on our unsecured debt and asset securitizations, as well as higher credit enhancement requirements for both our public and private asset securitizations. In addition to increased funding costs, deterioration in our credit ratings could reduce our borrowing capacity in the unsecured debt and asset securitization capital markets.
The table below reflects our current credit ratings and outlooks:
Moody’s Investors Service(1)
Standard & Poor’s Fitch Ratings
Discover Financial Services
Senior unsecured debt Baa3 BBB- BBB+
Outlook for Discover Financial Services senior unsecured debt Under Review Stable Stable
Discover Bank
Senior unsecured debt Baa2 BBB BBB+
Outlook for Discover Bank senior unsecured debt Under Review Stable Stable
Subordinated debt Baa2 BBB- BBB
Discover Card Execution Note Trust (DCENT)
Class A(2)
Aaa(sf) AAA(sf) AAA(sf)
(1)On December 7, 2022, Moody’s Investors Service placed all of the long-term ratings and assessments for Discover Financial Services and Discover Bank on review for upgrade.
(2)An “sf” in the rating denotes rating agency identification for structured finance product ratings.
A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. A credit rating outlook reflects an agency's opinion regarding the likely rating direction over the medium term, often a period of about a year, and indicates the agency's belief that the issuer's credit profile is consistent with its current rating level at that point in time.
Liquidity
We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy debt obligations under stressed and normal operating conditions. In addition to the funding sources discussed in the previous section, we also maintain highly liquid, unencumbered assets in our liquidity portfolio that we expect to be able to convert to cash quickly and with little loss of value using either the repo market or outright sales.
We maintain a liquidity risk and funding management policy, which outlines the overall framework and general principles we follow in managing liquidity risk across our business. The Board of Directors approves the policy and the Asset and Liability Management Committee (the “ALCO”) is responsible for its implementation. Additionally, we maintain a liquidity management framework document that outlines the general strategies, objectives and principles we utilize to manage our liquidity position and the various liquidity risks inherent in our business model. We seek to balance the trade-offs between maintaining too much liquidity, which may be costly, with having too little liquidity, which could cause financial distress. The ALCO, chaired by our Treasurer, has cross-functional membership, and manages liquidity risk centrally. The ALCO monitors the liquidity risk profiles of DFS and Discover Bank and oversees any actions Corporate Treasury may take to ensure that we maintain ready access to our funding sources and sufficient liquidity to meet current and projected needs. In addition, the ALCO and our Board of Directors regularly review our compliance with our liquidity limits at DFS and Discover Bank, which are established in accordance with the liquidity risk appetite set by our Board of Directors.
We employ a variety of metrics to monitor and manage liquidity. We utilize early warning indicators (“EWIs”) to detect emerging liquidity stress events and a reporting and escalation process designed to be consistent with regulatory guidance. The EWIs include both idiosyncratic and systemic measures and are monitored daily and reported to the ALCO regularly. A warning from one or more of these indicators triggers prompt review and decision-making by our senior management team and, in certain instances, may lead to the convening of a senior-level response team and activation of our contingency funding plan.
In addition, we conduct liquidity stress tests regularly and ensure contingency funding is in place to address potential liquidity shortfalls. We evaluate a range of stress scenarios that are designed according to regulatory
requirements, including idiosyncratic, systemic and a combination of such events that could impact funding sources and our ability to meet liquidity needs. These scenarios measure the projected liquidity position at DFS and Discover Bank across a range of time horizons by comparing estimated contingency funding needs to available contingent liquidity.
Our primary contingency liquidity sources include our liquidity portfolio securities, which we could sell, repo or borrow against, and private securitizations with unused borrowing capacity. In addition, we could borrow FHLB advances by pledging securities to the FHLB of Chicago. Moreover, we have unused borrowing capacity with the Federal Reserve discount window, which provides an additional source of contingency liquidity. We seek to maintain sufficient liquidity to satisfy all maturing obligations and fund business operations for at least 12 months in a severe stress environment. In such an environment, we may also take actions to curtail the size of our balance sheet, which would reduce the need for funding and liquidity.
At December 31, 2022, our liquidity portfolio was composed of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities. Cash and cash equivalents were primarily deposits with the Federal Reserve. Investment securities primarily included debt obligations of the U.S. Treasury and U.S. GSEs and residential mortgage-backed securities (“RMBS”) issued by U.S. government agencies or U.S. GSEs. These investments are considered highly liquid and we expect to have the ability to raise cash by selling them, utilizing repurchase agreements or pledging certain of these investments to access secured funding. The size and composition of our liquidity portfolio may fluctuate based on the size of our balance sheet as well as operational requirements, market conditions and interest rate risk management objectives.
At December 31, 2022, our liquidity portfolio and undrawn credit facilities were $67.3 billion, which was $14.4 billion higher than the balance at December 31, 2021. Our liquidity portfolio and undrawn credit facilities grew primarily as a result of the purchase of Treasury securities and additional borrowing capacity with the Federal Reserve. During the years ended December 31, 2022 and 2021, the average balance of our liquidity portfolio was $16.3 billion and $23.4 billion, respectively. Our liquidity portfolio and undrawn facilities consist of the following (dollars in millions):
December 31,
2022 2021
Liquidity portfolio
Cash and cash equivalents(1)
$ 7,585 $ 8,080
Investment securities(2)
12,213 6,879
Total liquidity portfolio 19,798 14,959
Private asset-backed securitizations(3)
3,500 3,500
Federal Home Loan Bank of Chicago 1,712 150
Primary liquidity sources 25,010 18,609
Federal Reserve discount window(3)
42,268 34,254
Total liquidity portfolio and undrawn credit facilities $ 67,278 $ 52,863
(1)Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes.
(2)Excludes $97 million and $27 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of December 31, 2022 and 2021, respectively.
(3)See “- Additional Funding Sources” for additional information.
Bank Holding Company Liquidity
The primary uses of funds at the unconsolidated DFS level include debt service obligations (interest payments and return of principal) and capital service and management activities, including dividend payments on capital instruments and the periodic repurchase of shares of our common stock. Our primary sources of funds at the bank holding company level include the proceeds from the issuance of unsecured debt and capital securities, as well as dividends from our subsidiaries, notably Discover Bank. Under periods of idiosyncratic or systemic stress, the bank holding company could lose or experience impaired access to the capital markets. In addition, our regulators have the discretion to restrict dividend payments from Discover Bank to the bank holding company.
We utilize a measure referred to as Number of Months of Pre-Funding to determine the length of time DFS can meet upcoming funding obligations, including common and preferred stock dividend payments and debt service obligations, using existing cash resources. In managing this metric, we structure our debt maturity schedule to manage
prudently the amount of debt maturing within a short period. See Note 9: Long-Term Borrowings to our consolidated financial statements for further information regarding our debt.
Capital
Our primary sources of capital are the earnings generated by our businesses and the proceeds from issuances of capital securities. We seek to manage capital to a level and composition sufficient to support our businesses’ growth, account for their risks, and meet regulatory requirements, rating agency targets and debt investor expectations. Within these constraints, we are focused on deploying capital in a manner that provides attractive returns to our stockholders. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments.
Under regulatory capital requirements adopted by the Federal Reserve and the FDIC, DFS, along with Discover Bank, must maintain minimum capital levels. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a direct material effect on our financial condition and operating results. We must meet specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidance and regulations. Current or future legislative or regulatory reforms, such as those related to the adoption of the CECL accounting model, may require us to hold more capital or adversely impact our capital level. We consider the potential impacts of these reforms in managing our capital position.
DFS and Discover Bank are subject to regulatory capital rules issued by the Federal Reserve and the FDIC, respectively, under the Basel Committee’s December 2010 framework (“Basel III rules”). Under the Basel III rules, DFS and Discover Bank are classified as “standardized approach” entities as they are U.S. banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposures less than $10 billion. The Basel III rules require DFS and Discover Bank to maintain minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios.
In March 2020, federal bank regulatory agencies announced an interim and now final rule that allows banks that have implemented the CECL accounting model to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, we have elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, the estimated impact of CECL on regulatory capital will be phased in over three years, beginning in 2022. Electing this option raised our Common Equity Tier 1 ("CET1") capital ratios in 2022 and 2021. The phase-in of the CECL accounting model decreased CET1 by $537 million as of January 1, 2022. For additional information regarding the risk-based capital and leverage ratios, see Note 17: Capital Adequacy to our consolidated financial statements.
In March 2020, the Federal Reserve announced the SCB final rule, which imposes limitations on DFS’ capital distributions if we do not maintain our risk-based capital ratios above stated regulatory minimum ratios based on the results of supervisory stress tests. Under this rule, DFS is required to assess whether our planned capital actions are consistent with the effective capital distribution limitations that will apply on a pro-forma basis throughout the planning horizon.
The SCB requirement is institution-specific and is calculated as the greater of (i) 2.5% and (ii) the sum of (a) the difference between DFS' actual CET1 ratio at the beginning of the forecast and the projected minimum CET1 ratio based on the Federal Reserve's models in its nine-quarter Severely Adverse stress scenario, plus (b) the sum of the dollar amount of DFS' planned common stock dividend distributions for each of the fourth through seventh quarters of its nine-quarter capital planning horizon, expressed as a percentage of risk-weighted assets. For Category IV firms, including DFS, the Federal Reserve calculates each firm’s SCB biennially in even-numbered calendar years, and did so in 2022. In odd-numbered years, each firm subject to Category IV standards that did not opt-in to such year’s supervisory stress tests as part of the Federal Reserve’s CCAR process receives an adjusted SCB requirement that is updated to reflect its planned common stock dividends per the firm’s annual capital plan. In August 2021, the Federal Reserve notified DFS of its adjusted SCB requirement of 3.6% based on the planned common stock dividends in the 2021 Capital Plan. DFS' SCB was effective in October 2021 and slightly increased from our SCB in effect for the preceding year, which was 3.5%. See "- Regulatory Environment and Developments - Banking - Capital Standards and Stress Testing" for additional information.
DFS elected not to participate in the Federal Reserve’s supervisory stress test in 2021, but did participate in 2022. As part of CCAR, DFS submitted an annual capital plan by the April 5, 2022 due date (“2022 Capital Plan”). On June 23, 2022, the Federal Reserve released results of the 2022 CCAR stress test. Discover’s results showed strong capital levels under stress, well above regulatory minimums. These results were used to set the new SCB effective October 1, 2022. On August 4, 2022, the Federal Reserve disclosed the new SCB for DFS is 2.5%, the lowest possible requirement.
At December 31, 2022, DFS and Discover Bank met the requirements for “well-capitalized” status under the Federal Reserve’s Regulation Y and the prompt corrective action rules and corresponding FDIC requirements, respectively, exceeding the regulatory minimums to which they were subject under the applicable rules.
Basel III rules also require disclosures relating to market discipline. This series of disclosures is commonly referred to as "Pillar 3." The objective is to increase the transparency of capital requirements for banking organizations. We are required to make prescribed regulatory disclosures quarterly regarding our capital structure, capital adequacy, risk exposures and risk-weighted assets. We make the Pillar 3 disclosures publicly available on our website in a report called "Basel III Regulatory Capital Disclosures."
We disclose tangible common equity, which represents common equity less goodwill and intangibles. Management believes that common stockholders’ equity excluding goodwill and intangibles is meaningful to investors as a measure of our true net asset value. At December 31, 2022, tangible common equity is considered to be a non-GAAP financial measure as it is not formally defined by GAAP or codified in the federal banking regulations. Other financial services companies may also disclose this measure and definitions may vary. We advise users of this information to exercise caution in comparing this measure for different companies.
The following table reconciles total common stockholders’ equity (a GAAP financial measure) to tangible common equity (dollars in millions):
December 31,
2022 2021
Total common stockholders’ equity(1)
$ 13,534 $ 12,352
Less: goodwill (255) (255)
Tangible common equity $ 13,279 $ 12,097
(1)Total common stockholders’ equity is calculated as total stockholders’ equity less preferred stock.
Our Board of Directors declared the following common stock dividends during 2022, 2021 and 2020:
Declaration Date Record Date Payment Date Dividend per Share
October 18, 2022 November 23, 2022 December 08, 2022 $ 0.60
July 20, 2022 August 25, 2022 September 08, 2022 0.60
April 27, 2022 May 26, 2022 June 09, 2022 0.60
January 18, 2022 February 17, 2022 March 03, 2022 0.50
Total common stock dividends $ 2.30
October 19, 2021 November 24, 2021 December 09, 2021 $ 0.50
July 20, 2021 August 19, 2021 September 02, 2021 0.50
April 20, 2021 May 20, 2021 June 03, 2021 0.44
January 19, 2021 February 18, 2021 March 04, 2021 0.44
Total common stock dividends $ 1.88
October 20, 2020 November 19, 2020 December 03, 2020 $ 0.44
July 21, 2020 August 20, 2020 September 03, 2020 0.44
April 21, 2020 May 21, 2020 June 04, 2020 0.44
January 21, 2020 February 20, 2020 March 05, 2020 0.44
Total common stock dividends $ 1.76
On January 17, 2023, we declared a quarterly cash dividend on our common stock of $0.60 per share, payable on March 9, 2023 to holders of record on February 23, 2023, which is consistent with the quarterly amount paid in 2022.
Our Board of Directors declared the following Series C preferred stock dividends during 2022, 2021 and 2020:
Declaration Date Record Date Payment Date Dividend per Depositary Share
July 20, 2022 October 14, 2022 October 31, 2022 $ 27.50
January 18, 2022 April 15, 2022 May 02, 2022 27.50
Total Series C preferred stock dividends $ 55.00
July 20, 2021 October 15, 2021 November 01, 2021 $ 27.50
January 19, 2021 April 15, 2021 April 30, 2021 27.50
Total Series C preferred stock dividends $ 55.00
July 21, 2020 October 15, 2020 October 30, 2020 $ 27.50
January 21, 2020 April 15, 2020 April 30, 2020 27.50
Total Series C preferred stock dividends $ 55.00
Our Board of Directors declared the following Series D preferred stock dividends during 2022 and 2021:
Declaration Date Record Date Payment Date Dividend per Depositary Share
July 20, 2022 September 08, 2022 September 23, 2022 $ 30.625
January 18, 2022 March 08, 2022 March 23, 2022 30.625
Total Series D preferred stock dividends $ 61.250
July 20, 2021 September 08, 2021 September 23, 2021 $ 30.625
January 19, 2021(1)
March 08, 2021 March 23, 2021 46.110
Total Series D preferred stock dividends $ 76.735
(1)The dividend includes $30.63 semi-annual dividend per depositary share plus $15.48 to account for the long first dividend period.
On January 17, 2023, we declared a semi-annual cash dividend on our Series C and Series D preferred stock of $27.50 and $30.625 per depositary share, respectively, payable on May 1, 2023 and March 23, 2023, respectively, to holders of record on April 14, 2023 and March 8, 2023, respectively.
Our Board of Directors approved a new share repurchase program in April 2022. The new program authorizes up to $4.2 billion of share repurchases through June 30, 2023. This share repurchase authorization replaced a $2.4 billion share repurchase program, which expired on March 31, 2022. During the three months ended December 31, 2022, we repurchased approximately 5.9 million shares, or 2.2% of our outstanding common stock as of September 30, 2022, for approximately $600 million. During the year ended December 31, 2022, we repurchased approximately 21.5 million shares, or 7.5% of our outstanding common stock as of December 31, 2021, for $2.3 billion. We may use various methods to repurchase shares under the program, including open market purchases, privately negotiated transactions or other purchases, including block trades, accelerated share repurchase transactions, or any combination of such methods.
The amount and size of any future dividends and share repurchases will depend on our results of operations, financial condition, capital levels, cash requirements, future prospects, regulatory review and other factors. In July 2022, we suspended our existing share repurchase program because of an internal investigation related to our student loan servicing practices and related compliance matters conducted under the oversight of a board-appointed independent special committee. In November 2022, the investigation was completed and we resumed share repurchases under the existing program. We continue to communicate with the supervisory staff of our regulators regarding the internal investigation, and we may be subject to reviews, investigations, proceedings, fines or other actions in connection with our student loan servicing practices and related compliance matters. The declaration and payment of future dividends and the amount thereof are subject to the discretion of our Board of Directors. Holders of our shares of common stock are subject to the prior dividend rights of holders of our preferred stock or the depositary shares representing such preferred stock outstanding. No dividend may be declared or paid or set aside for payment on our common stock if full dividends have not been declared and paid on all outstanding shares of preferred stock in any dividend period. In addition, as noted above, banking laws and regulations and our banking regulators may limit our ability to pay dividends and make share repurchases, including limitations on the extent our banking subsidiary (Discover Bank) can provide funds to us through dividends, loans or otherwise. Further, current or future regulatory reforms may require us to hold more capital or could adversely impact our capital level. As a result, there can be no assurance that we will declare and pay any dividends or repurchase any shares of our common stock in the future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses for an investment position or portfolio. We are exposed to market risk primarily from changes in interest rates.
Interest Rate Risk
We borrow money from various depositors and institutions to provide loans to our customers and invest in other assets and our business. These loans to customers and other assets earn interest, which we use to pay interest on the money borrowed. Our net interest income and, therefore, earnings will be reduced if the interest rate earned on assets increases at a slower pace than the interest rate paid on our borrowings. Changes in interest rates and our competitors’ responses to those changes may influence customer payment rates, loan balances or deposit account activity. As a result, we may incur higher funding costs that could decrease our earnings.
Our interest rate risk management policies are designed to measure and manage the potential volatility of earnings that may arise from changes in interest rates by having a portfolio that reflects our mix of variable- and fixed-rate assets and liabilities. To the extent that the repricing characteristics of the assets and liabilities in a particular portfolio are not sufficiently matched, we may utilize interest rate derivative contracts, such as swap agreements, to achieve our objectives. Interest rate swap agreements effectively convert the underlying asset or liability from fixed- to floating-rate or from floating- to fixed-rate. See Note 21: Derivatives and Hedging Activities to our consolidated financial statements for information on our derivatives activity.
We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12 months from our reporting date, we assume that all interest-rate-sensitive assets and liabilities are subject to a hypothetical, immediate 100 basis point change in interest rates relative to market consensus expectations as of the beginning of the period. The sensitivity simulation includes the hypothetical assumption that all relevant types of interest rates would change instantaneously, simultaneously and to the same degree.
Our interest-rate-sensitive assets include our variable-rate loan receivables and certain assets in our liquidity portfolio. We have limitations on our ability to mitigate interest rate risk by adjusting rates on existing balances. Further, competitive actions may limit our ability to increase the rates that we charge to customers for new loans. At December 31, 2022, the majority of our credit card and private student loans charge variable rates. Fixed-rate assets that will mature or otherwise contractually reset to a market-based indexed rate or other fixed-rate prior to the end of the 12-month measurement period are considered to be rate sensitive. The latter category includes certain revolving credit card loans that may be offered at below-market rates for an introductory period, such as balance transfers and special promotional programs, after which the loans will contractually reprice in accordance with our normal market-based pricing structure. For assets with a fixed interest rate that contractually will, or is assumed to, reset to a market-based indexed rate or other fixed rate during the next 12 months, earnings sensitivity is measured from the expected repricing date. In addition, for all interest-rate-sensitive assets, earnings sensitivity is calculated net of expected credit losses. For purposes of this analysis, expected credit losses are assumed to remain unchanged relative to our baseline expectations over the analysis horizon.
Interest-rate-sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12 months. Thus, liabilities that vary with changes in a market-based index, such as the federal funds rate or Secured Overnight Financing Rate (“SOFR”), which will reset before the end of the next 12 months, or liabilities that have fixed rates at the fiscal period end but will mature and are assumed to be replaced with a market-based indexed rate prior to the end of the next 12 months, are also considered to be rate sensitive. For these fixed-rate liabilities, earnings sensitivity is measured from the expected maturity date.
Net interest income sensitivity simulations require assumptions regarding market conditions, consumer behavior and the growth and composition of our balance sheet. The degree by which our deposit rates change when benchmark interest rates change, our deposit “beta,” is one of the most significant of these assumptions. Assumptions about deposit beta and other matters are inherently uncertain and, as a result, actual earnings may differ from the simulated earnings presented below. Our actual earnings depend on multiple factors including, but not limited to, the direction and timing of changes in interest rates, the movement of short-term interest rates relative to long-term rates, balance sheet composition, competitor actions affecting pricing decisions in our loans and deposits, the mix of promotional balances in our card portfolio, the level of interest charge-offs and recoveries, the influence of loan repayment rates on revolving balances and strategic actions undertaken by our management.
Our current short-term interest rate risk position is modestly asset-sensitive. We believe this position is prudent given benchmark interest rates have been prone to rise as the Federal Reserve has raised its federal funds rate target in response to high inflation. The following table shows the impacts to net interest income over the following 12-month period that we estimate would result from an immediate and parallel change in interest rates affecting all interest rate sensitive assets and liabilities (dollars in millions):
December 31,
2022 2021
Basis point change $ % $ %
+100 $ 183 1.40 % $ 154 1.51 %
-100 $ (190) (1.45) % NM NM
An estimated impact on net interest income of a decrease in interest rates at December 31, 2021, was not provided as many of our interest-rate-sensitive assets and liabilities were tied to interest rates (i.e., prime and federal funds) that were near their historical minimum levels and, therefore, could not materially decrease.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Discover Financial Services
Riverwoods, IL
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Discover Financial Services (the “Company”) as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial condition, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows as of and for the year ended December 31, 2022, of the Company and our report dated February 23, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 23, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Discover Financial Services
Riverwoods, IL
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Discover Financial Services (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - Refer to Notes 1, 2 and 4 to the financial statements.
Critical Audit Matter Description
Estimates of expected credit losses under the Current Expected Credit Losses (“CECL”) model, in accordance with ASU 2016-13, are based on relevant information about current conditions, historical experience and reasonable and supportable forward-looking forecasts regarding collectability of the loan portfolio.
Assumptions used to estimate expected credit losses under the CECL model included, but were not limited to, key economic assumptions applied over a reasonable and supportable forecast period and, for the credit card portfolio, the application of a credit card payment allocation policy.
During the year ended December 31, 2022, the economic environment resulted in increased uncertainty and more
judgment to derive the CECL estimate. Specifically, the unknown impacts of the cessation of fiscal policy assistance and recent monetary policy actions, in response to inflation, have increased the uncertainty associated with the macroeconomic outlook and CECL estimate. The selection of key assumptions and evaluation of model output required significant judgment from management. At December 31, 2022, the total allowance for loans was $7.4 billion.
Given the significant estimates and assumptions management makes to estimate the allowance for credit losses and the economic environment, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit modeling specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the allowance for credit losses balance included the following procedures, among others:
•We tested the design and operating effectiveness of management’s controls over the determination and review of model methodology, significant assumptions and model overlays, if applicable
•We evaluated whether the method (including the model), data, and significant assumptions are appropriate in the context of the applicable financial reporting framework
•We tested the relevance and reliability of internal and external data used within the models, including whether the data is accurate and complete when internally derived
•With assistance from credit modeling specialists, we evaluated whether the model is suitable for determining the estimate, which included understanding the model methodology and logic and whether the selected method for estimating loan losses is appropriate for each loan portfolio
•We evaluated whether the significant economic assumptions were reasonable and internally and externally consistent
•We evaluated the reasonableness and consistency of the reasonable and supportable forecast period
•We evaluated whether judgments have been applied consistently to the model and that any adjustments to the output of the model are consistent with the measurement objective of the applicable financial reporting framework and are appropriate in the circumstances
•We considered any contradictory evidence that arose while performing our procedures, and whether or not this evidence was indicative of management bias
•We evaluated the completeness and accuracy of the Company’s allowance for credit losses disclosures
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 23, 2023
We have served as the Company’s auditor since the spin-off from its former parent company in 2007 and as Discover Bank’s (a wholly owned subsidiary of the Company) auditor since 1985.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Financial Condition
(dollars in millions, except for share amounts)
December 31,
2022 2021
Assets
Cash and cash equivalents $ 8,856 $ 8,750
Restricted cash 41 2,582
Investment securities (includes available-for-sale securities of $11,987 and $6,700 reported at fair value with associated amortized cost of $12,167 and $6,549 at December 31, 2022 and 2021, respectively)
12,208 6,904
Loan receivables
Loan receivables 112,120 93,684
Allowance for credit losses (7,374) (6,822)
Net loan receivables 104,746 86,862
Premises and equipment, net 1,003 983
Goodwill 255 255
Other assets 4,519 3,906
Total assets $ 131,628 $ 110,242
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Interest-bearing deposit accounts $ 90,151 $ 70,818
Non-interest-bearing deposit accounts 1,485 1,575
Total deposits 91,636 72,393
Short-term borrowings - 1,750
Long-term borrowings 20,108 18,477
Accrued expenses and other liabilities 5,294 4,214
Total liabilities 117,038 96,834
Commitments, contingencies and guarantees (Notes 15, 18 and 19)
Stockholders’ Equity
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 569,689,007 and 568,830,897 shares issued at December 31, 2022 and 2021, respectively
6 6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at December 31, 2022 and 2021
1,056 1,056
Additional paid-in capital 4,468 4,369
Retained earnings 28,453 24,766
Accumulated other comprehensive loss (339) (94)
Treasury stock, at cost; 302,305,216 and 280,502,577 shares at December 31, 2022 and 2021, respectively
(19,054) (16,695)
Total stockholders’ equity 14,590 13,408
Total liabilities and stockholders’ equity $ 131,628 $ 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 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.
December 31,
2022 2021
Assets
Restricted cash $ 41 $ 2,582
Loan receivables $ 25,937 $ 25,449
Allowance for credit losses allocated to securitized loan receivables $ (1,152) $ (1,371)
Other assets $ 3 $ 4
Liabilities
Short- and long-term borrowings $ 10,259 $ 9,539
Accrued expenses and other liabilities $ 14 $ 6
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Income
(dollars in millions, except for share amounts)
For the Years Ended December 31,
2022 2021 2020
Interest income
Credit card loans $ 10,632 $ 8,717 $ 8,985
Other loans 1,870 1,734 1,817
Investment securities 179 182 252
Other interest income 183 18 41
Total interest income 12,864 10,651 11,095
Interest expense
Deposits 1,257 661 1,231
Short-term borrowings 2 - 32
Long-term borrowings 606 473 602
Total interest expense 1,865 1,134 1,865
Net interest income 10,999 9,517 9,230
Provision for credit losses 2,359 218 5,134
Net interest income after provision for credit losses 8,640 9,299 4,096
Other income
Discount and interchange revenue, net 1,424 1,224 933
Protection products revenue 172 165 180
Loan fee income 632 464 414
Transaction processing revenue 249 227 195
(Losses) gains on equity investments (214) 424 80
Other income 75 66 56
Total other income 2,338 2,570 1,858
Other expense
Employee compensation and benefits 2,139 1,986 1,894
Marketing and business development 1,035 810 659
Information processing and communications 513 500 540
Professional fees 871 797 717
Premises and equipment 118 92 113
Other expense 560 620 596
Total other expense 5,236 4,805 4,519
Income before income taxes 5,742 7,064 1,435
Income tax expense 1,350 1,615 294
Net income $ 4,392 $ 5,449 $ 1,141
Net income allocated to common stockholders $ 4,304 $ 5,351 $ 1,104
Basic earnings per common share $ 15.52 $ 17.85 $ 3.60
Diluted earnings per common share $ 15.50 $ 17.83 $ 3.60
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Comprehensive Income
(dollars in millions)
For the Years Ended December 31,
2022 2021 2020
Net income $ 4,392 $ 5,449 $ 1,141
Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax (250) (170) 172
Unrealized (losses) gains on cash flow hedges, net of tax (5) 3 5
Unrealized pension and post-retirement plan gains (losses), net of tax 10 28 (13)
Other comprehensive (loss) income (245) (139) 164
Comprehensive income $ 4,147 $ 5,310 $ 1,305
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Changes in Stockholders’ Equity
(dollars in millions, shares in thousands)
Preferred Stock Common Stock Additional
Paid-in
Capital Retained
Earnings Accumulated Other Comprehensive (Loss) Income Treasury
Stock Total
Stockholders’
Equity
Shares Amount Shares Amount
Balance at December 31, 2019 6 $ 563 566,654 $ 6 $ 4,206 $ 21,290 $ (119) $ (14,087) $ 11,859
Cumulative effect of ASU No. 2016-13 adoption - - - - - (1,902) - - (1,902)
Net income - - - - - 1,141 - - 1,141
Other comprehensive income - - - - - - 164 - 164
Purchases of treasury stock - - - - - - - (348) (348)
Common stock issued under employee benefit plans - - 192 - 10 - - - 10
Common stock issued and stock-based compensation expense - - 1,052 - 41 - - - 41
Preferred stock issued 5 493 - - - - - - 493
Dividends - common stock ($1.76 per share)
- - - - - (543) - - (543)
Dividends - Series C preferred stock ($5,500 per share)
- - - - - (31) - - (31)
Balance at December 31, 2020 11 1,056 567,898 6 4,257 19,955 45 (14,435) 10,884
Net income - - - - - 5,449 - - 5,449
Other comprehensive loss - - - - - - (139) - (139)
Purchases of treasury stock - - - - - - - (2,260) (2,260)
Common stock issued under employee benefit plans - - 88 - 9 - - - 9
Common stock issued and stock-based compensation expense - - 845 - 103 - - - 103
Dividends - common stock ($1.88 per share)
- - - - - (569) - - (569)
Dividends - Series C preferred stock ($5,500 per share)
- - - - - (31) - - (31)
Dividends - Series D preferred stock ($7,674 per share)
- - - - - (38) - - (38)
Balance at December 31, 2021 11 1,056 568,831 6 4,369 24,766 (94) (16,695) 13,408
Net income - - - - - 4,392 - - 4,392
Other comprehensive loss - - - - - - (245) - (245)
Purchases of treasury stock - - - - - - - (2,359) (2,359)
Common stock issued under employee benefit plans - - 107 - 10 - - - 10
Common stock issued and stock-based compensation expense - - 751 - 89 - - - 89
Dividends - common stock ($2.30 per share)
- - - - - (643) - - (643)
Dividends - Series C preferred stock ($5,500 per share)
- - - - - (31) - - (31)
Dividends - Series D preferred stock ($6,125 per share)
- - - - - (31) - - (31)
Balance at December 31, 2022 11 $ 1,056 569,689 $ 6 $ 4,468 $ 28,453 $ (339) $ (19,054) $ 14,590
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Cash Flows
(dollars in millions)
For the Years Ended December 31,
2022 2021 2020
Cash flows provided by operating activities
Net income $ 4,392 $ 5,449 $ 1,141
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 2,359 218 5,134
Deferred income taxes (427) 327 (672)
Depreciation and amortization
561 531 485
Amortization of deferred revenues (365) (295) (320)
Net losses (gains) on investments and other assets 261 (382) (26)
Other, net
125 257 200
Changes in assets and liabilities:
(Increase) decrease in other assets (846) (496) 118
Increase in accrued expenses and other liabilities 1,080 410 136
Net cash provided by operating activities 7,140 6,019 6,196
Cash flows provided by (used for) investing activities
Maturities of other short-term investments - 2,200 5,850
Purchases of other short-term investments - - (8,046)
Maturities of available-for-sale investment securities 2,084 2,727 1,007
Purchases of available-for-sale investment securities (7,682) (9) (113)
Maturities of held-to-maturity investment securities 32 82 54
Purchases of held-to-maturity investment securities (50) (28) (44)
Net change in principal on loans originated for investment (19,961) (4,574) 3,045
Proceeds from the sale of available for sale securities - 5 -
Proceeds from the sale of other investments 336 1 94
Purchases of other investments (169) (170) (72)
Proceeds from sale of premises and equipment 9 - -
Purchases of premises and equipment (236) (194) (261)
Net cash (used for) provided by investing activities (25,637) 40 1,514
Cash flows (used for) provided by financing activities
Net change in short-term borrowings (1,750) 1,750 -
Net change in deposits 19,208 (4,533) 4,128
Proceeds from issuance of securitized debt 5,620 1,727 -
Maturities and repayment of securitized debt (4,395) (3,451) (3,531)
Proceeds from issuance of other long-term borrowings 1,265 - 494
Maturities and repayments of other long-term borrowings (834) (922) (1,755)
Proceeds from issuance of common stock 10 9 10
Proceeds from issuance of preferred stock - - 493
Dividends paid on common and preferred stock (703) (636) (576)
Purchases of treasury stock (2,359) (2,260) (348)
Net cash provided by (used for) financing activities 16,062 (8,316) (1,085)
Net (decrease) increase in cash, cash equivalents and restricted cash (2,435) (2,257) 6,625
Cash, cash equivalents and restricted cash, at the beginning of the period 11,332 13,589 6,964
Cash, cash equivalents and restricted cash, at the end of the period $ 8,897 $ 11,332 $ 13,589
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents $ 8,856 $ 8,750 $ 13,564
Restricted cash 41 2,582 25
Cash, cash equivalents and restricted cash, at the end of the period $ 8,897 $ 11,332 $ 13,589
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest expense
$ 1,666 $ 1,077 $ 1,799
Income taxes, net of income tax refunds
$ 1,865 $ 1,305 $ 901
See Notes to the Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
1.Background and Basis of Presentation
Description of Business
Discover Financial Services (“DFS” or the “Company”) is a digital banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act. Therefore, the Company is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company provides digital banking products and services and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home loans and deposit products. The Company also operates the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”), collectively known as the Discover Global Network. The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as merchant acceptance throughout the United States of America (“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 credit and charge cards and/or provide card acceptance services.
The Company manages its business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. See Note 22: Segment Disclosures for a detailed description of each segment’s operations and the allocation conventions used in business segment reporting.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. The Company believes that the estimates used in the preparation of the consolidated financial statements are reasonable. Actual results could differ from these estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock unless it does not control the entity. However, the Company did not have a controlling voting interest in any entity other than its wholly-owned subsidiaries in the periods presented in the accompanying consolidated financial statements.
It is also the Company’s policy to consolidate any VIEs for which the Company is the primary beneficiary, as defined by GAAP. On this basis, the Company consolidates the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust (“DCENT”) as well as the student loan securitization trust. The Company is deemed to be the primary beneficiary of each of these trusts since it is, for each, the trust Servicer and the holder of both the residual interest and the majority of the most subordinated interests. Because of those involvements, the Company has, for each trust, (i) the power to direct the activities that most significantly impact the economic performance of the trust and (ii) the obligation (or right) to absorb losses (or receive benefits) of the trust that could potentially be significant. The Company has determined that it was not the primary beneficiary of any other VIE during the years ended December 31, 2022, 2021 and 2020.
For investments in any entities in which the Company owns 50% or less of the outstanding voting stock but in which the Company has significant influence over operating and financial decisions, the Company applies the equity method of accounting. The Company also applies the equity method to its investments in qualified affordable housing projects and similar tax credit partnerships. In cases where the Company’s equity investment is less than 20% and significant influence does not exist, such investments are carried at cost as they typically do not have readily determinable fair values, and are adjusted for any impairment in value. Investments in actively traded stock are carried at fair value with changes in fair value recorded as an adjustment to earnings.
Recently Issued Accounting Pronouncements (Not Yet Adopted)
In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the troubled debt restructuring ("TDR") recognition and measurement guidance and enhances disclosures for modifications of receivables to borrowers experiencing financial difficulty. Under ASU 2022-02, the use of a discounted cash flow method is no longer required when measuring expected credit losses on modified loans. The ASU also refines existing credit-related disclosures by requiring disclosure of current-period gross charge-offs of receivables by year of origination. The amendments in the ASU are to be applied prospectively to modifications and disclosures of gross charge-offs; however, adoption on a modified retrospective basis is permitted for the effect on the allowance for credit losses related to the elimination of the TDR recognition and measurement guidance. The ASU is effective for the Company on January 1, 2023. Management does not expect the amendments to have a material impact on the Company's financial statements.
In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The temporary reference rate transition guidance provided in Topic 848, which was originally set to expire on December 31, 2022, is designed to ease the operational cost and burden of accounting for the discontinuation of the London Interbank Offered Rate (“LIBOR”). The ASU extends the expiration date of Topic 848 to December 31, 2024. The ASU was effective upon issuance and the Company intends to apply the optional exemption from contract modification accounting provided in Topic 848 to LIBOR-indexed variable-rate private student loans. These outstanding student loans will convert to a Secured Overnight Financing Rate (“SOFR”) index in 2023 when 3-month U.S. dollar (“USD”) LIBOR ceases to be a representative reference rate. The Company does not expect the conversion of these loans to a SOFR index to have a material impact on the Company’s financial statements.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents is defined by the Company as cash on deposit with banks, including time deposits and other highly liquid investments with maturities of 90 days or less when purchased, excluding amounts restricted by certain contractual or other obligations. Cash and cash equivalents included $1.5 billion and $1.2 billion of cash and due from banks and $7.4 billion and $7.6 billion of interest-earning deposits at other banks at December 31, 2022 and 2021, respectively.
Restricted Cash
Restricted cash includes cash in accounts from which the Company’s ability to withdraw funds at any time is contractually limited. Restricted cash is generally designated for specific purposes arising out of certain contractual or other obligations.
Investment Securities
At December 31, 2022, investment securities consisted of debt obligations of the U.S. Treasury and government-sponsored enterprises of the U.S. (“U.S. GSEs”) and mortgage-backed securities issued by government agencies or U.S. GSEs. Investment securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost. All other investment securities are classified as available-for-sale, as the Company does not hold investment securities for trading purposes. Available-for-sale investment securities are reported at fair value with unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (“AOCI”) included in stockholders’ equity. The Company estimates the fair value of available-for-sale investment securities as more fully discussed in Note 20: Fair Value Measurements. The amortized cost for each held-to-maturity and available-for-sale investment security is adjusted for amortization of premiums or accretion of discounts, as appropriate. Such amortization or accretion is included in interest income. Interest on investment securities is accrued each month in accordance with their contractual terms and recorded in other assets in the consolidated statements of financial condition. The U.S. Treasury and U.S. GSE obligations and mortgage-backed securities issued by government agencies or U.S. GSEs in which the Company invests have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments.
Loan Receivables
Loan receivables consist of credit card receivables and other loan receivables. The carrying values of all classes of loan receivables include unamortized net deferred loan origination fees and costs (also see “- Significant Revenue Recognition Accounting Policies - Loan Interest and Fee Income”). The credit card loan receivables carrying amount includes the principal amounts outstanding and uncollected billed interest and fees and is reduced for unearned revenue related to balance transfer fees (also see “- Significant Revenue Recognition Accounting Policies - Loan Interest and Fee Income”). Other loans consist of private student loans, personal loans and other loans and the carrying amount of those loans includes principal amounts outstanding. For private student loans, principal amounts outstanding also include accrued interest that has been capitalized. The Company’s loan receivables are deemed to be held-for-investment at origination or acquisition because management has the intent and ability to hold them for the foreseeable future. Cash flows associated with loans originated or acquired for investment are classified as cash flows from investing activities, regardless of a subsequent change in intent.
Delinquent Loans and Net Charge-Offs
The entire balance of an account is contractually past due if the minimum payment is not received by the specified date on the customer’s billing statement. Delinquency is reported on loans that are 30 days or more past due.
Credit card loans are charged off at the end of the month during which an account becomes 180 days past due. Closed-end unsecured consumer loan receivables are charged off at the end of the month during which an account becomes 120 days contractually past due. Customer bankruptcies and probate accounts are charged off by the end of the month 60 days following the receipt of notification of the bankruptcy or death, but not later than the 180-day or 120-day time frame described above. Receivables associated with alleged or potential fraudulent transactions are reserved for at their net realizable value upon receipt of notification of such fraud through a charge to other expense and are subsequently written off at the end of the month 90 days following notification, but not later than the contractual 180-day or 120-day time frame described above. The Company’s charge-off policies are designed to comply with guidelines established by the Federal Financial Institutions Examination Council (“FFIEC”).
The Company’s net charge-offs include the principal amount of loans charged off less principal recoveries and exclude charged-off interest and fees, recoveries of interest and fees and fraud losses.
The practice of re-aging an account also may affect loan delinquencies and charge-offs. A re-age is intended to assist delinquent customers who have experienced financial difficulties but who demonstrate both an ability and willingness to repay. Accounts meeting specific criteria are re-aged when the Company and the customer agree on a temporary repayment schedule that may include concessionary terms. With re-aging, the outstanding balance of a delinquent account is returned to a current status. Customers may also qualify for a workout re-age when either a longer term or permanent hardship exists. The Company’s re-age practices are designed to comply with FFIEC guidelines.
Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level that is appropriate to absorb net credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. The estimate of expected credit losses considers uncollectible principal, interest and fees associated with the Company's loan receivables existing as of the balance sheet date. Additionally, the estimate includes expected recoveries of amounts that were either previously charged off or are expected to be charged off. The allowance is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for credit losses. Charge-offs of principal amounts of loans outstanding are deducted from the allowance and subsequent recoveries of such amounts increase the allowance. Charge-offs of loan balances representing unpaid interest and fees result in a reversal of interest and fee income, respectively, which is effectively a reclassification of the provision for credit losses.
The Company calculates its allowance for credit losses by estimating expected credit losses separately for classes of receivables with similar risk characteristics. This results in segmenting the portfolio by loan product type, which is the level that the Company develops and documents its methodology for determining the allowance for credit losses. The estimate of expected credit losses for each loan product type is based on: (i) a reasonable and supportable forecast period; (ii) a reversion period; and (iii) a post-reversion period based on historical information covering the remaining life of the loan, all of which is netted with expected recoveries. The lengths of the reasonable and supportable forecast and reversion periods can vary and are subject to a quarterly assessment that considers the economic outlook and level of variability among macroeconomic forecasts. In benign economic conditions, the Company expects to apply a
straight-line method to revert from the reasonable and supportable forecast period to the post-reversion period, but in certain stressed scenarios, a weighted approach may be deemed more appropriate.
Several analyses are used to help estimate credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. The Company's estimation process includes models that predict customer losses based on risk characteristics and portfolio attributes, macroeconomic variables and historical data and analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance.
For credit card loans, the Company uses a modeling framework that includes the following components for estimating expected credit losses:
•Probability of default: this component estimates the probability of charge-off at different points in time over the life of each loan.
•Exposure at default: this component estimates the portion of the balance sheet date balance remaining at any given time of charge-off for each loan. Given that there is no stated life of a receivable balance on a revolving credit card account, the Company applies a percentage of expected payments to estimate the portion of the balance that would remain at the time of charge-off.
•Loss given default: this component estimates the percentage of exposure (i.e., net loss) at time of charge-off that cannot be recovered, with the offsetting forecast recoveries being the driver of this estimate.
•Recoveries from previously charged-off accounts are estimated separately and are netted as part of the aggregation of all of the components of the card loss modeling framework.
For private student loans and personal loans, the Company uses vintage-based models that estimate expected credit losses over the life of the loan, net of recovery estimates, impacted mainly by time elapsed since origination, credit quality of origination vintages and macroeconomic forecasts.
The components described above for credit card, private student and personal loans are developed utilizing historical data and applicable macroeconomic variable inputs based on statistical analysis and customer behavioral relationships with credit performance. Expected recoveries from loans charged off as of the balance sheet date are modeled separately and included in the allowance estimate. The Company leverages these models and recent macroeconomic forecasts for the portion of the estimate associated with the reasonable and supportable forecast period. To estimate expected credit losses for the remainder of the life of the credit card loans, the Company reverts to historical experience of credit card loans with characteristics similar to those as of the balance sheet date and observed over various phases of a credit cycle. To estimate expected credit losses for the remainder of the life of private student and personal loans, the Company generally reverts to use of average macroeconomic variables over an appropriate historical period.
The considerations in these models include past and current loan performance, loan growth and seasoning, risk management practices, account collection strategies, economic conditions, bankruptcy filings, policy changes and forecasting uncertainties. Consideration of past and current loan performance includes the post-modification performance of loans modified in a troubled debt restructuring. For the credit card loan portfolio, the Company estimates its credit losses on a loan-level basis, which includes loans that are delinquent and/or no longer accruing interest and/or loans that have been restructured. For the remainder of its portfolio, including private student, personal and other loans, the Company estimates its credit losses on a pooled basis. For all loan types, recoveries are estimated at a pooled level based on estimates of future cash flows derived using historical experience.
Accrued interest receivable on credit card loans is included in the estimate of expected credit losses once billed to the customer (i.e., once the interest becomes part of the loan balance). Except as noted in the following sentence, an allowance for credit losses is not recorded for unbilled credit card interest or accrued interest receivable on other loan classes as the impact to the allowance for credit losses is not material. Accrued interest receivable on student loans that have not yet entered repayment is included in the estimate of expected credit losses.
No liability for expected credit losses is required for unused lines of credit on the Company’s credit card loans because they are unconditionally cancellable. The Company records a liability for expected credit losses for unfunded commitments on all other loans, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition. This liability is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for credit losses.
As part of certain collection strategies, the Company may modify the terms of loans to customers experiencing financial hardship. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on private student loans and certain grants of private student loan forbearance are generally accounted for as troubled debt restructurings. The Company classifies a modified loan in which a concession has been granted to the borrower as a troubled debt restructuring based on the cumulative length of the concession period and credit quality of the borrower.
Loan receivables that have been modified are subject to the same requirements for the accrual of expected credit loss over their expected remaining lives as described above for unmodified loans. The effects of all loan modifications, whether the TDR designation applies or not, are reflected in the allowance for credit losses. An adjustment to the allowance for credit losses is not recorded for reasonably expected TDRs as the impact is not material. When the impact of the concession can only be captured by use of a discounted cash flow method (or a reconcilable method), such method is used to measure the allowance for credit losses.
Premises and Equipment, net
Premises and equipment, net, are stated at cost less provisions for impairment and accumulated depreciation and amortization. Accumulated depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. The Company periodically reviews the estimated useful lives and may adjust them as necessary. Buildings are depreciated over a period of thirty-nine years. The costs of improvements are capitalized and depreciated either over the asset’s estimated useful life, typically ten years to fifteen years, or over the remaining term of the lease, when applicable. Furniture and fixtures are depreciated over a period of five years to ten years. Equipment is depreciated over three years to ten years. Maintenance and repairs are immediately expensed when incurred, while the costs of significant improvements are capitalized.
Purchased software and capitalized costs related to internally developed software are amortized over their useful lives of three years to ten years. Costs incurred during the application development stage related to internally developed software are capitalized. Costs are expensed as incurred during the preliminary project stage and post implementation stage. Once the capitalization criteria as defined in GAAP have been met, external direct costs incurred for materials and services used in developing or obtaining internal-use computer software and payroll and payroll-related costs for employees who are directly associated with the internal-use computer software project (to the extent those employees devoted time directly to the project) are capitalized. Amortization of capitalized costs begins when the software is ready for its intended use. Capitalized software is included in premises and equipment, net in the Company’s consolidated statements of financial condition. See Note 6: Premises and Equipment for further information about the Company’s premises and equipment.
Cloud computing arrangements involving the licensing of software that meet certain criteria are recognized as the acquisition of software. Such assets are measured at the present value of the license obligation, if the license is to be paid over time, in addition to any capitalized upfront costs and amortized over the life of the arrangement. Cloud computing arrangements that do not meet the criteria to be recognized as acquired software are accounted for as service contracts. To date, none of the Company’s cloud computing arrangements have met the criteria to be recognized as acquired software.
Premises and equipment are subject to impairment testing when events or conditions indicate that the carrying value of the asset may not be fully recoverable from future cash flows. A test for recoverability is done by comparing the asset’s carrying value to the sum of the undiscounted future net cash inflows expected to be generated from the use of the asset over its remaining useful life. Impairment exists if the sum of the undiscounted expected future net cash inflows is less than the carrying amount of the asset. Impairment would result in a write-down of the asset to its estimated fair value. The estimated fair values of these assets are based on the discounted present value of the stream of future net cash inflows expected to be derived over the remaining useful lives of the assets. If an impairment write-down is recorded, the remaining useful life of the asset will be evaluated to determine whether revision of the remaining amortization or depreciation period is appropriate.
Goodwill
Goodwill is recorded as part of the Company’s acquisitions of businesses when the purchase price exceeds the fair value of the net tangible and separately identifiable intangible assets acquired. The Company’s goodwill is not amortized, but rather is subject to an impairment test at the reporting unit level annually as of October 1, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. The Company’s reported goodwill relates to PULSE, which it acquired in 2005. The Company’s goodwill is tested for impairment by comparing the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. No impairment was identified during the impairment test conducted as of October 1, 2022.
Stock-based Compensation
The Company measures the cost of services received from employees and non-employee directors in exchange for an award of stock-based compensation based on the grant-date fair value of the award. The cost, net of estimated forfeitures, is recognized over the requisite service period. Awards to employees who are retirement-eligible at any point during the year are amortized over 12 months in accordance with the vesting terms that apply under those circumstances. No compensation cost is recognized for awards that are subsequently forfeited.
Advertising Costs
The Company expenses television and radio advertising costs in the period in which the advertising is first aired and all other advertising costs as incurred. Advertising costs are recorded in marketing and business development and were $307 million, $262 million and $212 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Income Taxes
Income tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and income tax bases of assets and liabilities using currently enacted tax rates. Deferred tax assets are recognized when their realization is determined to be more likely than not. A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances and which causes a change in management’s judgment about the realizability of the related deferred tax asset is included in the current tax provision. Uncertain tax positions are measured at the highest amount of tax benefit for which realization is judged to be more likely than not. Tax benefits that do not meet these criteria are unrecognized tax benefits. The Company recognizes and reports interest and penalties, if necessary, related to uncertain tax positions within its provision for income tax expense. See Note 15: Income Taxes for more information about the Company’s income taxes.
Accumulated Other Comprehensive Income
The Company records unrealized gains and losses on available-for-sale securities, changes in the fair value of cash flow hedges and certain pension and foreign currency translation adjustments in other comprehensive income (“OCI”) on an after-tax basis where applicable. The Company’s policy is to adjust the tax effects of a component of AOCI in the same period in which the item is sold or otherwise derecognized, or when the carrying value of the item is remeasured. Details of OCI, net of tax, are presented in the statement of comprehensive income and a roll forward of AOCI is presented in the consolidated statements of changes in stockholders’ equity and Note 13: Accumulated Other Comprehensive Income.
Significant Revenue Recognition Accounting Policies
Loan Interest and Fee Income
Interest on loans is composed largely of interest on credit card loans and is recognized based on the amount of loans outstanding and their contractual interest rate. Interest on credit card loans is included in loan receivables when billed to the customer. The Company accrues unbilled interest revenue each month from a customer’s billing cycle date to the end of the month. The Company applies an estimate of the percentage of loans that will revolve in the next cycle in the estimation of the accrued unbilled portion of interest revenue that is included in other assets on the consolidated statements of financial condition. Interest on other loan receivables is accrued each month in accordance with their contractual terms and recorded in other assets in the consolidated statements of financial condition.
The Company recognizes fees (except balance transfer fees and certain product fees) on loan receivables in interest income or loan fee income as the fees are assessed. Balance transfer fees and certain product fees are
recognized in interest income or loan fee income ratably over the periods to which they relate. Balance transfer fees are accreted to interest income over the estimated life of the related balance. As of December 31, 2022 and 2021, deferred revenues related to balance transfer fees, recorded as a reduction of loan receivables, were $85 million and $62 million, respectively. Loan fee income consists of fees on credit card loans and includes late, cash advance, returned check and other miscellaneous fees and is reflected net of waivers and charge-offs.
Direct loan origination costs on credit card loans are deferred and amortized on a straight-line basis over a one year period and recorded in interest income from credit card loans. Direct loan origination costs on other loan receivables are deferred and amortized over the life of the loan using the interest method and are recorded in interest income from other loans. As of December 31, 2022 and 2021, the remaining unamortized deferred costs related to loan origination were $298 million and $222 million, respectively, and were recorded in loan receivables.
The Company accrues interest and fees on credit card and closed-end loan receivables until the loans are paid or charged off, except in instances of customer bankruptcy, death or suspected fraud, where no further interest and fee accruals occur following notification. Upon completion of the fraud investigation, non-fraudulent credit card and closed-end consumer loan receivables may resume accruing interest. Payments received on non-accrual loans are allocated according to the same payment hierarchy applied to loans that are accruing interest. When loan receivables are charged off, unpaid accrued interest and fees are reversed against the income line items in which they were originally recorded in the consolidated statements of income. Charge-offs and recoveries of amounts that relate to capitalized interest on private student loans are treated as principal charge-offs and recoveries, affecting the provision for credit losses rather than interest income. The Company considers uncollectible interest and fee revenues in assessing the adequacy of the allowance for credit losses.
Interest income from loans accounted for as troubled debt restructurings is accounted for in the same manner as other accruing loans. Cash collections on these loans are allocated according to the same payment hierarchy applied to loans that are not in such programs.
Discount and Interchange Revenue
The Company earns discount revenue from fees charged to merchants with whom it has entered into card acceptance agreements for processing credit card purchase transactions. The Company earns acquirer interchange revenue primarily from merchant acquirers on Discover Network, Diners Club and PULSE transactions made by credit and debit card customers at merchants with whom merchant acquirers have entered into card acceptance agreements for processing payment card transactions. These card acceptance arrangements generally renew automatically and do not have fixed durations. Under these agreements, the Company stands ready to process payment transactions as and when each is presented. The Company earns discount, interchange and similar fees only when transactions are processed. Contractually defined per-transaction fee amounts typically apply to each type of transaction processed and are recognized as revenue at the time each transaction is captured for settlement. These fees are typically collected by the Company as part of the process of settling transactions daily with merchants and acquirers and are fully earned at the time settlement is made.
The Company pays issuer interchange to card-issuing entities that have entered into contractual arrangements to issue cards on the Discover Network and on certain transactions on the Diners Club and PULSE networks. This cost is contractually established and is based on the card-issuing organization’s transaction volume. The Company classifies this cost as a reduction of discount and interchange revenue. Costs of cardholder reward arrangements, including the Cashback Bonus reward program, are classified as reductions of discount and interchange revenue pursuant to guidance under Accounting Standards Codification (“ASC”) Topic 606 governing consideration payable to a customer. For both issuer interchange and transaction-based cardholder rewards, the Company accrues the cost at the time each underlying card transaction is captured for settlement.
Customer Rewards
The Company offers its customers various reward programs, including the Cashback Bonus reward program, pursuant to which the Company pays certain customers a reward equal to a percentage of their credit card purchase amounts based on the type and volume of the customer’s purchases. The liability for customer rewards is recorded on an individual customer basis and is accumulated as qualified customers earn rewards through their ongoing credit card purchase activity or other defined actions. The Company recognizes customer rewards costs as a reduction of the related revenue, if any. In instances where a reward is not associated with a revenue-generating transaction, such as when a reward is given for opening an account, the reward cost is recorded as an operating expense. For the years
ended December 31, 2022, 2021 and 2020, rewards costs amounted to $3.0 billion, $2.5 billion and $1.9 billion, respectively. The liability for customer rewards was $2.2 billion and $2.0 billion at December 31, 2022 and 2021, respectively, and is included in accrued expenses and other liabilities on the consolidated statements of financial condition.
Protection Products Revenue
The Company earns revenue related to fees received for providing ancillary products and services, including payment protection and identity theft protection services, to its credit card customers. A portion of this revenue comprises amounts earned for arranging for the delivery of products offered by third-party service providers. The amount of revenue recorded is generally based on either a percentage of a customer’s outstanding balance or a flat fee, in either case assessed monthly and recognized as earned. These contracts are month-to-month arrangements that are cancellable at any time. The Company recognizes each monthly fee in the period to which the service or coverage relates.
Transaction Processing Revenue
Transaction processing revenue represents switch fees charged to financial institutions and merchants under network participation agreements for processing ATM and debit transactions over the PULSE network, as well as various participation and membership fees. Network participation agreements generally renew automatically and do not have fixed durations, although the Company does enter into fixed-term pricing or incentive arrangements with certain network participants. Similar to discount and interchange fees, switch fees are contractually defined per-transaction fee amounts and are assessed and recognized as revenue at the time each transaction is captured for settlement. These fees are typically collected by the Company as part of the process of settling transactions with network participants. Membership and other participation fees are recognized over the periods to which each fee relates.
Other Income
Other income includes gains and losses on equity investments, sales-based royalty revenues earned by Diners Club, merchant fees, revenues from network partners and other miscellaneous revenue items. Unrealized gains and losses on equity investments carried at fair value are recognized quarterly based on changes in their respective fair values. Sales-based royalty revenues are recognized as the related sales are reported by Diners franchisees. All remaining items of other income are recognized as the related performance obligations are satisfied.
Future Revenue Associated with Customer Contracts
For contracts under which the Company processes payment card transactions, the Company has the right to assess fees for services performed and to collect those fees through the settlement process. The Company generates essentially all of its discount and interchange revenue and transaction processing revenue, as well as some revenue reported as other income, through such contracts. There is no specified quantity of service promised in these contracts as the number of payment transactions is dependent upon cardholder behavior, which is outside the control of the Company and its network customers (i.e., merchants, acquirers, issuers and other network participants). As noted above, these contracts are typically without fixed durations and renew automatically. For these reasons, the Company does not make or disclose an estimate of revenue associated with performance obligations attributable to the remaining terms of these contracts. Future revenue associated with the Company’s sales-based royalty revenues earned from Diners Club licensees is similarly variable and open-ended and therefore the Company does not make or disclose an estimate of royalties associated with performance obligations attributable to the remaining terms of the licensing and royalty arrangements. Because of the nature of the services and the manner of collection associated with the majority of the Company’s revenue from contracts with customers, material receivables or deferred revenues are not generated.
Incentive Payments
The Company makes certain incentive payments under contractual arrangements with financial institutions, Diners Club licensees, merchants, acquirers and certain other customers. These payments are generally classified as contra-revenue unless a distinct good or service is received by the Company in exchange for the payment and the fair value of the good or service can be reasonably estimated. If no such good or service is identified, then the entire payment is classified as contra-revenue and included in the consolidated statements of income in the line item where the related revenues are recorded. If the payment gives rise to an asset because it is expected to directly or indirectly contribute to future net cash inflows, it is deferred and recognized over the expected benefit period. The unamortized portion of the
deferred incentive payments included in other assets on the consolidated statements of financial condition was $32 million and $33 million at December 31, 2022 and 2021, respectively.
3. Investments
The Company’s other short-term investments and investment securities consist of the following (dollars in millions):
December 31,
2022 2021
U.S. Treasury securities(1) and U.S. GSE(2) securities
$ 11,423 $ 6,514
Residential mortgage-backed securities - Agency(3)
785 390
Total investment securities $ 12,208 $ 6,904
(1)$97 million and $27 million of U.S. Treasury securities pledged as swap collateral as of December 31, 2022 and 2021, respectively.
(2)Consists of a security issued by the Federal Home Loan Bank.
(3)Consists of securities issued by Fannie Mae, Freddie Mac, or 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
December 31, 2022
Available-for-Sale Investment Securities(1)
U.S. Treasury and U.S. GSE securities $ 11,580 $ 21 $ (178) $ 11,423
Residential mortgage-backed securities - Agency 587 - (23) 564
Total available-for-sale investment securities $ 12,167 $ 21 $ (201) $ 11,987
Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)
$ 221 $ - $ (22) $ 199
Total held-to-maturity investment securities $ 221 $ - $ (22) $ 199
December 31, 2021
Available-for-Sale Investment Securities(1)
U.S. Treasury and U.S. GSE securities $ 6,368 $ 146 $ - $ 6,514
Residential mortgage-backed securities - Agency 181 5 - 186
Total available-for-sale investment securities $ 6,549 $ 151 $ - $ 6,700
Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)
$ 204 $ 3 $ (1) $ 206
Total held-to-maturity investment securities $ 204 $ 3 $ (1) $ 206
(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 (“RMBS”) that were classified as held-to-maturity as they were entered into as a part of the Company’s community reinvestment initiatives.
The Company invests in U.S. Treasury obligations and securities issued by U.S. GSEs, which have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. federal government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments. In addition, the Company did not have the intent to sell any available-for-sale securities with an unrealized loss position and did not believe it is more likely than not that it will be required to sell any such security before recovery of its amortized cost basis.
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):
Less than 12 months More than 12 months
Number of Securities in a Loss Position Fair Value Unrealized Losses Fair Value Unrealized Losses
December 31, 2022
Available-for-Sale Investment Securities
U.S. Treasury securities 123 $ 9,060 $ (175) $ 106 $ (3)
Residential mortgage-backed securities - Agency 34 $ 559 $ (22) $ 5 $ (1)
December 31, 2021
Available-for-Sale Investment Securities
U.S. Treasury securities 2 $ 110 NM $ - $ -
Residential mortgage-backed securities - Agency 1 $ 7 NM $ - $ -
During the year ended December 31, 2022, the Company had no sales of available-for-sale securities. During the year ended December 31, 2021, the Company received $5 million of proceeds from the sale of available-for-sale securities. As a result of the sale, the Company recognized an immaterial gain during the year ended December 31, 2021. There were no sales of available-for-sale securities during the year ended December 31, 2020. See Note 13: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the years ended December 31, 2022, 2021 and 2020.
Maturities and weighted-average yields of available-for-sale debt securities and held-to-maturity debt securities are provided in the following tables (dollars in millions):
At December 31, 2022 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 and U.S. GSE securities $ 1,726 $ 9,025 $ 829 $ - $ 11,580
Residential mortgage-backed securities - Agency(1)
1 87 25 474 587
Total available-for-sale investment securities $ 1,727 $ 9,112 $ 854 $ 474 $ 12,167
Held-to-Maturity Investment Securities - Amortized Cost
Residential mortgage-backed securities - Agency(1)
$ - $ - $ - $ 221 $ 221
Total held-to-maturity investment securities $ - $ - $ - $ 221 $ 221
Available-for-Sale Investment Securities - Fair Values
U.S. Treasury and U.S. GSE securities $ 1,706 $ 8,890 $ 827 $ - $ 11,423
Residential mortgage-backed securities - Agency(1)
1 83 24 456 564
Total available-for-sale investment securities $ 1,707 $ 8,973 $ 851 $ 456 $ 11,987
Held-to-Maturity Investment Securities - Fair Values
Residential mortgage-backed securities - Agency(1)
$ - $ - $ - $ 199 $ 199
Total held-to-maturity investment securities $ - $ - $ - $ 199 $ 199
Available-for-Sale Investment Securities - Weighted-Average Yields(2)
U.S. Treasury and U.S. GSE securities 2.48 % 3.39 % 3.94 % - % 3.30 %
Residential mortgage-backed securities - Agency(1)
1.82 % 1.94 % 2.50 % 3.51 % 3.23 %
Total available-for-sale investment securities 2.48 % 3.38 % 3.90 % 3.51 % 3.29 %
Held-to-Maturity Investment Securities - Weighted-Average Yields
Residential mortgage-backed securities(1)
- % - % - % 3.05 % 3.05 %
Total held-to-maturity investment securities - % - % - % 3.05 % 3.05 %
(1)Maturities of RMBS are reflective of the contractual maturities of the investment.
(2)The weighted-average yield for available-for-sale investment securities is calculated based on the amortized cost.
Taxable interest on investment securities was $179 million, $182 million and $252 million for the years ended December 31, 2022, 2021 and 2020, respectively. There was no U.S. federal income tax-exempt interest on investment securities for the years ended December 31, 2022, 2021 and 2020.
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 and 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 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 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 tax credits allocated to the affordable housing projects and the community revitalization projects. The Company does not consolidate these investments as the Company does not have a controlling financial interest in the investee entities. As of December 31, 2022 and 2021, the Company had outstanding investments in these entities of $416 million and $388 million, respectively, and related contingent liabilities for unconditional and legally binding delayed equity contributions of $111 million and $92 million, respectively. Of the above outstanding equity investments, the Company had $375 million and $350 million of investments related to
affordable housing projects as of December 31, 2022 and 2021, respectively, which had $100 million and $80 million of related contingent liabilities for unconditional and legally binding delayed equity contributions, respectively.
The Company holds non-controlling equity positions in several payment services entities. Most of these investments are not subject to equity method accounting because the Company does not have significant influence over the investee. The common or preferred equity securities that the Company holds typically do not have readily determinable fair values. As a result, the majority of these investments are carried at cost minus impairment, if any. As of December 31, 2022 and 2021, the carrying value of these investments, which are recorded within other assets on the Company’s consolidated statements of financial condition, was $39 million and $36 million, respectively.
The Company also holds non-controlling equity positions in payment service entities that have actively traded stock and therefore have readily determinable fair values. As a result, these investments are carried at fair value based on the quoted share prices. As of December 31, 2022 and 2021, the carrying value of these investments, which are recorded within other assets on the Company's consolidated statements of financial condition, were $41 million and $461 million, respectively. During the year ended December 31, 2022, the Company recognized a net loss of $214 million on the consolidated statements of income related to these investments. The Company recognized a net gain of $423 million during the year ended December 31, 2021. The Company recognized no gains or losses during the year ended December 31, 2020.
4. Loan Receivables
The Company has two loan portfolio segments: credit card loans and other loans.
The Company’s classes of receivables within the two portfolio segments are depicted in the following table (dollars in millions):
December 31,
2022 2021
Credit card loans(1)(2)
$ 90,113 $ 74,369
Other loans(3)
Private student loans(4)
10,308 10,113
Personal loans 7,998 6,936
Other loans 3,701 2,266
Total other loans 22,007 19,315
Total loan receivables 112,120 93,684
Allowance for credit losses (7,374) (6,822)
Net loan receivables $ 104,746 $ 86,862
(1)Amounts include carrying values of $13.5 billion and $13.3 billion underlying investors’ interest in trust debt at December 31, 2022 and 2021, respectively, and $12.2 billion and $11.9 billion in seller’s interest at December 31, 2022 and 2021, respectively. See Note 5: Credit Card and Private Student Loan Securitization Activities for additional information.
(2)Unbilled accrued interest receivable on credit card loans, which is presented as part of other assets in the Company’s consolidated statements of financial condition, was $611 million and $423 million at December 31, 2022 and 2021, respectively.
(3)Accrued interest receivable on private student, personal and other loans, which is presented as part of other assets in the Company’s consolidated statements of financial condition, was $468 million, $49 million and $11 million, respectively, at December 31, 2022 and $443 million, $42 million and $6 million, respectively, at December 31, 2021.
(4)Amounts include carrying values of $176 million and $207 million in loans pledged as collateral against the note issued from a private student loan securitization trust at December 31, 2022 and 2021, respectively. See Note 5: Credit Card and Private Student Loan Securitization Activities for additional information.
Credit Quality Indicators
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 and information from credit bureaus, such as FICO or other credit scores, relating to the customer's broader credit performance. The Company actively monitors key credit quality indicators, including FICO scores and delinquency status, for credit card, private student and personal loans. These indicators are important to understand the overall credit performance of the Company's customers and their ability to repay.
FICO scores are generally obtained at the origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that accounts with FICO scores below 660 have larger delinquencies and credit losses than those with higher credit scores.
The following table provides the distribution of the amortized cost basis (excluding accrued interest receivable presented in other assets) by the most recent FICO scores available for the Company's customers for credit card, private student and personal loan receivables (dollars in millions):
Credit Risk Profile by FICO Score
December 31,
2022 2021
660 and Above Less than 660
or No Score 660 and Above Less than 660
or No Score
$ % $ % $ % $ %
Credit card loans(1)
$ 73,827 82 % $ 16,286 18 % $ 62,262 84 % $ 12,107 16 %
Private student loans by origination year(2)(3)
2022 $ 1,172 94 % $ 77 6 %
2021 1,668 95 % 81 5 % $ 1,251 94 % $ 73 6 %
2020 1,365 95 % 65 5 % 1,561 96 % 59 4 %
2019 1,221 95 % 67 5 % 1,439 96 % 61 4 %
2018 945 94 % 62 6 % 1,147 95 % 59 5 %
Prior 3,361 94 % 224 6 % 4,215 94 % 248 6 %
Total private student loans $ 9,732 94 % $ 576 6 % $ 9,613 95 % $ 500 5 %
Personal loans by origination year
2022 $ 4,270 98 % $ 77 2 %
2021 1,958 96 % 91 4 % $ 3,326 99 % $ 37 1 %
2020 790 95 % 40 5 % 1,622 98 % 39 2 %
2019 444 92 % 38 8 % 1,052 94 % 62 6 %
2018 164 88 % 23 12 % 435 91 % 44 9 %
Prior 85 83 % 18 17 % 276 87 % 43 13 %
Total personal loans $ 7,711 96 % $ 287 4 % $ 6,711 97 % $ 225 3 %
(1)Amounts include $645 million and $813 million of revolving line-of-credit arrangements that were converted to term loans as a result of a TDR program as of December 31, 2022 and 2021, respectively.
(2)A majority of private student loan originations occur in the third quarter and disbursements can span multiple calendar years.
(3)FICO score represents the higher credit score of the cosigner or borrower.
Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.
The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent loans in the Company’s loan portfolio is shown below for credit card, private student and personal loan receivables (dollars in millions):
December 31,
2022 2021
30-89 Days
Delinquent 90 or
More Days
Delinquent Total Past
Due 30-89 Days
Delinquent 90 or
More Days
Delinquent Total Past
Due
Credit card loans $ 1,250 $ 1,028 $ 2,278 $ 670 $ 562 $ 1,232
Private student loans by origination year(1)
2022 $ - $ - $ -
2021 6 1 7 $ - $ - $ -
2020 14 3 17 4 1 5
2019 19 5 24 9 2 11
2018 21 6 27 14 4 18
Prior 107 30 137 94 29 123
Total private student loans $ 167 $ 45 $ 212 $ 121 $ 36 $ 157
Personal loans by origination year
2022 $ 12 $ 3 $ 15
2021 15 6 21 $ 5 $ 1 $ 6
2020 8 2 10 7 2 9
2019 6 2 8 11 4 15
2018 3 2 5 6 3 9
Prior 3 1 4 6 3 9
Total personal loans $ 47 $ 16 $ 63 $ 35 $ 13 $ 48
(1)Private student loans may include a deferment period, during which borrowers are not required to make payments while enrolled in school at least half time as determined by the school. During a deferment period, these loans do not advance into delinquency.
Allowance for Credit Losses
The following tables provide changes in the Company’s allowance for credit losses (dollars in millions):
For the Year Ended December 31, 2022
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2021 $ 5,273 $ 843 $ 662 $ 44 $ 6,822
Additions
Provision for credit losses(1)
2,233 99 24 13 2,369
Deductions
Charge-offs (2,417) (126) (159) - (2,702)
Recoveries 794 23 68 - 885
Net charge-offs (1,623) (103) (91) - (1,817)
Balance at December 31, 2022 $ 5,883 $ 839 $ 595 $ 57 $ 7,374
For the Year Ended December 31, 2021
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2020 $ 6,491 $ 840 $ 857 $ 38 $ 8,226
Additions
Provision for credit losses(1)
229 67 (75) 6 227
Deductions
Charge-offs (2,255) (89) (190) - (2,534)
Recoveries 808 25 70 - 903
Net charge-offs (1,447) (64) (120) - (1,631)
Balance at December 31, 2021 $ 5,273 $ 843 $ 662 $ 44 $ 6,822
For the Year Ended December 31, 2020
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2019(2)
$ 2,883 $ 148 $ 348 $ 4 $ 3,383
Cumulative effect of ASU No. 2016-13 adoption(3)
1,667 505 265 24 2,461
Balance at January 1, 2020 4,550 653 613 28 5,844
Additions
Provision for credit losses(1)
4,379 251 476 11 5,117
Deductions
Charge-offs (3,101) (85) (289) (1) (3,476)
Recoveries 663 21 57 - 741
Net charge-offs (2,438) (64) (232) (1) (2,735)
Balance at December 31, 2020 $ 6,491 $ 840 $ 857 $ 38 $ 8,226
(1)Excludes a $10 million, $9 million and $17 million reclassification of the liability for expected credit losses on unfunded commitments for the years ended December 31, 2022, 2021 and 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in the Company’s consolidated statements of financial condition.
(2)Prior to the adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
(3)Represents the adjustment to the allowance for credit losses as a result of the adoption of ASU No. 2016-13 on January 1, 2020.
The allowance for credit losses was approximately $7.4 billion at December 31, 2022, which reflects a $552 million build from the amount of the allowance for credit losses at December 31, 2021. The build in the allowance for credit losses between December 31, 2022 and December 31, 2021, was primarily driven by loan growth.
The allowance estimation process begins with a loss forecast that uses certain macroeconomic variables and multiple macroeconomic scenarios among its inputs. In estimating the allowance at December 31, 2022, the Company used a macroeconomic forecast that resulted in the following weighted average amounts: (i) peak unemployment rate of 4.68%, decreasing to 4.63% by the end of 2023 and (ii) 1.05% annualized growth in the real gross domestic product in 2023.
In estimating expected credit losses, the Company considered the uncertainties associated with borrower behavior and payment trends, as well as higher consumer price inflation experienced during 2022 and the fiscal and monetary policy responses to that inflation. In 2022, the Federal Reserve raised its federal funds rate target range and financial market participants expect additional increases during 2023 in an effort to reduce inflation. In recognition of the risks related to the macroeconomic environment, the estimation of the allowance for credit losses has required significant management judgment.
The forecast period the Company deemed to be reasonable and supportable was 18 months for all periods presented. The 18-month reasonable and supportable forecast period was deemed appropriate given the current economic conditions. For all periods presented, the Company determined that a reversion period of 12 months was appropriate for the same reason. The Company applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented.
The net charge-offs on the Company’s credit card loans for the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, due to continued credit normalization and the seasoning of vintages from the past two years. The net charge-offs on private student loans for the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, primarily driven by credit normalization. The net charge-offs on personal loans for the year ended December 31, 2022, decreased when compared to the year ended December 31, 2021, primarily driven by continued benefit from tighter credit underwriting standards implemented in 2020.
Net charge-offs of principal are recorded against the allowance for credit 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 Years Ended December 31,
2022 2021 2020
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income) $ 303 $ 286 $ 484
Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income) $ 100 $ 75 $ 117
Delinquent and Non-Accruing Loans
The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent and non-accruing loans in the Company’s loan portfolio is shown below for each class of loan receivables (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)
December 31, 2022
Credit card loans $ 1,250 $ 1,028 $ 2,278 $ 1,003 $ 176
Other loans
Private student loans 167 45 212 45 8
Personal loans 47 16 63 16 7
Other loans 13 12 25 1 23
Total other loans 227 73 300 62 38
Total loan receivables $ 1,477 $ 1,101 $ 2,578 $ 1,065 $ 214
December 31, 2021
Credit card loans $ 670 $ 562 $ 1,232 $ 527 $ 194
Other loans
Private student loans 121 36 157 35 8
Personal loans 35 13 48 12 7
Other loans 7 7 14 1 16
Total other loans 163 56 219 48 31
Total loan receivables $ 833 $ 618 $ 1,451 $ 575 $ 225
(1)The Company estimates that the gross interest income that would have been recorded under the original terms of non-accruing credit card loans was $23 million, $28 million and $33 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company does not separately track the amount of gross interest income that would have been recorded under the original terms of loans. Instead, the Company estimated this amount based on customers’ current balances and most recent interest rates.
The payment status of modified loans, whether the TDR designation applies or not, is reflected in the Company’s delinquency reporting.
Troubled Debt Restructurings
The Company has internal loan modification programs that provide relief to credit card, private student and personal loan borrowers who may be experiencing financial hardship. The Company considers a modified loan in which a concession has been granted to the borrower to be a TDR based on the cumulative length of the concession period and credit quality of the borrower. The internal loan modification programs include both temporary and permanent programs, which vary by product. External loan modification programs are also available for credit card and personal loans. The Company evaluates new programs to determine which of them meet the definition of a TDR. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on private student loans and certain grants of private student loan forbearance, generally result in the loans being classified as TDRs. In addition, loans that defaulted from, or successfully completed, a loan modification program or forbearance continue to be classified as TDRs, except as noted in the following paragraph. See the table below that presents the carrying value of loans that entered a TDR program and experienced a default during the period for more information.
For credit card customers, the Company offers both temporary and permanent hardship programs. The temporary hardship programs consist of an interest rate reduction and in some cases a reduced minimum payment, both lasting for a period no longer than 12 months. Charging privileges on these accounts are generally suspended while in the program. However, if the customer meets certain criteria, charging privileges may be reinstated following completion of the program. Credit card accounts of borrowers who have previously participated in a temporary interest rate reduction program and that have both demonstrated financial stability and had their charging privileges reinstated at a market-based interest rate, are excluded from the balance of TDRs.
The permanent modification program involves closing the account, changing the structure of the loan to a fixed payment loan with a maturity no longer than 72 months and reducing the interest rate on the loan. The permanent modification program does not typically provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. The Company also makes permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans typically receive a reduced interest rate, generally reflect fixed payment terms and do not normally include waiver of unpaid principal, interest or fees. These permanent loan modifications remain in the population of TDRs until they are paid off or charged off.
At December 31, 2022 and 2021, there were $6.0 billion and $5.8 billion, respectively, of private student loans in repayment and $81 million and $64 million, respectively, in forbearance. To assist private student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance, payment deferral, a temporary payment reduction, a temporary interest rate reduction or extended terms. A modified loan typically meets the definition of a TDR based on the cumulative length of the concession period and a determination of financial distress based on an evaluation of the borrower’s credit quality using FICO scores.
For personal loan customers, the Company offers various payment programs, including temporary and permanent programs, in certain situations. The temporary programs normally consist of reducing the minimum payment for no longer than 12 months and, in certain circumstances, the interest rate on the loan is reduced. The permanent programs involve extending the loan term and, in certain circumstances, reducing the interest rate on the loan. The total term of the loan, including modification, may not exceed nine years. The Company also allows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are classified as TDRs.
The Company monitors borrower performance after using payment programs or forbearance. The Company believes the programs are useful in assisting customers experiencing financial difficulties and allowing them to make timely payments. In addition to helping customers with their credit needs, these programs are designed to maximize collections and ultimately the Company’s profitability. The Company plans to continue to use payment programs and forbearance to provide relief to customers experiencing temporary financial difficulties and expects to have additional loans classified as TDRs in the future as a result.
To evaluate the primary financial effects that resulted from credit card loans entering into a TDR program during the years ended December 31, 2022, 2021 and 2020, the Company quantified the amount by which interest and fees were reduced during the periods. During the years ended December 31, 2022, 2021 and 2020, the Company forgave approximately $29 million, $33 million and $66 million, respectively, of interest and fees resulting from accounts entering into a credit card loan TDR program. For all loan products, interest income on modified loans is recognized based on the modified contractual terms.
The following table provides information on loans that entered a TDR program during the period (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Number of Accounts Balances Number of Accounts Balances Number of Accounts Balances
Accounts that entered a TDR program during the period
Credit card loans(1)
237,339 $ 1,545 64,359 $ 399 152,055 $ 1,022
Private student loans 6,841 $ 127 477 $ 8 1,916 $ 35
Personal loans 6,303 $ 86 4,066 $ 51 8,805 $ 114
(1)Accounts that entered a credit card TDR program include $322 million, $351 million and $670 million that were converted from revolving line-of-credit arrangements to term loans during the years ended December 31, 2022, 2021 and 2020, respectively.
The number and balance of enrollments in credit card, private student loan and personal loan modification programs designated as TDRs increased during the year ended December 31, 2022, when compared to the same period in 2021. The increase is primarily driven by the impact of accounting and financial reporting exemptions
provided by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which expired on January 1, 2022, during the prior periods.
The following table presents the carrying value of loans that experienced a default during the period that had been modified in a TDR during the 15 months preceding the end of each period (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Number of Accounts Aggregated Outstanding Balances Upon Default Number of Accounts Aggregated Outstanding Balances Upon Default Number of Accounts Aggregated Outstanding Balances Upon Default
TDRs that subsequently defaulted
Credit card loans(1)(2)
28,231 $ 141 17,953 $ 104 48,075 $ 276
Private student loans(3)
1,145 $ 22 290 $ 6 1,119 $ 22
Personal loans(2)
1,140 $ 20 1,589 $ 22 3,145 $ 46
(1)For credit card loans that default from a temporary loan modification program, accounts revert back to the pre-modification terms and charging privileges remain suspended in most cases.
(2)For credit card loans and personal loans, a customer defaults from a loan modification program after either two consecutive missed payments or at charge-off, depending on the program. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.
(3)For student loans, a customer defaults from a loan modification after they are 60 or more days delinquent. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.
Of the account balances that defaulted as shown above for the years ended December 31, 2022, 2021 and 2020, approximately 65%, 66% and 53%, respectively, of the total balances were charged off at the end of the month in which they defaulted from a TDR program. For accounts that have defaulted from a TDR program and have not been subsequently charged off, the balances are included in the allowance for credit loss analysis discussed above under “- Allowance for Credit Losses.”
Geographical Distribution of Loans
The Company originates credit card loans throughout the U.S. The geographic distribution of the Company’s credit card loan receivables was as follows (dollars in millions):
December 31,
2022 2021
$ % $ %
Texas $ 7,996 8.9 % $ 6,543 8.8 %
California 7,888 8.7 6,334 8.5
Florida 6,465 7.2 5,199 7.0
New York 5,895 6.5 4,908 6.6
Illinois 4,528 5.0 3,838 5.2
Pennsylvania 4,484 5.0 3,757 5.1
Ohio 3,759 4.2 3,149 4.2
New Jersey 3,127 3.5 2,599 3.5
Georgia 2,849 3.2 2,328 3.1
Michigan 2,521 2.8 2,081 2.8
Other 40,601 45.0 33,633 45.2
Total credit card loans $ 90,113 100.0 % $ 74,369 100.0 %
The Company originates private student, personal and other loans throughout the U.S. The geographic distribution of private student, personal and other loan receivables was as follows (dollars in millions):
December 31,
2022 2021
$ % $ %
California $ 2,015 9.2 % $ 1,686 8.7 %
New York 1,900 8.6 1,771 9.2
Texas 1,595 7.2 1,305 6.8
Pennsylvania 1,431 6.5 1,341 6.9
Florida 1,248 5.7 1,017 5.3
Illinois 1,247 5.7 1,162 6.0
New Jersey 1,114 5.1 1,009 5.2
Ohio 849 3.9 770 4.0
Michigan 656 3.0 599 3.1
Massachusetts 626 2.8 583 3.0
Other 9,326 42.3 8,072 41.8
Total other loans $ 22,007 100.0 % $ 19,315 100.0 %
5. Credit Card and Private Student Loan Securitization Activities
The Company’s securitizations are accounted for as secured borrowings and the related trusts are treated as consolidated subsidiaries of the Company. For a description of the Company’s principles of consolidation with respect to VIEs, see Note 1: Background and Basis of Presentation.
Credit Card Securitization Activities
The Company accesses the term asset securitization market through DCMT and DCENT. Credit card loan receivables are transferred into DCMT and beneficial interests in DCMT are transferred into DCENT. DCENT issues debt securities to investors that are reported primarily in long-term borrowings.
The DCENT debt structure consists of four classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. To issue senior, higher-rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower-rated or more highly subordinated classes of notes. Wholly-owned subsidiaries of Discover Bank hold the subordinated classes of notes. The Company is exposed to credit risk associated with trust receivables as of the balance sheet date through the retention of these subordinated interests. The estimate of expected credit losses on trust receivables is included in the allowance for credit losses estimate.
The Company’s retained interests in the trust’s assets, consisting of investments in DCENT notes held by subsidiaries of Discover Bank, constitute intercompany positions that are eliminated in the preparation of the Company’s consolidated statements of financial condition.
Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the trust’s creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to the Company’s third-party creditors. The trusts have ownership of cash balances, the amounts of which are reported in restricted cash within the Company’s consolidated statements of financial condition. Except for the seller’s interest in trust receivables, the Company’s interests in trust assets are generally subordinate to the interests of third-party investors in trust debt and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to those investors. Apart from the restricted assets related to securitization activities, the investors and the securitization trusts have no recourse to the Company’s other assets or the Company’s general credit for a shortage in cash flows.
The carrying values of these restricted assets, which are presented on the Company’s consolidated statements of financial condition as relating to securitization activities, are shown in the following table (dollars in millions):
December 31,
2022 2021
Restricted cash $ 33 $ 2,574
Investors’ interests held by third-party investors 10,200 9,425
Investors’ interests held by wholly-owned subsidiaries of Discover Bank 3,341 3,899
Seller’s interest 12,220 11,918
Loan receivables(1)
25,761 25,242
Allowance for credit losses allocated to securitized loan receivables(1)
(1,152) (1,371)
Net loan receivables 24,609 23,871
Other assets 2 3
Carrying value of assets of consolidated variable interest entities $ 24,644 $ 26,448
(1)The Company maintains its allowance for credit losses at an amount equal to lifetime expected credit losses associated with all loan receivables, which includes all loan receivables in the trusts. Therefore, the credit risk associated with the transferred receivables is fully reflected on the Company’s statements of financial condition in accordance with GAAP.
The debt securities issued by the consolidated trusts are subject to credit, payment and interest rate risks on the transferred credit card loan receivables. To protect investors in the securities, there are certain features or triggering events that will cause an early amortization of the debt securities, including triggers related to the impact of the performance of the trust receivables on the availability and adequacy of cash flows to meet contractual requirements. As of December 31, 2022, no economic or other early amortization events have occurred.
The Company continues to own and service the accounts that generate the loan receivables held by the trusts. Discover Bank receives servicing fees from the trusts based on a percentage of the monthly investor principal balance outstanding. Although the fee income to Discover Bank offsets the fee expense to the trusts and thus is eliminated in consolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead to a termination of the servicing rights and the loss of future servicing income, net of related expenses.
Private Student Loan Securitization Activities
The Company’s private student loan trust receivables reported in loan receivables and the related debt issued by the trust reported in long-term borrowings were immaterial as of December 31, 2022 and 2021. The amounts are included, together with amounts related to the Company’s credit card securitizations, in the supplemental information about assets and liabilities of consolidated variable interest entities, which is presented with the Company’s consolidated statements of financial condition.
6. Premises and Equipment
A summary of premises and equipment, net is as follows (dollars in millions):
December 31,
2022 2021
Land $ 37 $ 38
Buildings and improvements 587 676
Furniture, fixtures and equipment 1,111 1,126
Software 1,125 992
Premises and equipment 2,860 2,832
Less: accumulated depreciation (1,339) (1,415)
Less: accumulated amortization of software (518) (434)
Premises and equipment, net $ 1,003 $ 983
Depreciation expense was $80 million, $86 million and $98 million for the years ended December 31, 2022, 2021 and 2020, respectively. Amortization expense on capitalized software was $114 million, $103 million and $100 million for the years ended December 31, 2022, 2021 and 2020, respectively.
7. Goodwill
As of December 31, 2022 and 2021, the Company had goodwill of $255 million related to PULSE, which is part of the Payment Services segment. The Company conducted its annual goodwill impairment test as of October 1, 2022 and 2021 and no impairments were identified.
8. Deposits
The Company obtains deposits from consumers directly or through affinity relationships (“direct-to-consumer deposits”). Additionally, the Company obtains deposits through third-party securities brokerage firms that offer the Company’s deposits to their customers (“brokered deposits”). Direct-to-consumer deposit products include savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts. Brokered deposit products include certificates of deposit and sweep accounts.
Customer deposits held with Discover Bank are currently insured for up to $250,000 per account holder through the Federal Deposit Insurance Corporation (“FDIC”). At December 31, 2022 and 2021, the Company had approximately $8.9 billion and $8.2 billion of uninsured deposits, respectively. Uninsured deposits are the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit or similar state deposit insurance regime, and amounts in any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regime. The amounts of uninsured deposits above were estimated based on the same methodologies and assumptions used for Discover Bank’s regulatory reporting requirements.
The following table summarizes certificates of deposit in uninsured accounts and accounts that are in excess of the FDIC insurance limit by time remaining until maturity (dollars in millions):
At December 31, 2022
Three months or less $ 64
Over three months through six months 62
Over six months through twelve months 255
Over twelve months 188
Total $ 569
The following table summarizes certificates of deposit maturing over each of the next five years and thereafter (dollars in millions):
At December 31, 2022
2023 $ 18,024
2024 6,413
2025 2,672
2026 2,015
2027 3,318
Thereafter 628
Total $ 33,070
9. Long-Term Borrowings
Long-term borrowings consist of borrowings having original maturities of one year or more. The following table provides a summary of the Company’s long-term borrowings and weighted-average interest rates on outstanding balances (dollars in millions):
December 31,
2022 2021
Maturity Interest
Rate Weighted-Average Interest Rate Outstanding Amount Outstanding Amount
Securitized Debt
Fixed-rate asset-backed securities(1)
2023-2026 0.58% - 5.03%
2.78% $ 8,401 $ 5,588
Floating-rate asset-backed securities(2)
2023-2024 4.65% - 4.92%
4.80% 1,774 3,347
Total Discover Card Master Trust I and Discover Card Execution Note Trust 10,175 8,935
Floating-rate asset-backed security(3)(4)
2031 8.50%
8.50% 84 104
Total private student loan securitization trust 84 104
Total long-term borrowings - owed to securitization investors 10,259 9,039
Discover Financial Services (Parent Company)
Fixed-rate senior notes 2024-2032 3.75% - 6.70%
4.68% 3,333 3,382
Fixed-rate retail notes 2023-2031 2.85% - 4.40%
3.77% 154 166
Discover Bank
Fixed-rate senior bank notes(1)
2023-2030 2.45% - 4.65%
3.63% 5,348 5,385
Fixed-rate subordinated bank notes(1)
2028 4.68%
4.68% 489 505
Floating-rate Federal Home Loan Bank advance(5)
2023 4.53% 4.53% 525 -
Total long-term borrowings $ 20,108 $ 18,477
(1)The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in the applicable benchmark interest rates. The use of these interest rate swaps impacts the carrying value of the debt. See Note 21: Derivatives and Hedging Activities.
(2)DCENT floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 33 to 60 basis points as of December 31, 2022.
(3)The private student loan securitization trust floating-rate asset-backed security includes an issuance with the following interest rate term: Prime rate + 100 basis points as of December 31, 2022.
(4)Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying private student loans. The date shown represents the final maturity date.
(5)The floating-rate Federal Home Loan Bank (“FHLB”) advance includes an issuance with the following interest rate term: SOFR + 23 basis points as of December 31, 2022.
The following table summarizes long-term borrowings maturing over each of the next five years and thereafter (dollars in millions):
At December 31, 2022
2023 $ 3,815
2024 3,729
2025 6,158
2026 2,659
2027 1,000
Thereafter 2,747
Total $ 20,108
As a member of the FHLB of Chicago, the Company has access to both short- and long-term advance structures with maturities ranging from overnight to 30 years. As of December 31, 2022, the Company had total committed borrowing capacity of $2.2 billion based on the amount and type of assets pledged, of which the outstanding balance was comprised solely of a $525 million long-term advance. As of December 31, 2021, the Company had total committed borrowing capacity of $1.4 billion, of which the outstanding balance was comprised solely of a $1.3 billion short-term advance. These advances are presented as short- or long-term borrowings on the consolidated statements of financial condition as appropriate.
Additionally, the Company has access to committed borrowing capacity through private securitizations to support the funding of its credit card loan receivables. As of December 31, 2022, the total commitment of secured credit facilities through private providers was $3.5 billion, none of which was drawn. As of December 31, 2021, the total commitment of secured credit facilities through private providers was $4.0 billion, $500 million of which was outstanding as a short-term draw. Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers. The secured credit facilities have various expirations in 2024. Borrowings outstanding under each facility bear interest at a margin above LIBOR, Term SOFR or the asset-backed commercial paper costs of each provider. The terms of each agreement provide for a commitment fee to be paid on the unused capacity and include various affirmative and negative covenants, including performance metrics and legal requirements similar to those required to issue any term securitization transaction.
10. Stock-Based Compensation Plans
The Company has two stock-based compensation plans: the Discover Financial Services Omnibus Incentive Plan (“Omnibus Plan”) and the Discover Financial Services Directors’ Compensation Plan (“Directors’ Compensation Plan”).
Omnibus Plan
The Omnibus Plan, which is stockholder-approved, provides for the award of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance stock units (“PSUs”) and other stock-based and/or cash awards (collectively, “awards”). Currently, the Company does not have any stock options, stock appreciation rights or restricted stock outstanding. The total number of shares that may be granted is 45 million shares, subject to adjustments for certain transactions as described in the Omnibus Plan document. Shares granted under the Omnibus Plan may be the following: (i) authorized but unissued shares and (ii) treasury shares that the Company acquires in the open market, in private transactions or otherwise.
Directors’ Compensation Plan
The Directors’ Compensation Plan, which is stockholder-approved, permits the grant of RSUs to non-employee directors. Under the Directors’ Compensation Plan, the Company may issue awards of up to a total of 1 million shares of common stock to non-employee directors. Shares of stock that are issuable pursuant to the awards granted under the Directors’ Compensation Plan may be one of the following: authorized but unissued shares, treasury shares or shares that the Company acquires in the open market. Annual awards for eligible directors are calculated by dividing $170,000 by the fair market value of a share of stock on the date of grant and are subject to a restriction period whereby 100% of such units shall vest in full on the earlier of the one year anniversary of the date of grant or immediately prior to the first annual meeting of shareholders following the date of grant. RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Company common shareholders.
Stock-Based Compensation
The following table details the compensation cost, net of forfeitures (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
RSUs $ 58 $ 46 $ 49
PSUs(1)
31 57 (8)
Total stock-based compensation expense $ 89 $ 103 $ 41
Income tax benefit $ 16 $ 15 $ 9
(1)Total PSU expense for the year ended December 31, 2021, includes an incremental $1 million, representing a modification to the 2019 PSU award. Total PSU expense for the year ended December 31, 2020, includes an incremental $2 million, representing a modification to the 2018 PSU award. The nature of the modifications was to adjust the payout to compensate for the 2020 CECL adoption impact on earnings per share (“EPS”).
RSUs
The following table sets forth the activity related to vested and unvested RSUs:
Number of Units Weighted-Average Remaining Contractual Term (in years) Aggregate
Intrinsic Value
(in millions)
RSUs at December 31, 2021 1,816,244 $ 210
Granted 739,388
Conversions to common stock (509,254)
Forfeited (108,095)
RSUs at December 31, 2022 1,938,283 0.91 $ 190
Vested and convertible RSUs at December 31, 2022 752,223 0.00 $ 74
The following table sets forth the activity related to unvested RSUs:
Number of Units Weighted-Average Grant-Date Fair Value
Unvested RSUs at December 31, 20211)
890,484 $ 90.40
Granted 739,388 $ 116.50
Vested (462,094) $ 88.18
Forfeited (108,095) $ 111.11
Unvested RSUs at December 31, 2022(1)
1,059,683 $ 107.47
(1)Unvested RSUs represent awards where recipients have yet to satisfy either explicit vesting terms or retirement-eligibility requirements.
Compensation cost associated with RSUs is determined based on the number of units granted and the fair value on the date of grant. The fair value is amortized on a straight-line basis, net of estimated forfeitures, over the requisite service period for each separately vesting tranche of the award. The requisite service period is generally the vesting period.
The following table summarizes the total intrinsic value of the RSUs converted to common stock and the total grant-date fair value of RSUs vested (dollars in millions, except weighted-average grant-date fair value amounts):
For the Years Ended December 31,
2022 2021 2020
Intrinsic value of RSUs converted to common stock $ 59 $ 62 $ 55
Grant-date fair value of RSUs vested $ 41 $ 47 $ 51
Weighted-average grant-date fair value of RSUs granted $ 116.50 $ 101.47 $ 76.58
As of December 31, 2022, there was $47 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 0.92 years.
RSUs provide for accelerated vesting if there is a change in control or upon certain terminations (as defined in the Omnibus Plan or the award certificate). RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Company common shareholders.
PSUs
The following table sets forth the activity related to vested and unvested PSUs:
Number of Units Weighted-Average Grant-Date Fair Value Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in millions)
PSUs at December 31, 2021(1)
764,135 $ 84.58 $ 88
Granted 247,458 $ 124.01
Conversions to common stock (242,682) $ 71.62
Forfeited (52,439) $ 99.33
PSUs at December 31, 2022(1)(2)(3)(4)
716,472 $ 99.21 1.05 $ 70
(1) All PSUs outstanding at December 31, 2022 and December 31, 2021, are unvested PSUs.
(2) Includes 271,588 PSUs granted in 2020 that are earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ended December 31, 2022, and are subject to the requisite service period, which ended February 1, 2023.
(3) Includes 244,498 PSUs granted in 2021 that are earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ends December 31, 2023, and are subject to the requisite service period, which ends February 1, 2024.
(4) Includes 200,386 PSUs granted in 2022 that may be earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ends December 31, 2024, and are subject to the requisite service period, which ends February 1, 2025.
Compensation cost associated with PSUs is determined based on the number of instruments granted, the fair value on the date of grant and the performance factor. The fair value is amortized on a straight-line basis, net of estimated forfeitures, over the requisite service period. Each PSU outstanding at December 31, 2022, is a restricted stock instrument that is subject to additional conditions and constitutes a contingent and unsecured promise by the Company to pay up to 1.5 shares per unit of the Company’s common stock on the conversion date for the PSU, contingent on the number of PSUs to be issued. PSUs have a performance period of three years and a vesting period of three years. The requisite service period of an award having both performance and service conditions is the longest of the explicit, implicit and derived service periods.
The following table summarizes the total intrinsic value of the PSUs converted to common stock and the total grant-date fair value of PSUs vested (dollars in millions, except weighted-average grant-date fair value amounts):
For the Years Ended December 31,
2022 2021 2020
Intrinsic value of PSUs converted to common stock $ 29 $ 15 $ 21
Grant-date fair value of PSUs vested $ 17 $ 18 $ 17
Weighted-average grant-date fair value of PSUs granted $ 124.01 $ 94.21 $ 85.25
As of December 31, 2022, there was $20 million of total unrecognized compensation cost related to non-vested PSUs. The cost is expected to be recognized over a weighted-average period of 1.05 years.
PSUs provide for accelerated vesting if there is a change in control or upon certain terminations (as defined in the Omnibus Plan or the award certificate). PSUs include the right to receive dividend equivalents, which will accumulate and pay out in cash if and when the underlying shares are issued.
11. Employee Benefit Plans
The Company sponsors the Discover Financial Services Pension Plan (the “Discover Pension Plan”), which is a non-contributory defined benefit plan that is qualified under Section 401(a) of the Internal Revenue Code, for eligible employees in the U.S. Effective December 31, 2008, the Discover Pension Plan was amended to discontinue the accrual of future benefits. The Company also sponsors the Discover Financial Services 401(k) Plan (the “Discover 401(k) Plan”), which is a defined contribution plan that is qualified under Section 401(a) of the Internal Revenue Code, for its eligible U.S. employees.
Discover Pension Plan
The Discover Pension Plan generally provides retirement benefits that are based on each participant’s years of credited service prior to 2009 and on compensation specified in the Discover Pension Plan. The Company’s policy is to fund at least the amounts sufficient to meet minimum funding requirements under the Employee Retirement Income Security Act of 1974, as amended. Net periodic benefit cost (income) is recorded in employee compensation and benefits within the consolidated statements of income. For this plan, the net periodic benefit cost was immaterial for all periods presented.
The Company recognizes the funded status of the defined benefit pension plan, measured as the difference between the fair value of plan assets and the projected benefit obligation, in accrued expenses and other liabilities on the consolidated statements of financial condition. As of December 31, 2022 and 2021, the unfunded status related to the defined benefit pension plan was $101 million and $106 million, respectively. Pending review by internal governance committees, the Company expects to contribute approximately $115 million to the pension plan during 2023. Expected benefit payments from the Discover Pension Plan for each of the next five years range from $25 million and $30 million annually.
Discover 401(k) Plan
Under the Discover 401(k) Plan, eligible U.S. employees receive 401(k) matching contributions. Eligible employees also receive fixed employer contributions. The pretax expense associated with the Company contributions for the years ended December 31, 2022, 2021 and 2020 was $104 million, $97 million and $99 million, respectively.
12. Common and Preferred Stock
Common Stock Repurchase Program
In July 2021, the Board of Directors approved a share repurchase program authorizing up to $2.4 billion of share repurchases. The program expired on March 31, 2022. On April 27, 2022, the Company’s Board of Directors approved a new share repurchase program authorizing the repurchase of up to $4.2 billion of its outstanding shares of common stock. This program expires on June 30, 2023. During the three months ended December 31, 2022, the Company repurchased approximately 5.9 million shares for approximately $600 million. During the year ended December 31, 2022, the Company repurchased approximately 21.5 million shares for approximately $2.3 billion.
Preferred Stock
The table below presents a summary of the Company's non-cumulative perpetual preferred stock that is outstanding at December 31, 2022 (dollars in millions, except per depositary share amounts):
Series Description Initial Issuance Date Liquidation Preference and Redemption Price per Depositary Share(1)
Per Annum Dividend Rate in effect at December 31, 2022
Total Depositary Shares Authorized, Issued and Outstanding Carrying Value
December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021
C(2)(3)(4)
Fixed-to-Floating Rate 10/31/2017 $ 1,000 5.500 % 570,000 570,000 $ 563 $ 563
D(2)(5)(6)
Fixed-Rate Reset 6/22/2020 $ 1,000 6.125 % 500,000 500,000 493 493
Total Preferred Stock 1,070,000 1,070,000 $ 1,056 $ 1,056
(1)Redeemable at the redemption price plus declared and unpaid dividends.
(2)Issued as depositary shares, each representing 1/100th interest in a share of the corresponding series of preferred stock. Each preferred share has a par value of $0.01.
(3)Redeemable at the Company’s option, subject to regulatory approval, either (i) in whole or in part on any dividend payment date on or after October 30, 2027, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series C preferred stock).
(4)Any dividends declared are payable semi-annually in arrears at a rate of 5.50% per annum until October 30, 2027. Thereafter, dividends declared will be payable quarterly in arrears at a floating rate equal to 3-month LIBOR plus a spread of 3.076% per annum.
(5)Redeemable at the Company’s option, subject to regulatory approval, either (i) in whole or in part during the three-month period prior to, and including, each reset date (as defined in the certificate of designations for the Series D preferred stock) or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series D Preferred Stock).
(6)Any dividends declared are payable semi-annually in arrears at a rate of 6.125% per annum until September 23, 2025, after which the dividend rate will reset every 5 years to a fixed annual rate equal to the 5-year Treasury plus a spread of 5.783%.
13. Accumulated Other Comprehensive Income
Changes in each component of AOCI were as follows (dollars in millions):
Unrealized Gains (Losses) on Available-for-Sale Investment Securities, Net of Tax Losses on Cash Flow Hedges, Net of Tax Losses on Pension Plan, Net of Tax AOCI
For the Year Ended December 31, 2022
Balance at December 31, 2021 $ 114 $ (9) $ (199) $ (94)
Net change
(250) (5) 10 (245)
Balance at December 31, 2022 $ (136) $ (14) $ (189) $ (339)
For the Year Ended December 31, 2021
Balance at December 31, 2020 $ 284 $ (12) $ (227) $ 45
Net change
(170) 3 28 (139)
Balance at December 31, 2021 $ 114 $ (9) $ (199) $ (94)
For the Year Ended December 31, 2020
Balance at December 31, 2019 $ 112 $ (17) $ (214) $ (119)
Net change
172 5 (13) 164
Balance at December 31, 2020 $ 284 $ (12) $ (227) $ 45
The following table presents each component of OCI before reclassifications and amounts reclassified from AOCI for each component of OCI before- and after-tax (dollars in millions):
Before Tax Tax Benefit (Expense) Net of Tax
For the Year Ended December 31, 2022
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period $ (331) $ 81 $ (250)
Net change $ (331) $ 81 $ (250)
Cash Flow Hedges
Net unrealized losses arising during the period $ (13) $ 3 $ (10)
Amounts reclassified from AOCI 4 1 5
Net change $ (9) $ 4 $ (5)
Pension Plan
Unrealized gains arising during the period $ 13 $ (3) $ 10
Net change $ 13 $ (3) $ 10
For the Year Ended December 31, 2021
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period $ (226) $ 56 $ (170)
Net change $ (226) $ 56 $ (170)
Cash Flow Hedges
Net unrealized losses arising during the period $ (1) $ 1 $ -
Amounts reclassified from AOCI 3 - 3
Net change $ 2 $ 1 $ 3
Pension Plan
Unrealized gains arising during the period $ 37 $ (9) $ 28
Net change $ 37 $ (9) $ 28
For the Year Ended December 31, 2020
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period $ 227 $ (55) $ 172
Net change $ 227 $ (55) $ 172
Cash Flow Hedges
Net unrealized losses arising during the period $ (7) $ 3 $ (4)
Amounts reclassified from AOCI 12 (3) 9
Net change $ 5 $ - $ 5
Pension Plan
Unrealized losses arising during the period $ (17) $ 4 $ (13)
Net change $ (17) $ 4 $ (13)
14. Other Expense
Total other expense includes the following components (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Postage $ 97 $ 91 $ 93
Fraud losses and other charges 149 92 96
Supplies 35 46 51
Incentive expense 32 44 57
Impairment charges - 95 59
Other expense 247 252 240
Total other expense $ 560 $ 620 $ 596
15. Income Taxes
Income tax expense consisted of the following (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Current
U.S. federal $ 1,465 $ 1,084 $ 807
U.S. state and local 312 204 159
Total 1,777 1,288 966
Deferred
U.S. federal (376) 288 (585)
U.S. state and local (51) 39 (87)
Total (427) 327 (672)
Income tax expense $ 1,350 $ 1,615 $ 294
The following table reconciles the Company’s effective tax rate to the U.S. federal statutory income tax rate:
For the Years Ended December 31,
2022 2021 2020
U.S. federal statutory income tax rate 21.0 % 21.0 % 21.0 %
U.S. state, local and other income taxes, net of U.S. federal income tax benefits 3.4 3.4 3.4
Tax credits (1.3) (1.2) (4.4)
Other 0.4 (0.3) 0.5
Effective income tax rate 23.5 % 22.9 % 20.5 %
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. The Company evaluates the likelihood of realizing its deferred tax assets by estimating sources of future taxable income and the impact of tax planning strategies.
Significant components of the Company’s net deferred income taxes, which are included in other assets in the Company’s consolidated statements of financial condition, were as follows (dollars in millions):
December 31,
2022 2021
Deferred tax assets
Allowance for credit losses $ 1,791 $ 1,660
Customer fees and rewards 166 45
Unrealized losses 53 -
Other 140 158
Total deferred tax assets before valuation allowance 2,150 1,863
Valuation allowance (1) (1)
Total deferred tax assets, net of valuation allowance 2,149 1,862
Deferred tax liabilities
Depreciation and software amortization (71) (167)
Unrealized gains - (125)
Deferred loan origination costs (48) (35)
Other (26) (41)
Total deferred tax liabilities (145) (368)
Net deferred tax assets $ 2,004 $ 1,494
A reconciliation of beginning and ending unrecognized tax benefits is as follows (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Balance at beginning of period $ 39 $ 56 $ 61
Additions
Current year tax positions 4 13 5
Prior year tax positions 1 8 3
Reductions
Prior year tax positions (20) (14) -
Settlements with taxing authorities - (14) (2)
Expired statute of limitations (5) (10) (11)
Balance at end of period(1)
$ 19 $ 39 $ 56
(1)For the years ended December 31, 2022, 2021 and 2020, amounts included $18 million, $37 million and $51 million, respectively, of unrecognized tax benefits, which, if recognized, would favorably affect the effective tax rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties related to unrecognized tax benefits were $2 million and $3 million for the years ended December 31, 2022 and 2021, respectively.
The Company is subject to examination by the Internal Revenue Service (“IRS”) and tax authorities in various state, local and foreign tax jurisdictions. The Company’s federal income tax filings are open to examinations for the tax year ended December 31, 2019 and forward. The Company regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions. At this time, the potential change in unrecognized tax benefits is not expected to be significant over the next 12 months. The Company believes that its reserves are sufficient to cover any tax, penalties and interest that would result from such examinations.
The Company has an immaterial amount of state net operating loss carryforwards that are subject to a partial valuation allowance as of December 31, 2022 and 2021.
16. Earnings Per Share
The following table presents the calculation of basic and diluted EPS (dollars and shares in millions, except per share amounts):
For the Years Ended December 31,
2022 2021 2020
Numerator
Net income $ 4,392 $ 5,449 $ 1,141
Preferred stock dividends (62) (69) (31)
Net income available to common stockholders 4,330 5,380 1,110
Income allocated to participating securities (26) (29) (6)
Net income allocated to common stockholders $ 4,304 $ 5,351 $ 1,104
Denominator
Weighted-average shares of common stock outstanding 277 300 307
Effect of dilutive common stock equivalents 1 - -
Weighted-average shares of common stock outstanding and common stock equivalents 278 300 307
Basic earnings per common share $ 15.52 $ 17.85 $ 3.60
Diluted earnings per common share $ 15.50 $ 17.83 $ 3.60
Anti-dilutive securities were not material and had no impact on the computation of diluted EPS for the years ended December 31, 2022, 2021 and 2020.
17. Capital Adequacy
DFS is subject to the capital adequacy guidelines of the Federal Reserve. Discover Bank, the Company’s banking subsidiary, is subject to various regulatory capital requirements as administered by the FDIC. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit the Company’s business activities and have a direct material effect on the financial condition and operating results of DFS and Discover Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, DFS and Discover Bank must meet specific risk-based capital requirements and leverage ratios that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidelines. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
DFS and Discover Bank are subject to regulatory and capital rules issued by the Federal Reserve and FDIC, respectively, under the Basel Committee’s December 2010 framework (“Basel III rules”). Under the Basel III rules, DFS and Discover Bank are classified as “standardized approach” entities. Standardized approach entities are defined as U.S. banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposure less than $10 billion.
In March 2020, federal bank regulatory agencies announced an interim and now final rule that allows banks that have implemented the CECL accounting model to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, the Company has elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, which ended December 31, 2021, the estimated impact of CECL on regulatory capital will be phased in over three years beginning in 2022. Accordingly, the Company’s Common Equity Tier 1 (“CET1”) capital ratios in 2021 and 2020 are higher than they otherwise would have been. The Company's CET1 capital ratios will continue to be favorably impacted by this election over the phase-in period.
As of December 31, 2022 and 2021, DFS and Discover Bank met all Basel III minimum capital ratio requirements to which they were subject. DFS and Discover Bank also met the requirements to be considered “well-capitalized” under Regulation Y and prompt corrective action rules, respectively. There have been no conditions or events that management believes have changed DFS’ or Discover Bank’s category. To be categorized as “well-capitalized,” DFS and Discover Bank must maintain minimum capital ratios outlined in the table below.
The following table shows the actual capital amounts and ratios of DFS and Discover Bank and comparisons of each to the regulatory minimum and “well-capitalized” requirements (dollars in millions):
Actual Minimum Capital
Requirements Capital Requirements
To Be Classified as
Well-Capitalized
Amount Ratio(1)
Amount Ratio Amount(2)
Ratio(2)
December 31, 2022
Total capital (to risk-weighted assets)
Discover Financial Services $ 18,250 16.0 % $ 9,133 ≥8.0%
$ 11,416 ≥10.0%
Discover Bank $ 16,579 14.7 % $ 9,015 ≥8.0%
$ 11,268 ≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services $ 16,285 14.3 % $ 6,850 ≥6.0%
$ 6,850 ≥6.0%
Discover Bank $ 13,683 12.1 % $ 6,761 ≥6.0%
$ 9,015 ≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services $ 16,285 12.7 % $ 5,147 ≥4.0%
N/A N/A
Discover Bank $ 13,683 10.8 % $ 5,086 ≥4.0%
$ 6,357 ≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services $ 15,229 13.3 % $ 5,137 ≥4.5%
N/A N/A
Discover Bank $ 13,683 12.1 % $ 5,071 ≥4.5%
$ 7,324 ≥6.5%
December 31, 2021
Total capital (to risk-weighted assets)
Discover Financial Services $ 17,150 17.6 % $ 7,775 ≥8.0%
$ 9,719 ≥10.0%
Discover Bank $ 15,957 16.9 % $ 7,573 ≥8.0%
$ 9,466 ≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services $ 15,395 15.8 % $ 5,831 ≥6.0%
$ 5,831 ≥6.0%
Discover Bank $ 13,932 14.7 % $ 5,680 ≥6.0%
$ 7,573 ≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services $ 15,395 13.9 % $ 4,432 ≥4.0%
N/A N/A
Discover Bank $ 13,932 12.8 % $ 4,365 ≥4.0%
$ 5,456 ≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services $ 14,339 14.8 % $ 4,373 ≥4.5%
N/A N/A
Discover Bank $ 13,932 14.7 % $ 4,260 ≥4.5%
$ 6,153 ≥6.5%
(1)Capital ratios are calculated based on the Basel III standardized approach rules, subject to applicable transition provisions, including CECL transition provisions.
(2)The Basel III rules do not establish well-capitalized thresholds for these measures for bank holding companies. Existing well-capitalized thresholds established in the Federal Reserve’s Regulation Y have been included where available.
The amount of dividends that a bank may pay in any year is subject to certain regulatory restrictions. Under the current banking regulations, a bank may not pay dividends if such a payment would leave the bank inadequately capitalized. Discover Bank paid dividends of $4.0 billion, $3.3 billion and $555 million in the years ended December 31, 2022, 2021 and 2020, respectively, to DFS.
18. Commitments, Contingencies and Guarantees
In the normal course of business, the Company enters into a number of off-balance sheet commitments, transactions and obligations under guarantee arrangements that expose the Company to varying degrees of risk. The Company’s commitments, contingencies and guarantee relationships are described below.
Commitments
Unused Credit Arrangements
At December 31, 2022, the Company had unused credit arrangements for loans of approximately $224.7 billion. Such arrangements arise primarily from agreements with customers for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions in the related agreements. These arrangements, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification. As the Company’s credit card loans are unconditionally cancellable, no liability for expected credit losses is required for unused lines of credit. For all other loans, the Company records a liability for expected credit losses for unfunded commitments, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition.
Contingencies
See Note 19: Litigation and Regulatory Matters for a description of potential liability arising from pending litigation or regulatory proceedings involving the Company.
Guarantees
The Company has obligations under certain guarantee arrangements, including contracts, indemnification agreements and representations and warranties, which contingently require the Company to make payments to the guaranteed party based on changes in an underlying asset, liability or equity security of a guaranteed party, rate or index. Also included as guarantees are contracts that contingently require the Company to make payments to a guaranteed party based on another entity’s failure to perform under an agreement. The Company’s use of guarantees is disclosed below by type of guarantee.
Securitizations Representations and Warranties
As part of the Company’s financing activities, the Company provides representations and warranties that certain assets pledged as collateral in secured borrowing arrangements conform to specified guidelines. Due diligence is performed by the Company, which is intended to ensure that asset guideline qualifications are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company may be required to replace, repurchase or sell such assets. In its credit card securitization activities, the Company would replace nonconforming receivables through the allocation of excess seller’s interest or from additional transfers from the unrestricted pool of receivables. If the Company could not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors’ interests would be triggered. In its student loan securitizations, the Company would generally repurchase the loans from the trust at the outstanding principal amount plus interest.
The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of third-party investor interests in credit card asset-backed securities and the principal amount of any private student loan secured borrowings, plus any unpaid interest for the corresponding secured borrowings. The Company has recorded substantially all of the maximum potential amount of future payments in long-term borrowings on the Company’s consolidated statements of financial condition. The Company has not recorded any incremental contingent liability associated with its secured borrowing representations and warranties. Management believes that the probability of having to replace, repurchase or sell assets pledged as collateral under secured borrowing arrangements, including an early amortization event, is low.
Counterparty Settlement Guarantees
Diners Club and DFS Services LLC (on behalf of PULSE) have various counterparty exposures, which are listed below:
•Merchant Guarantee. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants.
•ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.
•Global Network Alliance Guarantee. Discover Network, Diners Club and PULSE have entered into contractual relationships with certain international payment networks in which DFS Services LLC retains the counterparty exposure if a network fails to fulfill its settlement obligation.
The maximum potential amount of future payments related to such contingent obligations is dependent upon the transaction volume processed between the time a potential counterparty defaults on its settlement and the time at which the Company disables the settlement of any further transactions for the defaulting party. The Company has some contractual remedies to offset these counterparty settlement exposures (such as letters of credit or pledged deposits), however, there is no limitation on the maximum amount the Company may be liable to pay.
The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether particular counterparties will fail to meet their settlement obligations. In the event all licensees and/or issuers were to become unable to settle their transactions, the Company estimates its maximum potential counterparty exposures to these settlement guarantees would be approximately $90 million as of December 31, 2022.
The Company believes that the estimated amounts of maximum potential future payments are not representative of the Company’s actual potential loss exposure given Diners Club’s and PULSE’s insignificant historical losses from these counterparty exposures. As of December 31, 2022, the Company had not recorded any contingent liability in the consolidated financial statements for these counterparty exposures and management believes that the probability of any payments under these arrangements is low.
Discover Network Merchant Chargeback Guarantees
The Company operates the Discover Network, issues payment cards and permits third parties to issue payment cards. The Company is contingently liable for certain transactions processed on the Discover Network in the event of a dispute between the payment card customer and a merchant. The contingent liability arises if the disputed transaction involves a merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in the customer’s favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn credits its customer’s account. The Discover Network will then charge back the disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by the applicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect the amount subject to dispute from the merchant or merchant acquirer (e.g., in the event of merchant default or dissolution or after expiration of the time period for chargebacks in the applicable agreement), the Discover Network will bear the loss for the amount credited or refunded to the customer. In most instances, a loss by the Discover Network is unlikely to arise in connection with payments on card transactions because most products or services are delivered when purchased and credits are issued by merchants on returned items in a timely fashion, thus minimizing the likelihood of cardholder disputes with respect to amounts paid by the Discover Network. However, where the product or service is not scheduled to be provided to the customer until a later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases. Losses related to merchant chargebacks were not material for the years ended December 31, 2022, 2021 and 2020.
The maximum potential amount of obligations of the Discover Network arising from such contingent obligations is estimated to be the portion of the total Discover Network transaction volume processed to date for which timely and valid disputes may be raised under applicable law and relevant issuer and customer agreements. There is no limitation on the maximum amount the Company may be liable to pay to issuers. However, the Company believes that such amount is not representative of the Company’s actual potential loss exposure based on the Company’s historical
experience. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes may include or result in disputed transactions.
The following table summarizes certain information regarding merchant chargeback guarantees (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Aggregate sales transaction volume(1)
$ 256,237 $ 223,360 $ 175,026
(1)Represents transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume.
The Company did not record any contingent liability in the consolidated financial statements for merchant chargeback guarantees as of December 31, 2022 and 2021. The Company mitigates the risk of potential loss exposure by withholding settlement from merchants, obtaining third-party guarantees, or obtaining escrow deposits or letters of credit from certain merchant acquirers or merchants that are considered a higher risk due to various factors such as time delays in the delivery of products or services. As of December 31, 2022 and 2021, the Company had escrow deposits and settlement withholdings of $11 million and $15 million, respectively, which are recorded in interest-bearing deposit accounts and accrued expenses and other liabilities on the Company’s consolidated statements of financial condition.
19. Litigation and Regulatory Matters
In the normal course of business, from time to time, the Company has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The litigation process is not predictable and can lead to unexpected results. The Company contests liability and/or the amount of damages as appropriate in each pending matter.
The Company has historically offered its customers an arbitration clause in its customer agreements. The arbitration clause allows the Company and its customers to quickly and economically resolve disputes. Additionally, the arbitration clause has in some instances limited the costs of, and the Company’s exposure to, litigation. Future legal and regulatory challenges and prohibitions may cause the Company to discontinue its offering and use of such clauses. From time to time, the Company is involved in legal actions challenging its arbitration clause. Bills may be periodically introduced in Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses.
The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company’s business including, among other matters, consumer regulatory, accounting, tax and other operational matters. The investigations and proceedings may result in significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief. These outcomes could materially impact the Company’s consolidated financial statements, increase its cost of operations, or limit the Company’s ability to execute its business strategies and engage in certain business activities. Certain subsidiaries of the Company are subject to a consent order with the Consumer Financial Protection Bureau (“CFPB”) regarding certain private student loan servicing practices, as described below. Pursuant to powers granted under federal banking laws, regulatory agencies have broad and sweeping discretion and may assess civil money penalties, require changes to certain business practices or require customer restitution at any time.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matters present loss contingencies that are both probable and estimable. Litigation and regulatory settlement-related expense was $15 million, $59 million and $31 million for the years ended December 31, 2022, 2021 and 2020, respectively.
There may be an exposure to loss in excess of any amounts accrued. The Company believes the estimate of the aggregate range of reasonably possible losses (meaning the likelihood of losses is more than remote but less than likely), in excess of the amounts that the Company has accrued for legal and regulatory proceedings, is up to $190 million as of December 31, 2022. This estimated range of reasonably possible losses is based on currently available information for those proceedings in which the Company is involved and considers the Company’s best estimate of such losses for those matters for which an estimate can be made. It does not represent the Company’s maximum potential
loss exposure. Various aspects of the legal proceedings underlying the estimated range will change from time to time and actual results may vary significantly from the estimate.
The Company’s estimated range noted above involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years and, in some cases, a wide range of business activities), unspecified damages and/or the novelty of the legal issues presented. The outcome of pending matters could adversely affect the Company’s reputation and be material to the Company’s consolidated financial condition, operating results and cash flows for a particular future period, depending on, among other things, the level of the Company’s income for such period.
In July 2015, the Company announced that its subsidiaries, Discover Bank, The Student Loan Corporation and Discover Products Inc. (the “Discover Subsidiaries”), agreed to a consent order with the CFPB with respect to certain private student loan servicing practices (the “2015 Order”). The 2015 Order expired in July 2020. In December 2020, the Discover Subsidiaries agreed to a consent order (the “2020 Order”) with the CFPB resolving the agency’s investigation into Discover Bank’s compliance with the 2015 Order. In connection with the 2020 Order, Discover is required to implement a redress and compliance plan and must pay at least $10 million in consumer redress to consumers who may have been harmed and has paid a $25 million civil money penalty to the CFPB.
On March 8, 2016, a class-action lawsuit was filed against the Company, other credit card networks, other issuing banks and EMVCo in the U.S. District Court for the Northern District of California (B&R Supermarket, Inc., d/b/a Milam’s Market, et al. v. Visa, Inc. et al.) alleging a conspiracy by defendants to shift fraud liability to merchants with the migration to the EMV security standard and chip technology. The plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys’ fees, costs and injunctive relief. In May 2017, the Court entered an order transferring the entire action to a federal court in New York that is presiding over certain related claims that are pending in the actions consolidated as MDL 1720. In August 2020, the Court granted the plaintiffs’ Motion to Certify a Class. The defendants appealed the ruling, which was denied in January 2021. Expert discovery closed on February 28, 2022. On June 3, 2022, the Court granted Plaintiffs’ Motion to Approve Class Notices. The Company filed its renewed motion to compel arbitration, motion for summary judgment, and Daubert challenges on November 30, 2022, with briefing scheduled to close on July 27, 2023. The Company is not in a position at this time to assess the likely outcome or its exposure, if any, with respect to this matter. However, the Company will seek to defend itself vigorously against all claims asserted by the plaintiffs.
20. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820, Fair Value Measurement, provides a three-level hierarchy for classifying the inputs to valuation techniques used to measure fair value of financial instruments based on whether the inputs are observable or unobservable. It also requires certain disclosures about those measurements. The three-level valuation hierarchy is as follows:
•Level 1: Fair values determined by Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
•Level 2: Fair values determined by Level 2 inputs are those that utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive markets, quoted prices for the identical assets in an inactive market and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company evaluates factors such as the frequency of transactions, the size of the bid-ask spread and the significance of adjustments made when considering transactions involving similar assets or liabilities to assess the relevance of those observed prices. If relevant and observable prices are available, the fair values of the related assets or liabilities would be classified as Level 2.
•Level 3: Fair values determined by Level 3 inputs are those based on unobservable inputs and include situations where there is little, if any, market activity for the asset or liability being valued. In instances where the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy in which the measurements are classified is based on the lowest level input that is significant to the fair value measurement in its entirety. Accordingly, the Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.
The Company evaluates the classification of each fair value measurement within the hierarchy at least quarterly.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and involves consideration of factors specific to the asset or liability. Furthermore, certain techniques used to measure fair value involve some degree of judgment and, as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are as follows (dollars in millions):
Quoted Price in Active Markets
for Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3) Total
Balance at December 31, 2022
Assets
Fair value - OCI
U.S. Treasury and U.S. GSE securities $ 11,416 $ 7 $ - $ 11,423
Residential mortgage-backed securities - Agency - 564 - 564
Available-for-sale investment securities $ 11,416 $ 571 $ - $ 11,987
Derivative financial instruments - cash flow hedges(1)
$ - $ 1 $ - $ 1
Fair value - Net income
Marketable equity securities $ 41 $ - $ - $ 41
Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges(1)
$ - $ 3 $ - $ 3
Fair value - Net income
Derivative financial instruments - fair value hedges(1)
$ - $ 2 $ - $ 2
Balance at December 31, 2021
Assets
Fair value - OCI
U.S. Treasury and U.S. GSE securities $ 6,505 $ 9 $ - $ 6,514
Residential mortgage-backed securities - Agency - 186 - 186
Available-for-sale investment securities $ 6,505 $ 195 $ - $ 6,700
Fair value - Net income
Marketable equity securities $ 461 $ - $ - $ 461
(1)Derivative instrument carrying values in an asset or liability position are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company’s consolidated statements of financial condition.
Available-for-Sale Investment Securities
Investment securities classified as available-for-sale consist of U.S. Treasury and U.S. GSE securities and RMBS. The fair value estimates of investment securities classified as Level 1, consisting of U.S. Treasury securities, are determined based on quoted market prices for the same securities. The fair value estimates of U.S. GSE securities and RMBS are classified as Level 2 and are valued by maximizing the use of relevant observable inputs, including quoted prices for similar securities, benchmark yield curves and market-corroborated inputs.
The Company validates the fair value estimates provided by pricing services primarily by comparing to valuations obtained through other pricing sources. The Company evaluates pricing variances among different pricing sources to ensure that the valuations utilized are reasonable. The Company also corroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as market interest rate curves. The Company further performs
due diligence in understanding the procedures and techniques performed by the pricing services to derive fair value estimates.
At December 31, 2022, amounts reported in RMBS reflect U.S. government agency and U.S. GSE obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac with an aggregate par value of $586 million, a weighted-average coupon of 4.05% and a weighted-average remaining maturity of four years.
Marketable Equity Securities
The Company holds non-controlling equity positions in payment service entities that have actively traded stock and therefore have readily determinable fair values. The Company classifies these equity securities as Level 1, the fair value estimates of which are determined based on quoted share prices for the same securities.
Derivative Financial Instruments
The Company’s derivative financial instruments consist of interest rate swaps and foreign exchange forward contracts. These instruments are classified as Level 2 as their fair values are estimated using proprietary pricing models, containing certain assumptions based on readily observable market-based inputs, including interest rate curves, option volatility and foreign currency forward and spot rates. In determining fair values, the pricing models use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity and the observable market-based inputs. The fair values of the interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments are based on an expectation of future interest rates derived from the observable market interest rate curves. The Company considers collateral and master netting agreements that mitigate credit exposure to counterparties in determining the counterparty credit risk valuation adjustment. The fair values of the currency instruments are valued by comparing the contracted forward exchange rate pertaining to the specific contract maturities to the current market exchange rate.
The Company validates the fair value estimates of interest rate swaps primarily through comparison to the fair value estimates computed by the counterparties to each of the derivative transactions. The Company evaluates pricing variances among different pricing sources to ensure that the valuations utilized are reasonable. The Company also corroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as market interest rate curves. The Company performs due diligence in understanding the impact of any changes to the valuation techniques performed by proprietary pricing models before implementation, working closely with the third-party valuation service and reviewing the service’s control objectives at least annually. The Company corroborates the fair value of foreign exchange forward contracts through independent calculation of the fair value estimates.
In October 2020, the Company revised its valuation methodology to reflect changes made by central clearinghouses that changed the discounting methodology and interest calculation of cash variation margin from Federal Funds Overnight Index Swap (“OIS”) to SOFR OIS for U.S. Dollar cleared interest rate swaps. The Company’s revised valuation methodology results in valuations for cleared interest rate swaps that better reflect cleared swap prices obtainable in the markets in which the Company transacts. Pursuant to ASC Topic 848, the Company has elected and applied certain optional expedients and exceptions that provide contract modification and hedge accounting relief to eligible interest rate swaps affected by the change in the discounting methodology. The changes in valuation methodology are applied prospectively as a change in accounting estimate and are immaterial to the Company’s financial statements.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill. For these assets, measurement at fair value in periods subsequent to the initial recognition of the assets may be applicable whenever one is tested for impairment. No impairments were recognized related to these assets for the year ended December 31, 2022. The Company recognized $95 million of impairments related to these assets for the year ended December 31, 2021.
Financial Instruments Measured at Other Than Fair Value
The following tables disclose the estimated fair value of the Company’s financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions):
Balance at December 31, 2022 Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Carrying Value
Assets
Amortized cost
Residential mortgage-backed securities - Agency $ - $ 199 $ - $ 199 $ 221
Held-to-maturity investment securities $ - $ 199 $ - $ 199 $ 221
Net loan receivables $ - $ - $ 110,796 $ 110,796 $ 104,746
Carrying value approximates fair value(1)
Cash and cash equivalents $ 8,856 $ - $ - $ 8,856 $ 8,856
Restricted cash $ 41 $ - $ - $ 41 $ 41
Accrued interest receivables(2)
$ - $ 1,211 $ - $ 1,211 $ 1,211
Liabilities
Amortized cost
Time deposits(3)
$ - $ 32,710 $ - $ 32,710 $ 33,070
Long-term borrowings - owed to securitization investors $ - $ 9,862 $ 84 $ 9,946 $ 10,259
Other long-term borrowings - 9,468 - 9,468 9,849
Long-term borrowings $ - $ 19,330 $ 84 $ 19,414 $ 20,108
Carrying value approximates fair value(1)
Accrued interest payables(2)
$ - $ 308 $ - $ 308 $ 308
Balance at December 31, 2021 Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Carrying Value
Assets
Amortized cost
Residential mortgage-backed securities - Agency $ - $ 206 $ - $ 206 $ 204
Held-to-maturity investment securities $ - $ 206 $ - $ 206 $ 204
Net loan receivables $ - $ - $ 94,176 $ 94,176 $ 86,862
Carrying value approximates fair value(1)
Cash and cash equivalents $ 8,750 $ - $ - $ 8,750 $ 8,750
Restricted cash $ 2,582 $ - $ - $ 2,582 $ 2,582
Accrued interest receivables(2)
$ - $ 948 $ - $ 948 $ 948
Liabilities
Amortized cost
Time deposits(3)
$ - $ 21,490 $ - $ 21,490 $ 21,125
Short-term borrowings $ - $ 1,750 $ - $ 1,750 $ 1,750
Long-term borrowings - owed to securitization investors $ - $ 8,953 $ 104 $ 9,057 $ 9,039
Other long-term borrowings - 10,013 - 10,013 9,438
Long-term borrowings $ - $ 18,966 $ 104 $ 19,070 $ 18,477
Carrying value approximates fair value(1)
Accrued interest payables(2)
$ - $ 184 $ - $ 184 $ 184
(1) The carrying values of these assets and liabilities approximate fair value due to their short-term nature.
(2) Accrued interest receivable and payable carrying values are presented as part of other assets and accrued expenses and other liabilities, respectively, in the Company’s consolidated statements of financial condition.
(3) Excludes deposits without contractually defined maturities for all periods presented.
21. Derivatives and Hedging Activities
The Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or speculative purposes. Certain derivatives used to manage the Company’s exposure to foreign currency are not designated as hedges and do not qualify for hedge accounting.
Derivatives may give rise to counterparty credit risk, which generally is mitigated through collateral arrangements as described under the sub-heading “- Collateral Requirements and Credit-Risk Related Contingency Features.” The Company enters into derivative transactions with established dealers that meet minimum credit criteria established by the Company. All counterparties must be pre-approved before engaging in any transaction with the Company. The Company regularly monitors counterparties to ensure compliance with the Company’s risk policies and limits. In determining the counterparty credit risk valuation adjustment for the fair values of derivatives, if any, the Company considers collateral and legally enforceable master netting agreements that mitigate credit exposure to related counterparties.
All derivatives are recorded in other assets at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values. See Note 20: Fair Value Measurements for a description of the valuation methodologies used for derivatives. Cash collateral amounts associated with derivative positions that are cleared through an exchange are legally characterized as settlement of the derivative positions. Such collateral amounts are reflected as offsets to the associated derivatives balances recorded in other assets or in accrued expenses and other liabilities. Other cash collateral posted and held balances are recorded in other assets and deposits, respectively, in the
consolidated statements of financial condition. Collateral amounts recorded in the consolidated statements of financial condition are based on the net collateral posted or held position for each applicable legal entity’s master netting arrangement with each counterparty.
Derivatives Designated as Hedges
Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows arising from changes in interest rates, or other types of forecasted transactions, are considered cash flow hedges. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.
Cash Flow Hedges
The Company uses interest rate swaps to manage its exposure to variability in cash flows related to changes in interest rates on interest-earning assets and funding instruments. These interest rate swaps qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). At December 31, 2022 and 2021, the Company’s outstanding cash flow hedges primarily relate to interest receipts from credit card receivables and had an initial maximum period of three years and two years, respectively.
The change in the fair value of derivatives designated as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows affect earnings. Amounts reported in AOCI related to derivatives at December 31, 2022, will be reclassified to interest income and interest expense as interest receipts and payments are accrued on the Company’s then outstanding credit card receivables and certain floating-rate debt, respectively. During the next 12 months, the Company estimates it will reclassify $32 million into pretax earnings related to its cash flow hedges.
Fair Value Hedges
The Company is exposed to changes in the fair value of its fixed-rate debt obligations due to changes in interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value of certain fixed-rate long-term borrowings, including securitized debt and bank notes, attributable to changes in the respective benchmark rates. These interest rate swaps qualify as fair value hedges in accordance with ASC 815. Changes in the fair values of both (i) the derivatives and (ii) the hedged long-term borrowings attributable to the interest rate risk being hedged are recorded in interest expense. The changes generally provide substantial offset to one another, with any difference recognized in interest expense.
Derivatives Not Designated as Hedges
Foreign Exchange Forward Contracts
The Company has foreign exchange forward contracts that are economic hedges and are not designated as accounting hedges. The Company enters into foreign exchange forward contracts to manage foreign currency risk. Changes in the fair value of these contracts are recorded in other income on the consolidated statements of income.
Derivatives Cleared Through an Exchange
Cash variation margin payments on derivatives cleared through an exchange are legally considered settlement payments and are accounted for with corresponding derivative positions as one unit of account and not presented separately as collateral. With settlement payments on derivative positions cleared through this exchange reflected as offsets to the associated derivative asset and liability balances, the fair values of derivative instruments and collateral balances shown are generally reduced.
Derivatives Activity
The following table summarizes the fair value (including accrued interest) and outstanding notional amounts of derivative instruments and related collateral balances (dollars in millions):
December 31,
2022 2021
Notional
Amount Number of
Outstanding Derivative Contracts Derivative Assets Derivative Liabilities Notional
Amount Derivative Assets(1)
Derivative Liabilities(1)
Derivatives designated as hedges
Interest rate swaps - cash flow hedge $ 5,000 9 $ 1 $ 3 $ 250 $ - $ -
Interest rate swaps - fair value hedge $ 4,425 5 - 2 $ 6,125 - -
Derivatives not designated as hedges
Foreign exchange forward contracts(2)
$ 25 7 - - $ 36 - -
Total gross derivative assets/liabilities(3)
1 5 - -
Less: collateral held/posted(4)
- (5) - -
Total net derivative assets/liabilities $ 1 $ - $ - $ -
(1)The gross and net derivative assets and liabilities were immaterial as of December 31, 2021.
(2)The foreign exchange forward contracts have notional amounts of EUR 6 million, GBP 6 million, SGD 1 million, INR 788 million and AUD 2 million as of December 31, 2022, and notional amounts of EUR 6 million, GBP 6 million, SGD 1 million, INR 788 million and AUD 14 million as of December 31, 2021.
(3)In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At December 31, 2022, the Company had one outstanding contract with a total notional amount of $48 million and an immaterial fair value. At December 31, 2021, the Company had one outstanding contract with a total notional amount of $50 million and an immaterial fair value.
(4)Collateral amounts, which consist of cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged.
The following amounts were recorded on the statements of financial condition related to cumulative basis adjustments for fair value hedges (dollars in millions):
December 31,
2022 2021
Carrying Amount of Hedged Liabilities Cumulative Amount of Fair Value Hedging Adjustment (Decreasing) the Carrying Amount of Hedged Liabilities(1)
Carrying Amount of Hedged Liabilities Cumulative Amount of Fair Value Hedging Adjustment Increasing the Carrying Amount of Hedged Liabilities(1)
Long-term borrowings $ 4,386 $ (3) $ 6,158 $ 83
(1)The balance includes $28 million and $48 million of cumulative hedging adjustments related to discontinued hedging relationships as of December 31, 2022 and 2021, respectively.
The following table summarizes the impact of the derivative instruments on income and indicates where within the consolidated financial statements such impact is reported (dollars in millions):
Location and Amount of (Losses) Gains Recognized on the Consolidated Statements of Income
Interest Expense Other Income
Deposits Long-Term
Borrowings Interest Income
(Credit Card)
For the Year Ended December 31, 2022
Total amounts of income and expense line items presented in the consolidated statements of income, where the effects of fair value or cash flow hedges are recorded $ (1,257) $ (606) $ 10,632 $ 75
The effects of cash flow and fair value hedging
Gains (Losses) on cash flow hedging relationships
Amounts reclassified from OCI into earnings $ - $ (2) $ (2) $ -
Gains (losses) on fair value hedging relationships
Gains on hedged items $ - $ 66 $ - $ -
Gains (losses) on interest rate swaps - (70) - -
Total gains (losses) on fair value hedging relationships $ - $ (4) $ - $ -
The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges $ - $ - $ - $ 1
For the Year Ended December 31, 2021
Total amounts of income and expense line items presented in the consolidated statements of income, where the effects of fair value or cash flow hedges are recorded $ (661) $ (473) $ 8,717 $ 66
The effects of cash flow and fair value hedging
Gains (losses) on cash flow hedging relationships
Amounts reclassified from OCI into earnings $ - $ (3) $ - $ -
Gains (losses) on fair value hedging relationships
Gains on hedged items $ - $ 246 $ - $ -
Gains (losses) on interest rate swaps - (93) - -
Total gains on fair value hedging relationships $ - $ 153 $ - $ -
For the Year Ended December 31, 2020
Total amounts of income and expense line items presented in the consolidated statements of income, where the effects of fair value or cash flow hedges are recorded $ (1,231) $ (602) $ 8,985 $ 56
The effects of cash flow and fair value hedging
(Losses) gains on cash flow hedging relationships
Amounts reclassified from OCI into earnings $ (9) $ (3) $ - $ -
Gains (losses) on fair value hedging relationships
Gains (losses) on hedged items $ - $ (268) $ - $ -
Gains on interest rate swaps - 423 - -
Total gains on fair value hedging relationships $ - $ 155 $ - $ -
For the impact of the derivative instruments on OCI, see Note 13: Accumulated Other Comprehensive Income.
Collateral Requirements and Credit-Risk Related Contingency Features
The Company has master netting arrangements and minimum collateral posting thresholds with its counterparties for its fair value and cash flow hedge interest rate swaps and foreign exchange forward contracts. The Company has not sought a legal opinion in relation to the enforceability of its master netting arrangements and, as such, does not report any of these positions on a net basis. Collateral is required by either the Company or its subsidiaries or the counterparty depending on the net fair value position of the derivatives held with that counterparty. These collateral receivable or payable amounts are generally not offset against the fair value of these derivatives but are recorded separately in other assets or deposits. Most of the Company’s cash collateral amounts relate to positions cleared through an exchange and are reflected as offsets to the associated derivatives balances recorded in other assets and accrued expenses and other liabilities.
The Company also has agreements with certain of its derivative counterparties that contain a provision under which the Company could be declared in default on any of its derivative obligations if the Company defaults on any of its indebtedness, including default where the lender has not accelerated repayment of the indebtedness.
22. Segment Disclosures
The Company manages its business activities in two segments: Digital Banking and Payment Services.
•Digital Banking: The Digital Banking segment includes Discover-branded credit cards issued to individuals on the Discover Network and other consumer products and services, including private student loans, personal loans, home loans and other consumer lending and deposit products. The majority of Digital 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.
•Payment Services: The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and the Company’s Network Partners business, which provides payment transaction processing and settlement services on the Discover Network. The majority of Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue from Diners Club.
The business segment reporting provided to and used by the Company’s chief operating decision-maker is prepared using the following principles and allocation conventions:
•The Company aggregates operating segments when determining reportable segments.
•Corporate overhead is not allocated between segments; all corporate overhead is included in the Digital Banking segment.
•Through its operation of the Discover Network, the Digital Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments, except for an allocation of direct and incremental costs driven by the Company’s Payment Services segment.
•The Company’s assets are not allocated among the operating segments in the information reviewed by the Company’s chief operating decision-maker.
•The revenues of each segment are derived from external sources. The segments do not earn revenue from intercompany sources.
•Income taxes are not specifically allocated between the operating segments in the information reviewed by the Company’s chief operating decision maker.
The following table presents segment data (dollars in millions):
Digital
Banking Payment
Services Total
For the Year Ended December 31, 2022
Interest income
Credit card loans $ 10,632 $ - $ 10,632
Private student loans 831 - 831
Personal loans 872 - 872
Other loans 167 - 167
Other interest income 362 - 362
Total interest income 12,864 - 12,864
Interest expense 1,865 - 1,865
Net interest income 10,999 - 10,999
Provision for credit losses 2,359 - 2,359
Other income 2,162 176 2,338
Other expense 5,069 167 5,236
Income before income taxes $ 5,733 $ 9 $ 5,742
For the Year Ended December 31, 2021
Interest income
Credit card loans $ 8,717 $ - $ 8,717
Private student loans 742 - 742
Personal loans 878 - 878
Other loans 114 - 114
Other interest income 200 - 200
Total interest income 10,651 - 10,651
Interest expense 1,134 - 1,134
Net interest income 9,517 - 9,517
Provision for credit losses 218 - 218
Other income 1,781 789 2,570
Other expense 4,549 256 4,805
Income before income taxes $ 6,531 $ 533 $ 7,064
For the Year Ended December 31, 2020
Interest income
Credit card loans $ 8,985 $ - $ 8,985
Private student loans 754 - 754
Personal loans 958 - 958
Other loans 106 - 106
Other interest income 292 - 292
Total interest income 11,095 - 11,095
Interest expense 1,865 - 1,865
Net interest income 9,230 - 9,230
Provision for credit losses 5,134 - 5,134
Other income 1,459 399 1,858
Other expense 4,292 227 4,519
Income before income taxes $ 1,263 $ 172 $ 1,435
23. Revenue from Contracts with Customers
ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), generally applies to the sales of any good or service for which no other specific accounting guidance is provided. ASC 606 defines 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. The Company’s revenue that is subject to this model includes discount and interchange, protection products fees, transaction processing revenue and certain amounts classified as other income.
The following table presents revenue from contracts with customers disaggregated by business segment and reconciles revenue from contracts with customers to total other income (dollars in millions):
Digital
Banking Payment
Services Total
For the Year Ended December 31, 2022
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 1,345 $ 79 $ 1,424
Protection products revenue 172 - 172
Transaction processing revenue - 249 249
Other income 11 64 75
Total other income subject to ASC 606(2)
1,528 392 1,920
Other income not subject to ASC 606
Loan fee income 632 - 632
Gains (losses) on equity investments 2 (216) (214)
Total other income (loss) not subject to ASC 606 634 (216) 418
Total other income by operating segment $ 2,162 $ 176 $ 2,338
For the Year Ended December 31, 2021
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 1,151 $ 73 $ 1,224
Protection products revenue 165 - 165
Transaction processing revenue - 227 227
Other income - 66 66
Total other income subject to ASC 606(2)
1,316 366 1,682
Other income not subject to ASC 606
Loan fee income 464 - 464
Gains on equity investments 1 423 424
Total other income not subject to ASC 606 465 423 888
Total other income by operating segment $ 1,781 $ 789 $ 2,570
For the Year Ended December 31, 2020
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 871 $ 62 $ 933
Protection products revenue 180 - 180
Transaction processing revenue - 195 195
Other (loss) income (7) 63 56
Total other income subject to ASC 606(2)
1,044 320 1,364
Other income not subject to ASC 606
Loan fee income 414 - 414
Gains on equity investments 1 79 80
Total other income not subject to ASC 606 415 79 494
Total other income by operating segment $ 1,459 $ 399 $ 1,858
(1) Net of rewards, including Cashback Bonus rewards, of $3.0 billion, $2.5 billion and $1.9 billion for the years ended December 31, 2022, 2021 and 2020, respectively.
(2) Excludes $10 million, $2 million and $2 million deposit product fees that are reported within net interest income for the years ended December 31, 2022, 2021 and 2020, respectively.
For a detailed description of the Company’s significant revenue recognition accounting policies, see Note 2: Summary of Significant Accounting Policies.
24. Related Party Transactions
In the ordinary course of business, the Company offers consumer financial products to its directors, executive officers and certain members of their families. These products are offered on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and these receivables are included in the loan receivables in the Company’s consolidated statements of financial condition. They were not material to the Company’s financial position or results of operations.
25. Parent Company Condensed Financial Information
The following Parent Company financial statements are provided in accordance with SEC rules, which require such disclosure when the restricted net assets of consolidated subsidiaries exceed 25% of consolidated net assets.
Discover Financial Services
(Parent Company Only)
Condensed Statements of Financial Condition
December 31,
2022 2021
(dollars in millions)
Assets
Cash and cash equivalents(1)
$ 3,155 $ 3,182
Restricted cash 20 20
Notes receivable from subsidiaries(2)
1,759 777
Investment in bank subsidiary 11,922 11,889
Investments in non-bank subsidiaries 886 1,209
Other assets 811 663
Total assets $ 18,553 $ 17,740
Liabilities and Stockholders’ Equity
Non-interest-bearing deposit accounts $ 2 $ 2
Short-term borrowings from subsidiaries 115 439
Long-term borrowings 3,487 3,548
Accrued expenses and other liabilities 359 343
Total liabilities 3,963 4,332
Stockholders’ equity 14,590 13,408
Total liabilities and stockholders’ equity $ 18,553 $ 17,740
(1)The Parent Company had $3.1 billion and $3.0 billion in a money market deposit account at Discover Bank as of December 31, 2022 and 2021, respectively, which is included in cash and cash equivalents. These funds are available to the Parent for liquidity purposes.
(2)The Parent Company advanced $1.3 billion to Discover Bank as of December 31, 2022 and 2021, which is included in notes receivable from subsidiaries.
Discover Financial Services
(Parent Company Only)
Condensed Statements of Comprehensive Income
For the Years Ended December 31,
2022 2021 2020
(dollars in millions)
Interest income $ 98 $ 33 $ 44
Interest expense 189 199 205
Net interest expense (91) (166) (161)
Dividends from bank subsidiary 4,000 3,250 555
Dividends from non-bank subsidiaries 688 - 200
Total income 4,597 3,084 594
Other expense 6 10 (16)
Income before income tax benefit and equity in undistributed net income of subsidiaries 4,591 3,074 610
Income tax benefit 25 25 30
Equity in undistributed net income of subsidiaries (224) 2,350 501
Net income 4,392 5,449 1,141
Other comprehensive (loss) income, net (245) (139) 164
Comprehensive income $ 4,147 $ 5,310 $ 1,305
Discover Financial Services
(Parent Company Only)
Condensed Statements of Cash Flows
For the Years Ended December 31,
2022 2021 2020
(dollars in millions)
Cash flows provided by operating activities
Net income $ 4,392 $ 5,449 $ 1,141
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiaries
224 (2,350) (501)
Non-cash dividend from subsidiary (188) - -
Stock-based compensation expense
89 103 42
Deferred income taxes
(8) (13) (5)
Depreciation and amortization
32 47 41
Changes in assets and liabilities:
(Increase) decrease in other assets (143) (91) 42
Increase (decrease) in accrued expenses and other liabilities 27 24 (30)
Net cash provided by operating activities 4,425 3,169 730
Cash flows (used for) provided by investing activities(1)
(Increase) decrease in loans to subsidiaries (982) 114 (15)
Net cash (used for) provided by investing activities (982) 114 (15)
Cash flows used for financing activities
Net (decrease) increase in short-term borrowings from subsidiaries (324) 156 -
Proceeds from issuance of common stock 10 9 10
Proceeds from issuance of long-term borrowings 740 - -
Maturities and repayment of long-term borrowings (834) (172) (3)
Purchases of treasury stock (2,359) (2,260) (348)
Proceeds from issuance of preferred stock - - 493
Dividends paid on common and preferred stock (703) (636) (576)
Net cash used for financing activities (3,470) (2,903) (424)
(Decrease) increase in cash, cash equivalents and restricted cash (27) 380 291
Cash, cash equivalents and restricted cash, at beginning of period 3,202 2,822 2,531
Cash, cash equivalents and restricted cash, at end of period $ 3,175 $ 3,202 $ 2,822
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents $ 3,155 $ 3,182 $ 2,802
Restricted cash 20 20 20
Cash, cash equivalents and restricted cash, at end of period $ 3,175 $ 3,202 $ 2,822
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest expense $ 159 $ 156 $ 168
Income taxes, net of income tax refunds
$ (39) $ (70) $ (31)
(1)Subsequent to the issuance of the audited financial statements for the year ended December 31, 2021, the Company identified an immaterial classification error within cash flows (used for)/provided by investing activities. The correction of this error had no impact on the net cash (used for)/provided by investing activities. Management has evaluated the materiality of this misstatement and concluded it was not material to the prior period.
26. Subsequent Events
The Company has evaluated events and transactions that have occurred subsequent to December 31, 2022, and determined that there were no subsequent events that would require recognition or disclosure in the consolidated financial statements.
Glossary of Acronyms
•ALCO: Asset and Liability Management Committee
•AOCI: Accumulated Other Comprehensive Income (Loss)
•ARRC: Alternative Reference Rates Committee
•ASC: Accounting Standards Codification
•ASU: Accounting Standards Update
•BCBS: Basel Committee on Banking Supervision
•CARES Act: Coronavirus Aid, Relief, and Economic Security Act
•CCAR: Comprehensive Capital Analysis and Review
•CCPA: California Consumer Privacy Act
•CECL: Current Expected Credit Loss
•CEO: Chief Executive Officer
•CET1: Common Equity Tier 1
•CFPB: Consumer Financial Protection Bureau
•CLDC: Compensation and Leadership Development Committee
•COSO: Committee of Sponsoring Organizations of the Treadway Commission
•COVID-19: Coronavirus Disease 2019
•CPPA: California Privacy Protection Agency
•CPRA: California Privacy Rights Act
•CRM: Corporate Risk Management
•CRO: Chief Risk Officer
•DCENT: Discover Card Execution Note Trust
•DCMT: Discover Card Master Trust
•DE&I: Diversity, Equity and Inclusion
•DFS: Discover Financial Services
•DRR: Designated Reserve Ratio
•EGRRCPA: Economic Growth, Regulatory Relief, and Consumer Protection Act
•EPS: Earnings Per Share
•ESG: Environmental, Social and Governance
•EWI: Early Warning Indicator
•FASB: Financial Accounting Standards Board
•FCA: UK Financial Conduct Authority
•FDIA: Federal Deposit Insurance Act
•FDIC: Federal Deposit Insurance Corporation
•FFIEC: Federal Financial Institutions Examination Council
•FHLB: Federal Home Loan Bank
•GAAP: Accounting Principles Generally Accepted in the United States
•IRS: Internal Revenue Service
•KRI: Key Risk Indicator
•LFI: Large Financial Institution
•LIBOR: London Interbank Offered Rate
•OCI: Other Comprehensive Income (Loss)
•OIS: Overnight Index Swap
•PCAOB: Public Company Accounting Oversight Board
•POS: Point-of-sale
•PSU: Performance Stock Unit
•Repo: Repurchase Agreement
•RMBS: Residential Mortgage-Backed Securities
•RSU: Restricted Stock Unit
•SCB: Stress Capital Buffer
•SEC: Securities and Exchange Commission
•SOFR: Secured Overnight Financing Rate
•TDR: Troubled Debt Restructuring
•UDAAP: Unfair, Deceptive or Abusive Acts or Practices
•U.S.: United States of America
•USD: United States Dollar
•U.S. GSE: Government-sponsored Enterprise of the U.S.
•VIE: Variable Interest Entity
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of human error, the circumvention or overriding of the system and reasonable resource constraints. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s assessments and those criteria, management has concluded that our internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and the firm’s report on this matter is included in Item 8 of this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
During the first quarter of 2022, we implemented a new general ledger and related infrastructure and systems. The implementation was completed in the ordinary course of business to modernize technology used in our financial reporting processes and was not implemented in response to identified material weaknesses in our internal control over financial reporting. In connection with the implementation, where applicable, modifications were made to the design of the control environment associated with the new general ledger and related technology.
Except for the implementation discussed above, there have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Part III.
Part III | Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our executive officers is included under the heading “Information About Our Executive Officers” in Item 1 of this annual report on Form 10-K. Information regarding our directors and corporate governance under the following captions in our proxy statement for our annual meeting of stockholders to be held on May 11, 2023 (“Proxy Statement”) is incorporated by reference herein.
“Corporate Governance - Information Concerning Nominees for Election as Directors”
“Corporate Governance - Process for Nominating Directors - Shareholder Recommendations for Director Candidates”
“Corporate Governance - Board Roles and Responsibilities - Board and Committee Meetings”
Our Code of Ethics and Business Conduct applies to all directors, officers and employees, including our Chief Executive Officer and our Chief Financial Officer. You can find our Code of Ethics and Business Conduct on our internet site, www.discover.com. We will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on our internet site.
Item 11. Executive Compensation
Information regarding executive compensation under the following captions in our Proxy Statement is incorporated by reference herein.
“Corporate Governance - Director Compensation”
“Executive Compensation”
“Compensation Discussion and Analysis”
“2022 Executive Compensation Tables”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information related to the compensation plans under which our equity securities are authorized for issuance as of December 31, 2022, is presented under the caption “Approval of the Discover Financial Services 2023 Omnibus Incentive Plan - Equity Compensation Plan Information” in our Proxy Statement and is incorporated by reference herein.
Information related to the beneficial ownership of our common stock is presented under the caption “Stock Ownership Information - Beneficial Ownership of Company Common Stock” in our Proxy Statement and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions, and director independence under the following captions in our Proxy Statement is incorporated by reference herein.
“Other Matters - Certain Transactions”
“Corporate Governance - Information Concerning Nominees for Election as Directors - Director Independence”
Item 14. Principal Accounting Fees and Services
Information regarding principal accounting fees and services is presented under the caption “Audit Matters” in our Proxy Statement and is incorporated by reference herein.
Part IV.
Part IV | Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Form 10-K:
1. Consolidated Financial Statements
The consolidated financial statements required to be filed in this annual report on Form 10-K are listed below and appear on pages 82 through 142 herein.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Statements of Financial Condition as of December 31, 2022 and 2021
Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements.
3. Exhibits
See the Exhibit Index below for a list of the exhibits being filed or furnished with or incorporated by reference into this annual report on Form 10-K.
Exhibit Index
Exhibit
Number Description
2.1*
Separation and Distribution Agreement, dated as of June 29, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 2.1 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto), as amended by the First Amendment to the Separation and Distribution Agreement dated as of June 29, 2007 between Discover Financial Services and Morgan Stanley, dated February 11, 2010 (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on February 12, 2010 and incorporated herein by reference thereto).
2.2*
Agreement for the Sale and Purchase of the Goldfish Credit Card Business, dated February 7, 2008, among Discover Financial Services, Goldfish Bank Limited, Discover Bank, SCFC Receivables Corporation, and Barclays Bank Plc (filed as Exhibit 2.1 to Discover Financial Services’ Current Report on Form 8-K filed on February 7, 2008 and incorporated herein by reference thereto), as amended and restated by Amended and Restated Agreement for the Sale and Purchase of the Goldfish Credit Card Business, dated March 31, 2008, among Discover Financial Services, Goldfish Bank Limited, Discover Bank, SCFC Receivables Corporation, Barclays Bank PLC, and Barclays Group US Inc. (filed as Exhibit 2.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 14, 2008 and incorporated herein by reference thereto).
2.3
Agreement and Plan of Merger by and among Discover Bank, Academy Acquisition Corp. and The Student Loan Corporation dated as of September 17, 2010 (filed as Exhibit 2.3 to Discover Financial Services’ Annual Report on Form 10-K for the fiscal year ended November 30, 2010 filed on January 26, 2011 and incorporated herein by reference thereto).
Exhibit
Number Description
3.1
Restated Certificate of Incorporation of Discover Financial Services (filed as Exhibit 3.2 to Discover Financial Services’ Current Report on Form 8-K filed on May 21, 2019 and incorporated herein by reference thereto).
3.2
Amended and Restated By-Laws of Discover Financial Services (filed as Exhibit 3.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on October 28, 2021 and incorporated herein by reference thereto).
3.3
Certificate of Elimination of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Discover Financial Services (filed as Exhibit 3.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on June 26, 2012 and incorporated herein by reference thereto).
3.4
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 16, 2012 and incorporated herein by reference thereto).
3.5
Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto).
3.6
Certificate of Elimination of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 4, 2017 and incorporated herein by reference thereto).
3.7
Certificate of Designations of Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).
4.1
Description of Discover Financial Services’ Securities.
4.2
Senior Indenture, dated as of June 12, 2007, by and between Discover Financial Services and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 12, 2007 and incorporated herein by reference thereto).
4.3
Subordinated Indenture, dated as of September 8, 2015, by and between Discover Financial Services and U.S. Bank National Association (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on September 8, 2015 and incorporated herein by reference thereto).
4.4
Deposit Agreement (Series C), dated October 31, 2017 (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto).
4.5
Form of Certificate Representing the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (filed as Exhibit 4.2 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto).
4.6
Deposit Agreement (Series D), dated June 22, 2020 (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).
4.7
Form of Certificate Representing the Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (filed as Exhibit 4.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).
4.8 Other instruments defining the rights of holders of long-term debt securities of Discover Financial Services and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Discover Financial Services agrees to furnish copies of these instruments to the SEC upon request.
10.1
Tax Sharing Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
10.2
U.S. Employee Matters Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
Exhibit
Number Description
10.3
Transition Services Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
10.4
Transitional Trade Mark License Agreement, dated as of June 30, 2007, between Morgan Stanley & Co. PLC and Goldfish Bank Limited (filed as Exhibit 10.4 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
10.5
Amended and Restated Trust Agreement, dated as of December 22, 2015, between Discover Funding LLC, as Beneficiary, and Wilmington Trust Company, as Owner Trustee (filed as Exhibit 4.6 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.6
Third Amended and Restated Pooling and Servicing Agreement, dated as of December 22, 2015, between Discover Bank, as Master Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.2 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.7
Amended and Restated Series Supplement for Series 2007-CC, dated as of December 22, 2015, among Discover Bank, as Master Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.3 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.8†
Discover Financial Services Omnibus Incentive Plan (filed as an attachment to Discover Financial Services’ Proxy Statement on Schedule 14A filed on February 27, 2009 and incorporated herein by reference thereto).
10.9†
Amended Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.6 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 12, 2007 and incorporated herein by reference thereto).
10.10†
Directors’ Compensation Plan of Discover Financial Services (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto), as amended and restated as of January 20, 2011 (filed as Exhibit A to the Discover Financial Services’ definitive proxy statement filed on February 18, 2011 and incorporated herein by reference thereto), as further amended by Amendment No. 2, effective as of December 1, 2011 (filed as Exhibit 10.10 to the Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2012 and incorporated herein by reference thereto).
10.11†
Amended Form of Restricted Stock Unit Award Under Discover Financial Services Directors’ Compensation Plan (filed as Exhibit 10.7 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 12, 2007 and incorporated herein by reference thereto).
10.12†
Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto) as amended by Amendment No. 1 to Discover Financial Services Employee Stock Purchase Plan effective as of May 1, 2008 (filed as Exhibit 10.12 to Discover Financial Services’ Annual Report on Form 10-K filed on January 28, 2009 and incorporated herein by reference thereto); Amendment No. 2 to Discover Financial Services Employee Stock Purchase Plan, effective as of December 1, 2009 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 9, 2010 and incorporated herein by reference thereto); and Amendment No. 3 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on September 28, 2011 and incorporated herein by reference thereto).
10.13†
Offer of Employment, dated as of January 8, 1999 (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 12, 2007 and incorporated herein by reference thereto).
10.14†
Waiver of Change of Control Benefits, dated September 24, 2007 (filed as Exhibit 10.15 to Discover Financial Services’ Registration Statement on Form S-4 filed on November 27, 2007 and incorporated herein by reference thereto).
10.15
Collateral Certificate Transfer Agreement, dated as of July 26, 2007 between Discover Bank, as Depositor and Discover Card Execution Note Trust (filed as Exhibit 4.4 to Discover Bank’s Current Report on Form 8-K filed on July 27, 2007 and incorporated herein by reference thereto).
Exhibit
Number Description
10.16
Amended and Restated Indenture, dated as of December 22, 2015, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.4 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.17
Second Amended and Restated Indenture Supplement for the DiscoverSeries Notes, dated as of December 22, 2015, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.5 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.18
Omnibus Amendment to Indenture Supplement and Terms Documents, dated as of July 2, 2009, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.1 to Discover Bank’s Current Report on Form 8-K filed on July 6, 2009 and incorporated herein by reference thereto).
10.19†
Discover Financial Services Change-in-Control Severance Policy Amended and Restated October 15, 2014 (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 16, 2014 and incorporated herein by reference thereto).
10.20
Release and Settlement Agreement, executed as of October 27, 2008, by and among Discover Financial Services, DFS Services, LLC, Discover Bank, and their Subsidiaries and Affiliates; MasterCard Incorporated and MasterCard International Incorporated and their Affiliates; and Visa Inc. and its Affiliates and Predecessors including Visa U.S.A. Inc. and Visa International Service Association (filed as Exhibit 99.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 28, 2008 and incorporated herein by reference thereto).
10.21
Form of Waiver, executed by each of Discover Financial Services’ senior executive officers and certain other employees (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on March 13, 2009 and incorporated herein by reference thereto).
10.22†
Form of Executive Compensation Agreement, dated March 13, 2009, executed by each of Discover Financial Services’ senior executive officers and certain other employees (filed as Exhibit 10.4 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 8, 2009 and incorporated herein by reference thereto).
10.23
Settlement Agreement and Mutual Release between Discover Financial Services and Morgan Stanley, dated February 11, 2010 (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on February 12, 2010 and incorporated herein by reference thereto).
10.24
Purchase Price Adjustment Agreement by and among Citibank, N.A., The Student Loan Corporation and Discover Bank, dated September 17, 2010 (filed as Exhibit 10.32 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto).
10.25
Amendment to Purchase Price Adjustment Agreement by and among Citibank, N.A., The Student Loan Corporation and Discover Bank, dated December 30, 2010 (filed as Exhibit 10.33 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto).
10.26
Indemnification Agreement by and between Citibank, N.A. and Discover Bank, dated September 17, 2010 (filed as Exhibit 10.34 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto).
10.27
First Amendment to Indemnification Agreement by and between Citibank, N.A. and Discover Bank, dated December 30, 2010 (filed as Exhibit 10.35 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto).
10.28
Asset Purchase Agreement between Discover Bank and Citibank, N.A. dated August 31, 2011 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on September 28, 2011 and incorporated herein by reference thereto).
10.29†
Form 2012 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 4, 2012 and incorporated herein by reference thereto).
10.30†
Form 2012 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 4, 2012 and incorporated herein by reference thereto).
Exhibit
Number Description
10.31†
Form 2013 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2013 and incorporated herein by reference thereto).
10.32†
Form 2013 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2013 and incorporated herein by reference thereto).
10.33†
Amendment No. 3 to the Directors’ Compensation Plan of Discover Financial Services, effective as of July 1, 2013 (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 30, 2013 and incorporated herein by reference thereto).
10.34†
Form 2013 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 26, 2013 and incorporated herein by reference thereto).
10.35†
Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as an attachment to Discover Financial Services’ Proxy Statement on Schedule 14A filed on March 19, 2014 and incorporated herein by reference thereto).
10.36†
Form 2014 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and
Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly
Report on Form 10-Q filed on April 29, 2014 and incorporated herein by reference thereto).
10.37†
Form 2014 Award Certificate for Performance Stock Units Under Discover Financial Services Amended
and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’
Quarterly Report on Form 10-Q filed on April 29, 2014 and incorporated herein by reference thereto).
10.38†
Amendment No. 4 to the Directors’ Compensation Plan of Discover Financial Services, effective as of May 7, 2014 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on
August 1, 2014 and incorporated herein by reference thereto).
10.39†
Form 2015 Award Certificate for Cash-Converted Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto).
10.40†
Form 2015 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto).
10.41†
Form 2015 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto).
10.42†
Form 2015 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on April 30, 2015 and incorporated herein by reference thereto).
10.43†
Amendment No. 4 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on October 29, 2015 and incorporated herein by reference thereto).
10.44†
Form 2015 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 21, 2015 and incorporated herein by reference thereto).
10.45
Receivables Sale and Contribution Agreement, dated as of December 22, 2015 between Discover Bank and Discover Funding LLC (filed as Exhibit 4.1 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.46†
Form 2016 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.52 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2016 and incorporated herein by reference thereto).
Exhibit
Number Description
10.47†
Form 2016 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.53 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2016 and incorporated herein by reference thereto).
10.48†
Amendment No. 5 to Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2017 (filed as Exhibit 10.54 to Discover Financial Services’ Annual Report on Form 10-K filed on February 23, 2017 and incorporated herein by reference thereto).
10.49†
Form 2017 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and
Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2017 and incorporated herein by reference thereto).
10.50†
Form 2017 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2017 and incorporated herein by reference thereto).
10.51†
Form 2018 Award Certificate for Restricted Stock Units under Discover Financial Services Director’s Compensation Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.52†
Form 2018 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.53†
Form 2018 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.54†
Amendment to 2017 Directors’ Annual Equity Award Certificate for Restricted Stock Units of Discover Financial Services, effective as of February 22, 2018 (filed as Exhibit 10.4 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.55†
Amendment No. 6 to the Directors’ Compensation Plan of Discover Financial Services, effective as of February 22, 2018 (filed as Exhibit 10.5 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.56†
Amendment No. 7 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2019 (filed as Exhibit 10.62 to Discover Financial Services’ Annual Report on Form 10-K filed on February 20, 2019 and incorporated herein by reference thereto).
10.57†
Amendment No. 8 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2019 (filed as Exhibit 10.63 to Discover Financial Services’ Annual Report on Form 10-K filed on February 20, 2019 and incorporated herein by reference thereto).
10.58†
Amendment No. 9 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2022 (filed as Exhibit 10.58 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2022 and incorporated herein by reference thereto).
10.59†
Amendment No. 10 to the Directors’ Compensation Plan of Discover Financial Services, effective as of December 14, 2022.
10.60†
Form 2019 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2019 and incorporated herein by reference thereto).
10.61†
Form 2019 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2019 and incorporated herein by reference thereto).
10.62†
Form 2020 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2020 and incorporated herein by reference thereto).
10.63†
Form 2020 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2020 and incorporated herein by reference thereto).
Exhibit
Number Description
10.64†
Form 2021 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 4, 2021 and incorporated herein by reference thereto).
10.65†
Form 2021 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 4, 2021 and incorporated herein by reference thereto).
10.66†
Form 2022 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 22, 2022 and incorporated herein by reference thereto).
10.67†
Form 2022 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 28, 2022 and incorporated herein by reference thereto).
10.68†
Form 2022 Special Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 28, 2022 and incorporated herein by reference thereto).
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney (included on signature page).
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
101 Interactive Data File - the following financial statements from Discover Financial Services Annual Report on Form 10-K formatted in inline XBRL: (1) Consolidated Statements of Financial Condition, (2) Consolidated Statements of Income, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Changes in Stockholders' Equity, (5) Consolidated Statements of Cash Flows and (6) Notes to the Consolidated Financial Statements.
104 Cover Page Interactive Data File - the cover page from Discover Financial Services Annual Report on Form 10-K formatted in inline XBRL and contained in Exhibit 101.
* We agree to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to such agreement upon the request of the Commission in accordance with Item 601(b)(2) of Regulation S-K.
† Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 15(b) of this report.
Item 16. Form 10-K Summary
None.
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Discover Financial Services
(Registrant)
By: /s/ JOHN T. GREENE
John T. Greene
Executive Vice President, Chief Financial Officer
Date: February 23, 2023
Power of Attorney
We, the undersigned, hereby severally constitute Hope D. Mehlman and Philip J. Castrogiovanni, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the annual report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 23, 2023.
Signature Title
/s/ ROGER C. HOCHSCHILD
Chief Executive Officer and President, Director
Roger C. Hochschild
/s/ JOHN T. GREENE
Executive Vice President, Chief Financial Officer (Principal Financial Officer)
John T. Greene
/s/ SHIFRA C. KOLSKY
Senior Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
Shifra C. Kolsky
/s/ THOMAS G. MAHERAS
Chairman of the Board
Thomas G. Maheras
/s/ JEFFREY S. ARONIN
Director
Jeffrey S. Aronin
/s/ MARY K. BUSH
Director
Mary K. Bush
/s/ GREGORY C. CASE
Director
Gregory C. Case
/s/ CANDACE H. DUNCAN
Director
Candace H. Duncan
/s/ JOSEPH F. EAZOR
Director
Joseph F. Eazor
/s/ CYNTHIA A. GLASSMAN
Director
Cynthia A. Glassman
/s/ MICHAEL H. MOSKOW
Director
Michael H. Moskow
/s/ JOHN B. OWEN
Director
John B. Owen
/s/ DAVID L. RAWLINSON
Director
David L. Rawlinson
/s/ MARK A. THIERER
Director
Mark A. Thierer
/s/ JENNIFER L. WONG
Director
Jennifer L. Wong

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this annual report on Form 10-K particularly under “Risk Factors” and “Special Note Regarding Forward-Looking Statements,” which immediately follows “Risk Factors.” Unless otherwise specified, references to Notes to our consolidated financial statements are to the Notes to our audited consolidated financial statements as of December 31, 2022 and 2021 and for years ended December 31, 2022, 2021 and 2020.
Introduction and Overview
Discover Financial Services (“DFS”) is a digital banking and payment services company. We provide digital banking products and services and payment services through our subsidiaries. We offer our customers credit card loans, private student loans, personal loans, home loans and deposit products. We also operate the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”), collectively known as the Discover Global Network. 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 and merchant acceptance throughout the United States of America (“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 credit and charge cards and/or provide card acceptance services.
Our primary revenues consist of interest income earned on loan receivables and fees earned from customers, financial institutions, merchants and issuers. The primary expenses required to operate our business include funding costs (interest expense), credit loss provisions, customer rewards and expenses incurred to grow, manage and service our loan receivables and networks. Our business activities are funded primarily through consumer deposits, securitization of loan receivables and the issuance of unsecured debt.
2022 Highlights
The highlights below compare results as of and for the year ended December 31, 2022 against results as of and for the year ended December 31, 2021.
•Net income was $4.4 billion, or $15.50 per diluted share, compared to net income of $5.4 billion, or $17.83 per diluted share, in the prior year.
•Total loans grew $18.4 billion, or 20%, to $112.1 billion.
•Credit card loans grew $15.7 billion, or 21%, to $90.1 billion.
•The net charge-off rate for credit card loans decreased 4 basis points to 2.05% and the delinquency rate for credit card loans over 30 days past due increased 87 basis points to 2.53%.
•Direct-to-consumer deposits grew $8.6 billion, or 14%, to $70.5 billion.
•Payment Services transaction volume for the segment was $331.1 billion, up 5%.
Outlook
The outlook below provides our current expectations for our financial results based on market conditions, the regulatory and legal environment and our business strategies.
•We expect continued loan growth driven by recent account growth, moderation in the payment rate and our current expectations of sales trends.
•Based on the current interest rate environment, net interest margin is expected to modestly increase in comparison to 2022.
•We expect the total net charge-off rate to increase, in comparison to the prior year, driven by continued credit normalization and seasoning of recent vintages.
•Total expenses are expected to increase, driven by employee compensation and benefits expense from higher headcount and marketing and business development expense, and we remain committed to managing expenses while continuing to make investments in profitable long-term growth.
Regulatory Environment and Developments
Banking
Capital Standards and Stress Testing
As a bank holding company, DFS is subject to mandatory supervisory stress tests every other year and is required to submit annual capital plans to the Federal Reserve based on forward-looking internal analysis of income and capital levels under expected and stressful conditions. DFS is also subject to capital buffer requirements, including the Stress Capital Buffer ("SCB"), which requires maintenance of regulatory capital levels above a threshold established based on the results of supervisory stress tests after accounting for planned dividend payments.
In January 2021, the Federal Reserve finalized regulatory amendments that made targeted changes to the capital planning, regulatory reporting and SCB requirements for firms subject to Category IV standards, including DFS, to be consistent with the Federal Reserve’s regulatory tailoring framework. The final rules generally align to instructions the Federal Reserve previously provided to Category IV firms regarding their respective capital plan submissions. The amended rules also provide Category IV firms with the option to submit to supervisory stress tests during off years if they wish for the Federal Reserve to reset the stress test portion of their SCB requirement. The Federal Reserve also revised the scope of application of its existing regulatory guidance for capital planning to align with the tailoring framework. However, the timing and substance of any additional changes to existing guidance or new guidance are uncertain.
In June 2021, the Federal Reserve announced the results of its supervisory stress tests for the firms required to participate in the 2021 Comprehensive Capital Analysis and Review (“CCAR”) process. In accordance with the capital plan rule amendments, DFS elected not to participate in the 2021 supervisory stress tests. Nevertheless, DFS was required to submit a capital plan based on a forward-looking internal assessment of income and capital under baseline and stressful conditions. The Federal Reserve thereafter used our 2021 capital plan submission to assess its capital planning process and positions and, in August 2021, announced DFS' adjusted SCB requirement of 3.6% to reflect DFS' planned common stock dividends. This adjusted SCB is effective through October 1, 2022. Discover was a full participant in the 2022 CCAR process and submitted the 2022 Capital Plan to the Federal Reserve by the April 5, 2022 due date.
In June 2022, the Federal Reserve released results of the 2022 CCAR exercise. Discover’s results showed strong capital levels under stress, well above regulatory minimums. These results were used to set the new SCB effective October 1, 2022. In August 2022, the Federal Reserve established the new SCB for DFS is 2.5%, the lowest possible requirement.
London Interbank Offered Rate
In July 2017, the UK Financial Conduct Authority ("FCA") announced that it would no longer encourage or compel banks to continue to contribute quotes and maintain the London Interbank Offered Rate ("LIBOR") after 2021. To support a smooth transition away from LIBOR, the Federal Reserve and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee ("ARRC"), a group of private-market participants tasked with facilitating a successful transition from U.S. dollar ("USD") LIBOR to a more robust reference rate. The ARRC identified the Secured Overnight Financing Rate ("SOFR") as its recommended alternative reference rate for USD LIBOR. The ARRC has also established several priorities and milestones to support the use of SOFR and SOFR-based indices,
including developing contractual “fallback” language for capital markets and consumer products; providing clarity on legal, tax, accounting and regulatory matters; promoting broad outreach and education efforts around the LIBOR transition; and recommending spread adjustments for SOFR and SOFR-based indices, which will be of critical importance to market participants once USD LIBOR settings cease in 2023.
In March 2021, the FCA announced the future cessation and loss of representativeness for all LIBOR benchmark settings. While non-USD and several less frequently referenced USD LIBOR settings ceased publication immediately after December 31, 2021, commonly referenced USD LIBOR settings will cease publication immediately after June 30, 2023; this future cessation event will trigger fallback provisions in many financial contracts that require conversion of the benchmark index from LIBOR to an alternative rate. In July 2021, the ARRC announced its recommendation of forward-looking term rates based on SOFR as additional alternative reference rate options.
In December 2021, the Consumer Financial Protection Bureau (“CFPB”) finalized a rule to facilitate transition from LIBOR, which became effective on April 1, 2022. Specifically, this final rule provides guidance on LIBOR replacements and the LIBOR transition for purposes of Regulation Z. We have communicated with the CFPB regarding our plans for the LIBOR transition.
A cross-functional team is overseeing and managing our transition away from the use of LIBOR. This team assesses evolving industry and marketplace norms and conventions for LIBOR-indexed instruments, evaluates the impacts stemming from the future cessation of LIBOR publication and oversees and takes actions to transition our LIBOR exposures to alternative benchmark rates, usually SOFR. Our existing LIBOR exposures are limited to two instruments - variable-rate student loans and capital markets securities.
As of December 31, 2022, LIBOR-indexed variable-rate loans comprised approximately 39% of our private student loan portfolio and approximately 4% of our aggregate loan portfolio. These outstanding student loans indexed to LIBOR will convert to a SOFR index in 2023 when 3-month USD LIBOR ceases to be a representative reference rate. As of November 2021, we no longer originate new variable-rate student loans indexed to LIBOR. Instead, new originations of such loans are indexed solely to 3-month term SOFR published by the Chicago Mercantile Exchange.
We ceased entering into new LIBOR-indexed interest rate derivatives in 2018 and have since actively reduced LIBOR exposures in our derivatives portfolio. During the third quarter of 2021, we terminated our last LIBOR-indexed interest rate swap maturing after June 2023; our last LIBOR-indexed interest rate swap matured in January 2022.
Most of our capital markets securities indexed to USD LIBOR are floating-rate asset-backed securities. Beginning in 2018, we included fallback provisions in all newly-issued securities that will facilitate an orderly transition from LIBOR to an appropriate reference rate, which may be based on SOFR, once 1- and 3-month LIBOR cease to be published after June 2023. Approximately $1.5 billion of our capital markets securities that mature after June 2023 with no fallback provisions would be covered under federal legislation enacted in March 2022. This legislation would allow us to replace the LIBOR index with SOFR under a safe harbor provision. Approximately $500 million of our capital markets securities have a rate reset in August 2023 that contains a fallback provision that may not be covered under the federal LIBOR legislation; however, we may decide to exercise our right to call and redeem those securities on their reset date.
We have prepared for the cessation of USD LIBOR by taking steps to avoid new exposures and actively reduce our remaining exposures. We completed scheduled transition work before year-end 2021, including providing our stakeholders with information about the cessation of USD LIBOR and how it will affect their contracts with us. The transition process will continue through the end of 2023.
Consumer Financial Services
The CFPB regulates consumer financial products and services and examines certain providers of consumer financial products and services, including Discover. The CFPB’s authority includes rulemaking, supervisory and enforcement powers with respect to federal consumer protection laws; preventing “unfair, deceptive or abusive acts or practices” (“UDAAP”) and ensuring that consumers have access to fair, transparent and competitive financial products and services. Historically, the CFPB’s policy priorities focused on several financial products of the type we offer (e.g., credit cards and other consumer lending products). In addition, the CFPB is required by statute to undertake certain actions including its biennial review of the consumer credit card market.
Under Director Rohit Chopra’s leadership, the CFPB’s priorities have focused on and are expected to continue focusing on, among other things, increased enforcement of existing consumer protection laws, with a particular focus on
fees charged to consumers, UDAAP, fair lending, student lending and servicing, debt collection and credit reporting. Additionally, detection of repeat offenders, such as companies that violate a formal court or agency order, has become a priority for the CFPB. Director Chopra, in March 2022, identified, as repeat offenders, several companies that have had multiple enforcement actions, including us. The CFPB has recently taken action against financial institutions for violating prior enforcement actions. Enhanced regulatory requirements, potential supervisory findings, or enforcement actions and ratings could negatively impact our ability to implement certain consumer-focused enhancements to product features and functionality and business strategies, limit or change our business practices, limit our consumer product offerings, cause us to invest more management time and resources in compliance efforts or limit our ability to obtain related required regulatory approvals. The additional expense, time and resources needed to comply with ongoing or new regulatory requirements may adversely impact the cost of and access to credit for consumers and results of business operations.
In December 2020, certain of our subsidiaries entered into a consent order with the CFPB regarding identified private student loan servicing practices. See Note 19: Litigation and Regulatory Matters to our consolidated financial statements for more information.
Data Security and Privacy
Policymakers at the federal and state levels remain focused on enhancing data security and data breach incident response requirements. Furthermore, regulations and legislation at various levels of government have been proposed and enacted to augment consumer data privacy standards. The California Consumer Privacy Act ("CCPA") creates a broad set of privacy rights and remedies modeled in part on the European Union's General Data Protection Regulation. The CCPA went into effect in January 2020, and the California Attorney General’s final regulations became effective in August 2020, with enforcement beginning in July 2020. The California Privacy Rights Act ("CPRA"), a ballot measure led by the original proponent of the CCPA, passed in November 2020, with an effective date of January 1, 2023, and enforcement set to begin on July 1, 2023. The CPRA replaces the CCPA to enhance consumer privacy protections further and creates a new California Privacy Protection Agency (“CPPA”). The CPPA Board released a Notice of Proposed Rulemaking with final regulations still forthcoming. While the CPRA retains an exemption for information collected, processed, sold, or disclosed subject to the Gramm-Leach-Bliley Act, we continue to evaluate the impact of the CPRA on our businesses and other providers of consumer financial services.
Environmental, Social and Governance Matters
Environmental, social and governance (“ESG”) issues, including climate change, human capital and governance practices, are a significant area of focus by lawmakers at the state and federal levels, regulatory agencies, shareholders and other stakeholders. Proposed legislation and rulemakings have been issued or are being considered, including proposals to require disclosure of climate, cybersecurity and other ESG metrics and risk. The potential impact to us of these legislative and regulatory developments is uncertain at this time.
In particular, in March 2022, the Securities and Exchange Commission proposed climate-related disclosure requirements. Through an enterprise-wide working group, we continue to assess the potential impact of the proposed rules, if adopted.
Results of Operations
The discussion below provides a summary of our results of operations and information about our loan receivables as of and for the year ended December 31, 2022, compared to the year ended December 31, 2021. Refer to our annual report on Form 10-K for the year ended December 31, 2021, for discussion of our results of operations and loan receivables information as of and for the year ended December 31, 2021, compared to the year ended December 31, 2020.
Segments
We manage our business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. For a detailed description of the operations of each segment, as well as the allocation conventions used in our business segment reporting, see Note 22: Segment Disclosures to our consolidated financial statements.
The following table presents segment data (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Digital Banking
Interest income
Credit card loans $ 10,632 $ 8,717 $ 8,985
Private student loans 831 742 754
Personal loans 872 878 958
Other loans 167 114 106
Other interest income 362 200 292
Total interest income 12,864 10,651 11,095
Interest expense 1,865 1,134 1,865
Net interest income 10,999 9,517 9,230
Provision for credit losses 2,359 218 5,134
Other income 2,162 1,781 1,459
Other expense 5,069 4,549 4,292
Income before income tax expense 5,733 6,531 1,263
Payment Services
Other income 176 789 399
Other expense 167 256 227
Income before income tax expense 9 533 172
Total income before income tax expense $ 5,742 $ 7,064 $ 1,435
The following table presents information on transaction volume (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Network Transaction Volume
PULSE Network $ 253,072 $ 247,913 $ 212,081
Network Partners 44,542 40,707 31,917
Diners Club(1)
33,505 25,937 24,236
Total Payment Services 331,119 314,557 268,234
Discover Network - Proprietary(2)
218,738 188,960 148,754
Total Network Transaction Volume $ 549,857 $ 503,517 $ 416,988
Transactions Processed on Networks
Discover Network 3,617 3,259 2,624
PULSE Network 6,200 5,632 4,954
Total Transaction Processed on Networks 9,817 8,891 7,578
Credit Card Volume
Discover Card Volume(3)
$ 224,477 $ 192,755 $ 153,943
Discover Card Sales Volume(4)
$ 210,645 $ 182,125 $ 142,800
(1)Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment.
(2)Represents gross Discover card sales volume on the Discover Network.
(3)Represents Discover card activity related to sales net of returns, balance transfers, cash advances and other activity.
(4)Represents Discover card activity related to sales net of returns.
Digital Banking
Our Digital Banking segment reported pretax income of $5.7 billion for the year ended December 31, 2022, as compared to $6.5 billion for the year ended December 31, 2021.
Net interest income increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily driven by a higher average level of receivables and higher yield on loans, partially offset by higher funding costs. Interest income increased compared to the prior year primarily due to a higher average level of loan receivables and higher market rates. Interest expense increased compared to the prior year primarily due to higher funding costs driven by higher market rates and a larger funding base.
For the year ended December 31, 2022, the provision for credit losses increased as compared to the year ended December 31, 2021, primarily driven by continued loan growth. For a detailed discussion on provision for credit losses, see “- Loan Quality - Provision and Allowance for Credit Losses.”
Total other income for the Digital Banking segment increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to increases in net discount and interchange revenue and loan fee income. The increase in discount and interchange revenue was partially offset by an increase in rewards, both of which were driven by higher sales volume. Loan fee income increased primarily due to higher volume of late payments.
Total other expense increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to increases in marketing and business development, employee compensation and benefits and professional fees. The increase in marketing and business development was driven by growth investments in card and consumer banking. Employee compensation and benefits increased primarily from higher headcount. The increase in professional fees was due primarily to investments in technology and increased consulting costs.
Discover card sales volume was $210.6 billion for the year ended December 31, 2022, which was an increase of 15.7% as compared to the year ended December 31, 2021. This volume growth was primarily driven by higher consumer spending across all spending categories.
Payment Services
Our Payment Services segment reported pretax income of $9 million for the year ended December 31, 2022, as compared to pretax income of $533 million for the year ended December 31, 2021. The decrease in segment pretax income was primarily due to net losses on equity investments as a result of a decrease in the fair value of those investments.
Critical Accounting Estimates
In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”), management must make judgments and use estimates and assumptions about the effects of matters that are uncertain. For estimates that involve a high degree of judgment and subjectivity, it is possible that different estimates could reasonably be derived for the same period. For estimates that are particularly sensitive to changes in economic or market conditions, significant changes to the estimated amount from period to period are also possible. Management believes the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts in our consolidated financial statements, the resulting changes could have a material effect on our consolidated results of operations and, in certain cases, could have a material effect on our consolidated financial condition. Management has identified the estimates related to our allowance for credit losses as a critical accounting estimate.
Allowance for Credit Losses
The allowance for credit losses was $7.4 billion at December 31, 2022, which reflects a $552 million build from the amount of the allowance for credit losses at December 31, 2021. The allowance for credit losses represents management’s estimate of expected credit losses over the remaining expected life of our financial assets measured at amortized cost. Changes in the allowance for credit losses, and in the related provision for credit losses, can materially affect net income.
In estimating the expected credit losses, we use a combination of statistical models and qualitative analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced to estimate the allowance for credit losses. For more information on these judgments and our accounting policies and methodologies used to determine the allowance for credit losses, see "- Loan Quality," Note 4: Loan Receivables and Note 2: Summary of Significant Accounting Policies to our consolidated financial statements.
One of the key assumptions requiring significant judgment in estimating the current expected credit losses (“CECL”) on a quarterly basis is the determination of the macroeconomic forecasts used in the loss forecast models. For the reasonable and supportable loss forecast period, we consider forecasts of multiple economic scenarios that generally include a base scenario with one or more optimistic (upside) or pessimistic (downside) scenarios. These scenarios comprise a variety of macroeconomic variables, including annualized gross domestic product growth and unemployment rate. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal and third-party economists and industry trends. Assumptions about the macroeconomic environment are inherently uncertain and, as a result, actual changes in the allowance for credit losses may be different from the simulated scenario presented below.
To demonstrate the sensitivity of the estimated credit losses to the macroeconomic scenarios, we measured the impact of altering the weighting of macroeconomic scenarios used in our loss forecast. Our allowance for credit losses would increase by approximately $589 million at December 31, 2022 if we applied 100% weight to the most adverse scenario in our sensitivity analysis to reflect continued inflationary pressures, including persistent supply-chain disruptions and the influence of geopolitical events, as well as high interest rates.
The sensitivity disclosed above is hypothetical. It is difficult to estimate how potential changes in any one factor or input, such as the weighting of macroeconomic forecasts, might affect the overall allowance for credit losses because we consider a variety of factors and inputs in estimating the allowance for credit losses. The macroeconomic scenarios used are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. The inputs in the macroeconomic scenarios may not change at the same rate and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor or input may offset deterioration in others. As a result, the sensitivity analysis above does not necessarily reflect the nature and extent of
future changes in the allowance for credit losses. It is intended to provide insights into the impact of different judgments about the economy on our modeled loss estimates for the loan portfolio and does not imply any expectation of future losses. Furthermore, the hypothetical increase in our allowance for credit losses for loans does not incorporate the impact of management judgment for qualitative factors applied in the current allowance for credit losses, which may have a positive or negative effect on our actual financial condition and results of operations.
The overall economic environment directly impacts the macroeconomic variables that are used in the loss forecast models. If management used different assumptions about the economic environment in estimating expected credit losses, the impact to the allowance for credit losses could have a material effect on our consolidated financial condition and results of operations. In addition, if we experience significant instability in the economic environment, the uncertainty around the credit loss forecasts may increase, both due to the uncertainty of the economic forecasts and the challenges our models may have in incorporating them.
Earnings Summary
The following table outlines changes in our consolidated statements of income (dollars in millions):
For the Years Ended December 31, 2022 vs. 2021
Increase (Decrease) 2021 vs. 2020
(Decrease) Increase
2022 2021 2020 $ % $ %
Interest income $ 12,864 $ 10,651 $ 11,095 $ 2,213 21 % $ (444) (4) %
Interest expense 1,865 1,134 1,865 731 64 % (731) (39) %
Net interest income 10,999 9,517 9,230 1,482 16 % 287 3 %
Provision for credit losses 2,359 218 5,134 2,141 NM (4,916) (96) %
Net interest income after provision for credit losses 8,640 9,299 4,096 (659) (7) % 5,203 127 %
Other income 2,338 2,570 1,858 (232) (9) % 712 38 %
Other expense 5,236 4,805 4,519 431 9 % 286 6 %
Income before income tax expense 5,742 7,064 1,435 (1,322) (19) % 5,629 392 %
Income tax expense 1,350 1,615 294 (265) (16) % 1,321 449 %
Net income $ 4,392 $ 5,449 $ 1,141 $ (1,057) (19) % $ 4,308 378 %
Net income allocated to common stockholders $ 4,304 $ 5,351 $ 1,104 $ (1,047) (20) % $ 4,247 385 %
Net Interest Income
The tables that follow this section have been provided to supplement the discussion below and provide further analysis of net interest income, net interest margin and the impact of rate and volume changes on net interest income. Net interest income represents the difference between interest income earned on our interest-earning assets and the interest expense incurred to finance those assets. We analyze net interest income in total by calculating net interest margin (net interest income as a percentage of average total loan receivables) and net yield on interest-earning assets (net interest income as a percentage of average total interest-earning assets). We also separately consider the impact of the level of loan receivables and the related interest yield and the impact of the cost of funds related to each of our funding sources, along with the income generated by our liquidity portfolio, on net interest income.
Our interest-earning assets consist of: (i) cash and cash equivalents primarily related to amounts on deposit with the Federal Reserve Bank of Philadelphia, (ii) restricted cash, (iii) other short-term investments, (iv) investment securities and (v) loan receivables. Our interest-bearing liabilities consist primarily of deposits, both direct-to-consumer and brokered, and long-term borrowings, including amounts owed to securitization investors. The following factors influence net interest income:
•The level and composition of loan receivables, including the proportion of credit card loans to other loans, as well as the proportion of loan receivables bearing interest at promotional rates as compared to standard rates;
•The credit performance of our loans, particularly with regard to charge-offs of finance charges, which reduce interest income;
•The terms of long-term borrowings and certificates of deposit upon initial offering, including maturity and interest rate;
•The interest rates necessary to attract and maintain direct-to-consumer deposits;
•The level and composition of other interest-earning assets, including our liquidity portfolio, and interest-bearing liabilities;
•Changes in the interest rate environment, including the levels of interest rates and the relationships among interest rate indices, such as the prime rate, the federal funds rate, the interest rate on reserve balances, LIBOR and SOFR; and
•The effectiveness of interest rate swaps in our interest rate risk management program.
Net interest income increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily driven by a higher average level of receivables and higher yield on loans, partially offset by higher funding costs. Interest income increased compared to the prior year primarily due to a higher average level of loan receivables and higher market rates. Interest expense increased compared to the prior year primarily due to higher funding costs driven by higher market rates and a larger funding base.
Average Balance Sheet Analysis
(dollars in millions)
For the Years Ended December 31,
2022 2021 2020
Average Balance Yield/Rate Interest Average Balance Yield/Rate Interest Average
Balance Yield/Rate Interest
Assets
Interest-earning assets
Cash and cash equivalents $ 9,279 1.89 % $ 175 $ 14,236 0.13 % $ 18 $ 11,348 0.30 % $ 35
Restricted cash 515 1.48 % 8 695 0.03 % NM 438 0.45 % 2
Other short-term investments - - - 176 0.12 % NM 2,677 0.14 % 4
Investment securities 6,988 2.57 % 179 8,713 2.09 % 182 11,431 2.21 % 252
Loan receivables(1)
Credit card loans(2)(3)
79,243 13.42 % 10,632 69,365 12.57 % 8,717 71,447 12.58 % 8,985
Private student loans 10,240 8.11 % 831 10,057 7.38 % 742 9,890 7.63 % 754
Personal loans 7,295 11.95 % 872 6,945 12.64 % 878 7,406 12.93 % 958
Other 2,895 5.77 % 167 2,054 5.57 % 114 1,660 6.35 % 105
Total loan receivables 99,673 12.54 % 12,502 88,421 11.82 % 10,451 90,403 11.95 % 10,802
Total interest-earning assets 116,455 11.05 % 12,864 112,241 9.49 % 10,651 116,297 9.54 % 11,095
Allowance for credit losses (6,820) (7,351) (7,301)
Other assets 6,070 6,237 5,853
Total assets(4)
$ 115,705 $ 111,127 $ 114,849
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits $ 23,988 2.02 % 484 $ 23,928 1.84 % 440 $ 32,226 2.40 % 772
Money market deposits(5)
8,453 1.67 % 141 8,142 0.53 % 43 7,774 1.10 % 85
Other interest-bearing savings deposits 44,276 1.43 % 632 40,912 0.43 % 178 35,077 1.06 % 374
Total interest-bearing deposits 76,717 1.64 % 1,257 72,982 0.91 % 661 75,077 1.64 % 1,231
Borrowings
Short-term borrowings 225 0.70 % 2 72 0.18 % NM 1,024 3.10 % 32
Securitized borrowings(6)(7)(8)
9,060 2.41 % 219 9,627 1.06 % 102 12,521 1.44 % 181
Other long-term borrowings(7)(8)(9)
9,334 4.15 % 387 9,888 3.75 % 371 10,996 3.83 % 421
Total borrowings 18,619 3.26 % 608 19,587 2.42 % 473 24,541 2.58 % 634
Total interest-bearing liabilities 95,336 1.96 % 1,865 92,569 1.23 % 1,134 99,618 1.87 % 1,865
Other liabilities and stockholders’ equity(10)
20,369 18,558 15,231
Total liabilities and stockholders’ equity $ 115,705 $ 111,127 $ 114,849
Net interest income $ 10,999 $ 9,517 $ 9,230
Net interest margin(11)
11.04 % 10.76 % 10.21 %
Net yield on interest-earning assets(12)
9.45 % 8.48 % 7.94 %
Interest rate spread(13)
9.09 % 8.26 % 7.67 %
(1)Average balances of loan receivables and yield calculations include non-accruing loans. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.
(2)Interest income on credit card loans includes $365 million, $295 million and $298 million of amortization of balance transfer fees for the years ended December 31, 2022, 2021 and 2020, respectively.
(3)Includes the impact of interest rate swap agreements used to change a portion of floating-rate assets to fixed-rate assets for the years ended December 31, 2022, 2021 and 2020.
(4)The return on average assets, based on net income, was 3.80%, 4.90% and 0.99% for the years ended December 31, 2022, 2021 and 2020, respectively.
(5)Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding for the year ended December 31, 2020.
(6)Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the years ended December 31, 2022, 2021 and 2020.
(7)Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding for the years ended December 31, 2022, 2021 and 2020.
(8)Includes the impact of terminated derivatives formerly designated as fair value hedges for the years ended December 31, 2022 and 2021.
(9)Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding for the year ended December 31, 2022.
(10)The return on average stockholders’ equity, based on net income, was 31.00%, 43.12% and 11.28% for the years ended December 31, 2022, 2021 and 2020, respectively.
(11)Net interest margin represents net interest income as a percentage of average total loan receivables.
(12)Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
(13)Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
Rate/Volume Variance Analysis(1)
(dollars in millions)
Year Ended December 31, 2022 vs. Year Ended December 31, 2021 vs.
Year Ended December 31, 2021 Year Ended December 31, 2020
Volume Rate Total Volume Rate Total
Increase/(Decrease) in net interest income due to changes in:
Interest-earning assets
Cash and cash equivalents $ (9) $ 166 $ 157 $ 7 $ (24) $ (17)
Restricted cash - 8 8 1 (3) (2)
Other short-term investments - - - (3) (1) (4)
Investment securities (40) 37 (3) (57) (13) (70)
Loan receivables
Credit card loans 1,299 616 1,915 (261) (7) (268)
Private student loans 14 75 89 13 (25) (12)
Personal loans 43 (49) (6) (59) (21) (80)
Other 48 5 53 23 (14) 9
Total loan receivables 1,404 647 2,051 (284) (67) (351)
Total interest income 1,355 858 2,213 (336) (108) (444)
Interest-bearing liabilities
Interest-bearing deposits
Time deposits 1 43 44 (174) (158) (332)
Money market deposits 2 96 98 4 (46) (42)
Other interest-bearing savings deposits 15 439 454 54 (250) (196)
Total interest-bearing deposits 18 578 596 (116) (454) (570)
Borrowings
Short-term borrowings 1 1 2 (16) (16) (32)
Securitized borrowings (6) 123 117 (37) (42) (79)
Other long-term borrowings (22) 38 16 (42) (8) (50)
Total borrowings (27) 162 135 (95) (66) (161)
Total interest expense (9) 740 731 (211) (520) (731)
Net interest income $ 1,364 $ 118 $ 1,482 $ (125) $ 412 $ 287
(1) The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances between the years ended December 31, 2022, 2021 and 2020 based on the percentage of the rate or volume variance to the sum of the two absolute variances.
Loan Quality
Loan receivables consist of the following (dollars in millions):
December 31,
2022 2021
Credit card loans $ 90,113 $ 74,369
Other loans
Private student loans 10,308 10,113
Personal loans 7,998 6,936
Other loans 3,701 2,266
Total other loans 22,007 19,315
Total loan receivables 112,120 93,684
Allowance for credit losses (7,374) (6,822)
Net loan receivables $ 104,746 $ 86,862
Provision and Allowance for Credit Losses
Provision for credit losses is the expense related to maintaining the allowance for credit losses at an appropriate level to absorb the estimate of credit losses anticipated over the remaining expected life of loan receivables at each period end date. In deriving the estimate of expected credit losses, we consider the collectability of principal, interest and fees associated with our loan receivables. We also consider expected recoveries of amounts that were either previously charged-off or are expected to be charged-off. Establishing the estimate for expected credit losses requires significant management judgment. The factors that influence the provision for credit losses include:
•Increases or decreases in outstanding loan balances, including:
•Changes in consumer spending, payment and credit utilization behaviors;
•The level of new account and loan originations and loan maturities; and
•Changes in the overall mix of accounts and products within the portfolio;
•The credit quality of the loan portfolio, which reflects our credit granting practices and the effectiveness of collection efforts, among other factors;
•The impact of general economic conditions on the consumer, including national and regional conditions, unemployment levels, bankruptcy trends and interest rate movements;
•The level and direction of historical losses; and
•Regulatory changes or new regulatory guidance.
Refer to "- Critical Accounting Estimates - Allowance for Credit Losses" and Note 4: Loan Receivables to our consolidated financial statements for more details on how we estimate the allowance for credit losses.
The following tables provide changes in our allowance for credit losses (dollars in millions):
For the Year Ended December 31, 2022
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2021 $ 5,273 $ 843 $ 662 $ 44 $ 6,822
Additions
Provision for credit losses(1)
2,233 99 24 13 2,369
Deductions
Charge-offs (2,417) (126) (159) - (2,702)
Recoveries 794 23 68 - 885
Net charge-offs (1,623) (103) (91) - (1,817)
Balance at December 31, 2022 $ 5,883 $ 839 $ 595 $ 57 $ 7,374
For the Year Ended December 31, 2021
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2020 $ 6,491 $ 840 $ 857 $ 38 $ 8,226
Additions
Provision for credit losses(1)
229 67 (75) 6 227
Deductions
Charge-offs (2,255) (89) (190) - (2,534)
Recoveries 808 25 70 - 903
Net charge-offs (1,447) (64) (120) - (1,631)
Balance at December 31, 2021 $ 5,273 $ 843 $ 662 $ 44 $ 6,822
For the Year Ended December 31, 2020
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2019(2)
$ 2,883 $ 148 $ 348 $ 4 $ 3,383
Cumulative effect of ASU No. 2016-13 adoption(3)
1,667 505 265 24 2,461
Balance at January 1, 2020 4,550 653 613 28 5,844
Additions
Provision for credit losses(1)
4,379 251 476 11 5,117
Deductions
Charge-offs (3,101) (85) (289) (1) (3,476)
Recoveries 663 21 57 - 741
Net charge-offs (2,438) (64) (232) (1) (2,735)
Balance at December 31, 2020 $ 6,491 $ 840 $ 857 $ 38 $ 8,226
(1)Excludes a $10 million, $9 million and $17 million reclassification of the liability for expected credit losses on unfunded commitments for the years ended December 31, 2022, 2021 and 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in our consolidated statements of financial condition.
(2)Prior to the adoption of Accounting Standards Update (“ASU”) No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
(3)Represents the adjustment to the allowance for credit losses as a result of the adoption of ASU No. 2016-13 on January 1, 2020.
The allowance for credit losses was approximately $7.4 billion at December 31, 2022, which reflects a $552 million build from the amount of the allowance for credit losses at December 31, 2021. The build in the allowance for credit losses between December 31, 2022 and December 31, 2021, was primarily driven by loan growth.
In estimating the allowance at December 31, 2022, we used a macroeconomic forecast that resulted in the following weighted average amounts: (i) peak unemployment rate of 4.68%, decreasing to 4.63% by the end of 2023 and (ii) 1.05% annualized growth in the real gross domestic product in 2023.
In estimating expected credit losses, we considered the uncertainties associated with borrower behavior and payment trends, as well as higher consumer price inflation experienced during 2022 and the fiscal and monetary policy responses to that inflation. In 2022, the Federal Reserve raised its federal funds rate target range and financial market participants expect additional increases during 2023 in an effort to reduce inflation. In recognition of the risks related to the macroeconomic environment, the estimation of the allowance for credit losses has required significant management judgment.
The forecast period we deemed to be reasonable and supportable was 18 months for all periods presented. The 18-month reasonable and supportable forecast period was deemed appropriate given the current economic conditions. For all periods presented, we determined that a reversion period of 12 months was appropriate for the same reason. We applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented.
The provision for credit losses is the amount of expense realized after considering the level of net charge-offs in the period and the required amount of allowance for credit losses at the balance sheet date. For the year ended December 31, 2022, the provision for credit losses increased by $2.1 billion, as compared to the year ended December 31, 2021. The reserve build during the year ended December 31, 2022, was primarily driven by continued loan growth.
Net Charge-offs
Our net charge-offs include the principal amount of losses charged off less principal recoveries and exclude charged-off and recovered interest and fees and fraud losses. Charged-off and recovered interest and fees are recorded in interest income and loan fee income, respectively, which is effectively a reclassification of the provision for credit losses, while fraud losses are recorded in other expense.
The following table presents amounts and rates of net charge-offs of key loan products (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
$ % $ % $ %
Credit card loans $ 1,623 2.05 % $ 1,447 2.09 % $ 2,438 3.41 %
Private student loans $ 103 1.00 % $ 64 0.63 % $ 64 0.65 %
Personal loans $ 91 1.25 % $ 120 1.73 % $ 232 3.13 %
The net charge-offs on our credit card loans for the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, primarily due to continued credit normalization and the seasoning of vintages from the past two years. The net charge-off rate on credit card loans remained relatively flat for the year ended December 31, 2022, compared to the year ended December 31, 2021. The net charge-offs and net charge-off rate on private student loans for the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, primarily driven by credit normalization. The net charge-offs and net charge-off rate on personal loans for the year ended December 31, 2022, decreased when compared to the year ended December 31, 2021, due to continued benefit from tighter credit underwriting standards implemented in 2020.
Delinquencies
Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.
The following table presents the amounts and delinquency rates of key loan products that are 30 and 90 days or more delinquent, loan receivables that are not accruing interest regardless of delinquency and loans restructured in troubled debt restructuring (“TDR”) programs (dollars in millions):
December 31,
2022 2021
$ % $ %
Loans 30 or more days delinquent
Credit card loans $ 2,278 2.53 % $ 1,232 1.66 %
Private student loans $ 212 2.05 % $ 157 1.55 %
Personal loans $ 63 0.80 % $ 48 0.69 %
Total loan receivables $ 2,578 2.30 % $ 1,451 1.55 %
Loans 90 or more days delinquent(1)
Credit card loans $ 1,028 1.14 % $ 562 0.76 %
Private student loans $ 45 0.43 % $ 36 0.35 %
Personal loans $ 16 0.21 % $ 13 0.20 %
Total loan receivables $ 1,101 0.98 % $ 618 0.66 %
Loans not accruing interest $ 214 0.19 % $ 225 0.24 %
Troubled debt restructurings:
Credit card loans(2)(3)(4)
Currently enrolled $ 1,608 1.78 % $ 833 1.12 %
No longer enrolled 212 0.24 267 0.36
Total credit card loans $ 1,820 2.02 % $ 1,100 1.48 %
Private student loans(5)
$ 328 3.18 % $ 249 2.46 %
Personal loans(6)
$ 178 2.23 % $ 187 2.70 %
(1)Credit card loans that were 90 or more days delinquent at December 31, 2022 and 2021, included $55 million and $73 million, respectively, in loans that were previously enrolled in a modification program that was exempt from the TDR designation pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Within private student and personal loans that were 90 or more days delinquent at December 31, 2022 and 2021, the respective amounts associated with modifications exempt from the TDR designation under the CARES Act were immaterial.
(2)We estimate that interest income recognized on credit card loans restructured in TDR programs was $131 million, $105 million and $221 million for the years ended December 31, 2022, 2021 and 2020, respectively. We do not separately track interest income on loans in TDR programs. We estimate this amount by applying an average interest rate to the average loans in the various TDR programs.
(3)We estimate that the incremental interest income that would have been recorded in accordance with the original terms of credit card loans restructured in TDR programs was $148 million, $137 million and $181 million for the years ended December 31, 2022, 2021 and 2020, respectively. We do not separately track the amount of incremental interest income that would have been recorded if the loans in TDR programs had not been restructured and interest had instead been recorded in accordance with the original terms. We estimate this amount by applying the difference between the average interest rate earned on non-modified loans and the average interest rate earned on loans in the TDR programs to the average loans in the TDR programs.
(4)Credit card loans restructured in TDR programs include $123 million, $45 million and $94 million at December 31, 2022, 2021 and 2020, respectively, which are also included in loans 90 or more days delinquent.
(5)Private student loans restructured in TDR programs include $10 million, $7 million and $6 million at December 31, 2022, 2021 and 2020, respectively, which are also included in loans 90 or more days delinquent.
(6)Personal loans restructured in TDR programs include $4 million, $4 million and $6 million at December 31, 2022, 2021 and 2020, respectively, which are also included in loans 90 or more days delinquent.
The 30-day and 90-day delinquency rates in the table above include all loans, whether the TDR designation applies or not. The 30-day and 90-day delinquency rates for credit card and private student loans at December 31, 2022, increased compared to December 31, 2021, primarily driven by credit normalization. The increase in the 30-day and 90-day delinquency rates for credit card was also driven by the seasoning of prior vintages. The 30-day
delinquency rates for personal loans at December 31, 2022, increased compared to December 31, 2021, primarily driven by credit normalization and the seasoning of prior vintages. The 90-day delinquency rates for personal loans at December 31, 2022, remained relatively flat compared to December 31, 2021.
The balance of credit card and private student loans reported as TDRs increased at December 31, 2022, as compared to December 31, 2021, primarily due to the expiration of the CARES Act exemption for new modifications effective January 1, 2022. The balance of personal loans reported as TDRs decreased at December 31, 2022, compared to December 31, 2021, primarily due to continued benefit from tighter credit underwriting standards implemented in 2020, partially offset by enrollments in loan modification programs that are no longer exempt from the TDR designation under the CARES Act.
We believe loan modification programs are useful in assisting customers experiencing financial difficulties and help to prevent defaults. We plan to continue to use loan modification programs as a means to provide relief to customers experiencing financial difficulties.
Modified and Restructured Loans
Certain loan modifications made in 2021 were not reported as TDRs pursuant to accounting and financial reporting exemptions provided by the CARES Act. As a result, modifications reported as TDRs were favorably impacted for the year ended December 31, 2021. The CARES Act exemption ceased to apply after December 31, 2021, and, accordingly, modifications made after that date were reported as TDRs.
The table below reflects the number and balance of both new loan modifications reported as TDRs and new loan modifications excluded from the TDR designation pursuant to the CARES Act (dollars in millions)(1):
Accounts that entered a loan modification program and were classified as TDRs during the period Accounts that entered a loan modification program and were exempt from the TDR designation pursuant to the CARES Act(1)
Number of Accounts Balances Number of Accounts Balances
For the Year Ended December 31, 2022
Credit card loans 237,339 $ 1,545 - $ -
Private student loans 6,841 $ 127 - $ -
Personal loans 6,303 $ 86 - $ -
For the Year Ended December 31, 2021
Credit card loans 64,359 $ 399 127,878 $ 907
Private student loans 477 $ 8 8,844 $ 170
Personal loans 4,066 $ 51 1,378 $ 21
(1)Accounts that entered into a loan modification on or after January 1, 2022, are not eligible for this exemption.
The number and balance of new credit card and personal loan modifications increased during the year ended December 31, 2022, when compared to total modifications, including both TDRs and those exempt from the TDR designation, in the same period in 2021. The increase was primarily due to the expiration of government stimulus and disaster relief programs.
The number and balance of new private student loan modifications decreased during the year ended December 31, 2022, when compared to total modifications, including both TDRs and those exempt from the TDR designation, in the same period in 2021. The decrease was primarily due to heightened utilization of programs in the prior periods driven by the impacts of the COVID-19 pandemic on student loan borrowers.
The following table provides the number of accounts that exited a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act and corresponding outstanding balances along with the amount of the outstanding balances that were delinquent (30 or more days past due) upon exiting the temporary loan modification program (dollars in millions):(1)
Number of Accounts Outstanding Balances
Balances Delinquent(1)
For the Year Ended December 31, 2022
Credit card loans 101,273 $ 552 $ 110
Private student loans
3,897 $ 76 NM
Personal loans
649 $ 9 NM
For the Year Ended December 31, 2021
Credit card loans 198,506 $ 1,183 $ 166
Private student loans
8,788 $ 157 NM
Personal loans
4,809 $ 72 NM
(1)Includes balances charged-off at the end of the month the account exited the temporary loan modification program. The balances charged-off were not meaningful for the years ended December 31, 2022 and 2021.
The following table provides the balance of loan receivables restructured through a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act (dollars in millions):
December 31,
2022 2021
$ % $ %
Credit card loans $ 1,187 1.32 % $ 1,620 2.18 %
Private student loans $ 193 1.87 % $ 242 2.39 %
Personal loans $ 16 0.20 % $ 45 0.65 %
Our estimate of expected loss reflected in our allowance for credit losses includes the risk associated with all loans, including all modified loans. Refer to “- Delinquencies” and Note 4: Loan Receivables to our consolidated financial statements for additional details of our use of loan modification programs to provide relief to customers experiencing financial hardship, TDRs and the allowance for credit losses.
Maturities and Sensitivities of Loan Receivables to Changes in Interest Rates
Our loan portfolio had the following maturity distribution(1) (dollars in millions):
At December 31, 2022 Due One
Year or
Less Due After
One Year
Through
Five Years Due After
Five Years Through Fifteen Years Due After Fifteen Years Total
Credit card loans $ 26,846 $ 47,894 $ 14,926 $ 447 $ 90,113
Private student loans 345 2,131 7,129 703 10,308
Personal loans 2,224 5,364 410 - 7,998
Other loans 115 487 1,353 1,746 3,701
Total loan portfolio $ 29,530 $ 55,876 $ 23,818 $ 2,896 $ 112,120
(1) Because of the uncertainty regarding loan repayment patterns, the above amounts have been calculated using contractually required minimum payments. Historically, actual loan repayments have been higher than such minimum payments and, therefore, the above amounts may not necessarily be indicative of our actual loan repayments.
At December 31, 2022, approximately $51.0 billion of our loan portfolio due after one year had interest rates tied to an index and approximately $31.6 billion were fixed-rate loans.
Other Income
The following table presents the components of other income (dollars in millions):
For the Years Ended December 31, 2022 vs. 2021
Increase (Decrease) 2021 vs. 2020
Increase (Decrease)
2022 2021 2020 $ % $ %
Discount and interchange revenue, net(1)
$ 1,424 $ 1,224 $ 933 $ 200 16 % $ 291 31 %
Protection products revenue 172 165 180 7 4 % (15) (8) %
Loan fee income 632 464 414 168 36 % 50 12 %
Transaction processing revenue 249 227 195 22 10 % 32 16 %
(Losses) gains on equity investments (214) 424 80 (638) (150) % 344 430 %
Other income 75 66 56 9 14 % 10 18 %
Total other income $ 2,338 $ 2,570 $ 1,858 $ (232) (9) % $ 712 38 %
(1)Net of rewards, including Cashback Bonus rewards, of $3.0 billion, $2.5 billion and $1.9 billion for the years ended December 31, 2022, 2021 and 2020, respectively.
Total other income decreased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to net losses on equity investments partially offset by increases in net discount and interchange revenue and loan fee income. The net loss on equity investments was a result of a decrease in the fair value of those investments. The increase in discount and interchange revenue was partially offset by an increase in rewards, both of which were driven by higher sales volume. Loan fee income increased primarily due to higher volume of late payments.
Other Expense
The following table represents the components of other expense (dollars in millions):
For the Years Ended December 31, 2022 vs. 2021
Increase (Decrease) 2021 vs. 2020
Increase (Decrease)
2022 2021 2020 $ % $ %
Employee compensation and benefits $ 2,139 $ 1,986 $ 1,894 $ 153 8 % $ 92 5 %
Marketing and business development 1,035 810 659 225 28 % 151 23 %
Information processing and communications 513 500 540 13 3 % (40) (7) %
Professional fees 871 797 717 74 9 % 80 11 %
Premises and equipment 118 92 113 26 28 % (21) (19) %
Other expense 560 620 596 (60) (10) % 24 4 %
Total other expense $ 5,236 $ 4,805 $ 4,519 $ 431 9 % $ 286 6 %
Total other expense increased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to increases in marketing and business development, employee compensation and benefits and professional fees. These increases were partially offset by a decrease in other expense. The increase in marketing and business development was driven by growth investments in card and consumer banking. Employee compensation and benefits increased primarily from higher headcount. The increase in professional fees was due primarily to investments in technology and increased consulting costs. The decrease in other expense was driven by certain one-time items in the prior period.
Income Tax Expense
The following table reconciles our effective tax rate to the U.S. federal statutory income tax rate (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
U.S. federal statutory income tax rate 21.0 % 21.0 % 21.0 %
U.S. state, local and other income taxes, net of U.S. federal income tax benefits 3.4 3.4 3.4
Tax credits (1.3) (1.2) (4.4)
Other 0.4 (0.3) 0.5
Effective income tax rate 23.5 % 22.9 % 20.5 %
Income tax expense $ 1,350 $ 1,615 $ 294
Liquidity and Capital Resources
Funding and Liquidity
We seek to maintain stable, diversified and cost-effective funding sources and a strong liquidity profile to fund our business and repay or refinance our maturing obligations under normal operating conditions and periods of economic or financial stress. In managing our liquidity risk, we seek to maintain a prudent liability maturity profile and ready access to an ample store of primary and contingent liquidity sources. Our primary funding sources include direct-to-consumer and brokered deposits, public term asset-backed securitizations and other short-term and long-term borrowings. Our primary liquidity sources include a portfolio composed of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities, as well as secured borrowing capacity through private term asset-backed securitizations and Federal Home Loan Bank (“FHLB”) advances. In addition, we have unused borrowing capacity at the Federal Reserve discount window, which provides another source of contingent liquidity.
Funding Sources
Deposits
We obtain deposits from consumers directly or through affinity relationships (“direct-to-consumer deposits”). Additionally, we obtain deposits through third-party securities brokerage firms that offer our deposits to their customers (“brokered deposits”). Direct-to-consumer deposit products include savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts. Brokered deposit products include certificates of deposit and sweep accounts. In accordance with the Federal Deposit Insurance Corporation’s (“FDIC”) final rule on revisions to its brokered deposits regulation, we no longer categorize certain retail deposit products such as affinity deposits and deposits generated through certain sweep deposit relationships as brokered for regulatory reporting purposes. At December 31, 2022, we had $70.5 billion of direct-to-consumer deposits and $21.1 billion of brokered deposits, of which there are $76.6 billion of deposit balances due in less than one year and $15.0 billion of deposit balances due in one year or thereafter.
Credit Card Securitization Financing
We securitize credit card receivables as a source of funding. We access the asset-backed securitization market using the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust (“DCENT”). In connection with our securitization transactions, credit card receivables are transferred to DCMT. DCMT has issued a certificate representing the beneficial interest in its credit card receivables to DCENT. We issue DCENT DiscoverSeries notes in public and private transactions, which are collateralized by the beneficial interest certificate held by DCENT. From time to time, we may add credit card receivables to DCMT to create sufficient funding capacity for future securitizations while managing seller’s interest. We retain significant exposure to the performance of the securitized credit card receivables through holding the seller’s interest and subordinated classes of DCENT DiscoverSeries notes. At December 31, 2022, we had $10.2 billion of outstanding public asset-backed securities and $3.3 billion of outstanding subordinated asset-backed securities that had been issued to our wholly-owned subsidiaries.
The securitization structures include certain features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements, the insufficiency of which triggers early repayment of the securities. We refer to this as “economic early amortization,” which is based on excess spread levels. Excess spread is the amount by which income received with respect to the securitized credit card receivables during a collection period including interest collections, fees and interchange, exceeds the fees and expenses of DCENT during such collection period, including interest expense, servicing fees and charged-off receivables. In the event of an economic early amortization, which would occur if the excess spread fell below 0% on a three-month rolling average basis, we would be required to repay all outstanding securitized borrowings using available collections received with respect to the securitized credit card receivables. For the three months ended December 31, 2022, the DiscoverSeries three-month rolling average excess spread was 14.73%. The period of ultimate repayment would be determined by the amount and timing of collections received.
Through our wholly-owned indirect subsidiary, Discover Funding LLC, we are required to maintain an interest in a contractual minimum level of receivables in DCMT in excess of the face value of outstanding investors’ interests. This minimum interest is referred to as the minimum seller’s interest. The required minimum seller’s interest in the pool of trust receivables is approximately 7% in excess of the total investors’ interests, which includes interests held by third parties as well as those interests held by us. If the level of receivables in DCMT were to fall below the required minimum, we would be required to add receivables from the unrestricted pool of receivables, which would increase the amount of credit card receivables restricted for securitization investors. A decline in the amount of the excess seller’s interest could occur if balance repayments and charge-offs exceeded new lending on the securitized accounts or as a result of changes in total outstanding investors’ interests. Seller’s interest exhibits seasonality as higher receivable balance repayments tend to occur in the first calendar year quarter. If we could not add enough receivables to satisfy the minimum seller’s interest requirement, an early amortization (or repayment) of investors’ interests would be triggered.
An early amortization event would impair our liquidity and may require us to utilize our available non-securitization related contingent liquidity or rely on alternative funding sources, which may or may not be available at the time. We have several strategies we can deploy to prevent an early amortization event. For instance, we could add receivables to DCMT, which would reduce our available borrowing capacity at the Federal Reserve discount window. As of December 31, 2022, there were $25.8 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization investors for the year ended December 31, 2022. Alternatively, we could employ structured discounting, which was used effectively in 2009 to bolster excess spread and mitigate early amortization risk.
The following table summarizes expected contractual maturities of the investors’ interests in credit card securitizations, excluding those that have been issued to our wholly-owned subsidiaries (dollars in millions):
At December 31, 2022 Total Less Than
One Year One Year and Thereafter
Scheduled maturities of borrowings - owed to credit card securitization investors $ 10,175 $ 1,472 $ 8,703
The “AAA(sf)” and “Aaa(sf)” ratings of the DCENT DiscoverSeries Class A Notes issued to date have been based, in part, on an FDIC rule, which created a safe harbor that provides that the FDIC, as conservator or receiver, will not use its power to disaffirm or repudiate contracts, seek to reclaim or recover assets transferred in connection with a securitization, or recharacterize assets transferred in connection with a securitization as assets of the insured depository institution, provided such transfer satisfies the conditions for sale accounting treatment under previous GAAP. Although the implementation of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 860, Transfers and Servicing, no longer qualified certain transfers of assets for sale accounting treatment, the FDIC approved a final rule that preserved the safe-harbor treatment applicable to revolving trusts and master trusts, including DCMT, so long as those trusts would have satisfied the original FDIC safe harbor if evaluated under GAAP pertaining to transfers of financial assets in effect prior to December 2009. However, other legislative and regulatory developments may impact our ability or desire to issue asset-backed securities in the future.
Federal Home Loan Bank Advances
Discover Bank is a member bank of the FHLB of Chicago, one of 11 FHLBs that, along with the Office of Finance, compose the FHLB System. The FHLBs are government-sponsored enterprises of the U.S. (“U.S. GSEs”) chartered to improve the availability of funds to support home ownership. As such, senior debt obligations of the FHLBs feature the same credit ratings as U.S. Treasury securities and are considered high-quality liquid assets for bank regulatory purposes. Consequently, the FHLBs benefit from consistent capital market access during nearly all macroeconomic and financial market conditions and low funding costs, which they pass on to their member banks when they borrow advances. Thus, we consider FHLB advances a stable and reliable funding source for Discover Bank for short-term contingent liquidity and long-term asset-liability management.
As a member of the FHLB of Chicago, Discover Bank has access to short- and long-term advance structures with maturities ranging from overnight to 30 years. As of December 31, 2022, we had total committed borrowing capacity of $2.2 billion based on the amount and type of assets pledged, of which $525 million of long-term advances were outstanding with the FHLB of Chicago. Under certain stressed conditions, we could pledge our liquidity portfolio securities and borrow against them at a modest reduction to their value.
Other Long-Term Borrowings - Private Student Loans
At December 31, 2022, $84 million of principal was outstanding on securitized debt assumed as part of our acquisition of The Student Loan Corporation. Principal and interest payments on the underlying private student loans will reduce the balance of these secured borrowings over time.
Other Long-Term Borrowings - Corporate and Bank Debt
The following table provides a summary of Discover Financial Services (Parent Company) and Discover Bank outstanding fixed-rate debt (dollars in millions):
At December 31, 2022 Principal Amount Outstanding
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2024-2032 $ 3,350
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing 2023-2031 $ 155
Discover Bank fixed-rate senior bank notes, maturing 2023-2030 $ 5,350
Discover Bank fixed-rate subordinated bank notes, maturing 2028 $ 500
At December 31, 2022, $585 million of interest on our fixed-rate debt is due in less than one year and $1.6 billion of interest is due in one year and thereafter. See Note 9: Long-Term Borrowings to our consolidated financial statements for more information on the maturities of our long-term borrowings. Certain DFS senior notes require us to offer to repurchase the notes at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change of control involving us and corresponding ratings downgrade below investment grade.
Short-Term Borrowings
As part of our regular funding strategy, we may, from time to time, borrow short-term funds in the federal funds market or the repurchase (“repo”) market through repurchase agreements. Federal funds are short-term, unsecured loans between banks or other financial entities with a Federal Reserve account. Funds borrowed in the repo market are short-term, collateralized loans, usually secured with highly-rated investment securities such as U.S. Treasury bills or notes, or mortgage bonds or debentures issued by government agencies or U.S. GSEs. At December 31, 2022, there were no outstanding balances in the federal funds market or under repurchase agreements. Additionally, we have access to short-term advance structures through the FHLB of Chicago and privately placed asset-backed securitizations. At December 31, 2022, there were no short-term advances outstanding from the FHLB and no private asset-backed securitizations.
Additional Funding Sources
Private Asset-Backed Securitizations
We have access to committed borrowing capacity through privately placed asset-backed securitizations. While we may utilize funding from these private securitizations from time to time for normal business operations, their
committed nature also makes them a reliable contingency funding source. Therefore, we reserve some undrawn capacity, informed by our liquidity stress test results, for potential contingency funding needs. At December 31, 2022, we had a total committed capacity of $3.5 billion, none of which was drawn. We seek to ensure the stability and reliability of these securitizations by staggering their maturity dates, renewing them approximately one year prior to their scheduled maturity dates and periodically drawing them for operational tests and seasonal funding needs.
Federal Reserve
Discover Bank has access to the Federal Reserve Bank of Philadelphia’s discount window. As of December 31, 2022, Discover Bank had $42.3 billion of available borrowing capacity through the discount window based on the amount and type of assets pledged, primarily consumer loans. As of December 31, 2022, we have no borrowings outstanding under the discount window and reserve this capacity as a source of contingent liquidity.
Funding Uses
Our primary uses of funds include the extensions of loans and credit to customers, primarily through Discover Bank; the maintenance of sufficient working capital for routine operations; the service of our debt and capital obligations, including interest, principal, and dividend payments; and the purchase of investment securities for our liquidity portfolio.
In addition to originating consumer loans to new customers, we also extend credit to existing customers, which primarily arises from agreements for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions established in the related agreement. At December 31, 2022, our unused credit arrangements were approximately $224.7 billion. These arrangements, substantially all of which we can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification.
In the normal course of business, we enter into various contracts for goods and services, such as consulting, outsourcing, data, sponsorships, software licenses, telecommunications, and global merchant acceptance, among other things. These contracts are legally binding and specify all significant terms, including any applicable fixed future cash payments.
As of December 31, 2022, we have debt obligations, common stock and preferred stock outstanding. Refer to “- Funding Sources” and “- Capital” for more information related to our debt obligations and capital service, respectively, and the timing of expected payments.
We assess funding uses and liquidity needs under stressed and normal operating conditions, considering primary uses of funding, such as on-balance sheet loans and contingent uses of funding, such as the need to post additional collateral for derivatives positions. To anticipate funding needs under stress, we conduct liquidity stress tests to assess the impact of idiosyncratic, systemic and hybrid (i.e., idiosyncratic and systemic) scenarios with varying levels of liquidity risk reflecting a range of stress severity. If we determine we have excess cash and cash equivalents, we may invest in highly liquid, unencumbered assets that we expect to be able to convert to cash quickly and with little loss of value using the repo market or outright sales.
Guarantees
Guarantees are contracts or indemnification agreements that may require us to make payments to a guaranteed party based on changes in an underlying asset, liability, or equity security of a guaranteed party, rate or index. Also included in guarantees are contracts that may require the guarantor to make payments to a guaranteed party based on another entity’s failure to perform under an agreement. Our guarantees relate to transactions processed on the Discover Network and certain transactions processed by PULSE and Diners Club. In the ordinary course of business, we guarantee payment on behalf of subsidiaries relating to contractual obligations with external parties. The activities of the subsidiaries covered by any such guarantees are included in our consolidated financial statements. See Note 18: Commitments, Contingencies and Guarantees to our consolidated financial statements for further discussion regarding our guarantees.
Credit Ratings
Our borrowing costs and capacity in certain funding markets, including those for securitizations and unsecured senior and subordinated debt, may be affected by the credit ratings of DFS, Discover Bank and the securitization trusts.
Downgrades in these credit ratings could result in higher interest expense on our unsecured debt and asset securitizations, as well as higher credit enhancement requirements for both our public and private asset securitizations. In addition to increased funding costs, deterioration in our credit ratings could reduce our borrowing capacity in the unsecured debt and asset securitization capital markets.
The table below reflects our current credit ratings and outlooks:
Moody’s Investors Service(1)
Standard & Poor’s Fitch Ratings
Discover Financial Services
Senior unsecured debt Baa3 BBB- BBB+
Outlook for Discover Financial Services senior unsecured debt Under Review Stable Stable
Discover Bank
Senior unsecured debt Baa2 BBB BBB+
Outlook for Discover Bank senior unsecured debt Under Review Stable Stable
Subordinated debt Baa2 BBB- BBB
Discover Card Execution Note Trust (DCENT)
Class A(2)
Aaa(sf) AAA(sf) AAA(sf)
(1)On December 7, 2022, Moody’s Investors Service placed all of the long-term ratings and assessments for Discover Financial Services and Discover Bank on review for upgrade.
(2)An “sf” in the rating denotes rating agency identification for structured finance product ratings.
A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. A credit rating outlook reflects an agency's opinion regarding the likely rating direction over the medium term, often a period of about a year, and indicates the agency's belief that the issuer's credit profile is consistent with its current rating level at that point in time.
Liquidity
We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy debt obligations under stressed and normal operating conditions. In addition to the funding sources discussed in the previous section, we also maintain highly liquid, unencumbered assets in our liquidity portfolio that we expect to be able to convert to cash quickly and with little loss of value using either the repo market or outright sales.
We maintain a liquidity risk and funding management policy, which outlines the overall framework and general principles we follow in managing liquidity risk across our business. The Board of Directors approves the policy and the Asset and Liability Management Committee (the “ALCO”) is responsible for its implementation. Additionally, we maintain a liquidity management framework document that outlines the general strategies, objectives and principles we utilize to manage our liquidity position and the various liquidity risks inherent in our business model. We seek to balance the trade-offs between maintaining too much liquidity, which may be costly, with having too little liquidity, which could cause financial distress. The ALCO, chaired by our Treasurer, has cross-functional membership, and manages liquidity risk centrally. The ALCO monitors the liquidity risk profiles of DFS and Discover Bank and oversees any actions Corporate Treasury may take to ensure that we maintain ready access to our funding sources and sufficient liquidity to meet current and projected needs. In addition, the ALCO and our Board of Directors regularly review our compliance with our liquidity limits at DFS and Discover Bank, which are established in accordance with the liquidity risk appetite set by our Board of Directors.
We employ a variety of metrics to monitor and manage liquidity. We utilize early warning indicators (“EWIs”) to detect emerging liquidity stress events and a reporting and escalation process designed to be consistent with regulatory guidance. The EWIs include both idiosyncratic and systemic measures and are monitored daily and reported to the ALCO regularly. A warning from one or more of these indicators triggers prompt review and decision-making by our senior management team and, in certain instances, may lead to the convening of a senior-level response team and activation of our contingency funding plan.
In addition, we conduct liquidity stress tests regularly and ensure contingency funding is in place to address potential liquidity shortfalls. We evaluate a range of stress scenarios that are designed according to regulatory
requirements, including idiosyncratic, systemic and a combination of such events that could impact funding sources and our ability to meet liquidity needs. These scenarios measure the projected liquidity position at DFS and Discover Bank across a range of time horizons by comparing estimated contingency funding needs to available contingent liquidity.
Our primary contingency liquidity sources include our liquidity portfolio securities, which we could sell, repo or borrow against, and private securitizations with unused borrowing capacity. In addition, we could borrow FHLB advances by pledging securities to the FHLB of Chicago. Moreover, we have unused borrowing capacity with the Federal Reserve discount window, which provides an additional source of contingency liquidity. We seek to maintain sufficient liquidity to satisfy all maturing obligations and fund business operations for at least 12 months in a severe stress environment. In such an environment, we may also take actions to curtail the size of our balance sheet, which would reduce the need for funding and liquidity.
At December 31, 2022, our liquidity portfolio was composed of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities. Cash and cash equivalents were primarily deposits with the Federal Reserve. Investment securities primarily included debt obligations of the U.S. Treasury and U.S. GSEs and residential mortgage-backed securities (“RMBS”) issued by U.S. government agencies or U.S. GSEs. These investments are considered highly liquid and we expect to have the ability to raise cash by selling them, utilizing repurchase agreements or pledging certain of these investments to access secured funding. The size and composition of our liquidity portfolio may fluctuate based on the size of our balance sheet as well as operational requirements, market conditions and interest rate risk management objectives.
At December 31, 2022, our liquidity portfolio and undrawn credit facilities were $67.3 billion, which was $14.4 billion higher than the balance at December 31, 2021. Our liquidity portfolio and undrawn credit facilities grew primarily as a result of the purchase of Treasury securities and additional borrowing capacity with the Federal Reserve. During the years ended December 31, 2022 and 2021, the average balance of our liquidity portfolio was $16.3 billion and $23.4 billion, respectively. Our liquidity portfolio and undrawn facilities consist of the following (dollars in millions):
December 31,
2022 2021
Liquidity portfolio
Cash and cash equivalents(1)
$ 7,585 $ 8,080
Investment securities(2)
12,213 6,879
Total liquidity portfolio 19,798 14,959
Private asset-backed securitizations(3)
3,500 3,500
Federal Home Loan Bank of Chicago 1,712 150
Primary liquidity sources 25,010 18,609
Federal Reserve discount window(3)
42,268 34,254
Total liquidity portfolio and undrawn credit facilities $ 67,278 $ 52,863
(1)Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes.
(2)Excludes $97 million and $27 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of December 31, 2022 and 2021, respectively.
(3)See “- Additional Funding Sources” for additional information.
Bank Holding Company Liquidity
The primary uses of funds at the unconsolidated DFS level include debt service obligations (interest payments and return of principal) and capital service and management activities, including dividend payments on capital instruments and the periodic repurchase of shares of our common stock. Our primary sources of funds at the bank holding company level include the proceeds from the issuance of unsecured debt and capital securities, as well as dividends from our subsidiaries, notably Discover Bank. Under periods of idiosyncratic or systemic stress, the bank holding company could lose or experience impaired access to the capital markets. In addition, our regulators have the discretion to restrict dividend payments from Discover Bank to the bank holding company.
We utilize a measure referred to as Number of Months of Pre-Funding to determine the length of time DFS can meet upcoming funding obligations, including common and preferred stock dividend payments and debt service obligations, using existing cash resources. In managing this metric, we structure our debt maturity schedule to manage
prudently the amount of debt maturing within a short period. See Note 9: Long-Term Borrowings to our consolidated financial statements for further information regarding our debt.
Capital
Our primary sources of capital are the earnings generated by our businesses and the proceeds from issuances of capital securities. We seek to manage capital to a level and composition sufficient to support our businesses’ growth, account for their risks, and meet regulatory requirements, rating agency targets and debt investor expectations. Within these constraints, we are focused on deploying capital in a manner that provides attractive returns to our stockholders. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments.
Under regulatory capital requirements adopted by the Federal Reserve and the FDIC, DFS, along with Discover Bank, must maintain minimum capital levels. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a direct material effect on our financial condition and operating results. We must meet specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidance and regulations. Current or future legislative or regulatory reforms, such as those related to the adoption of the CECL accounting model, may require us to hold more capital or adversely impact our capital level. We consider the potential impacts of these reforms in managing our capital position.
DFS and Discover Bank are subject to regulatory capital rules issued by the Federal Reserve and the FDIC, respectively, under the Basel Committee’s December 2010 framework (“Basel III rules”). Under the Basel III rules, DFS and Discover Bank are classified as “standardized approach” entities as they are U.S. banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposures less than $10 billion. The Basel III rules require DFS and Discover Bank to maintain minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios.
In March 2020, federal bank regulatory agencies announced an interim and now final rule that allows banks that have implemented the CECL accounting model to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, we have elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, the estimated impact of CECL on regulatory capital will be phased in over three years, beginning in 2022. Electing this option raised our Common Equity Tier 1 ("CET1") capital ratios in 2022 and 2021. The phase-in of the CECL accounting model decreased CET1 by $537 million as of January 1, 2022. For additional information regarding the risk-based capital and leverage ratios, see Note 17: Capital Adequacy to our consolidated financial statements.
In March 2020, the Federal Reserve announced the SCB final rule, which imposes limitations on DFS’ capital distributions if we do not maintain our risk-based capital ratios above stated regulatory minimum ratios based on the results of supervisory stress tests. Under this rule, DFS is required to assess whether our planned capital actions are consistent with the effective capital distribution limitations that will apply on a pro-forma basis throughout the planning horizon.
The SCB requirement is institution-specific and is calculated as the greater of (i) 2.5% and (ii) the sum of (a) the difference between DFS' actual CET1 ratio at the beginning of the forecast and the projected minimum CET1 ratio based on the Federal Reserve's models in its nine-quarter Severely Adverse stress scenario, plus (b) the sum of the dollar amount of DFS' planned common stock dividend distributions for each of the fourth through seventh quarters of its nine-quarter capital planning horizon, expressed as a percentage of risk-weighted assets. For Category IV firms, including DFS, the Federal Reserve calculates each firm’s SCB biennially in even-numbered calendar years, and did so in 2022. In odd-numbered years, each firm subject to Category IV standards that did not opt-in to such year’s supervisory stress tests as part of the Federal Reserve’s CCAR process receives an adjusted SCB requirement that is updated to reflect its planned common stock dividends per the firm’s annual capital plan. In August 2021, the Federal Reserve notified DFS of its adjusted SCB requirement of 3.6% based on the planned common stock dividends in the 2021 Capital Plan. DFS' SCB was effective in October 2021 and slightly increased from our SCB in effect for the preceding year, which was 3.5%. See "- Regulatory Environment and Developments - Banking - Capital Standards and Stress Testing" for additional information.
DFS elected not to participate in the Federal Reserve’s supervisory stress test in 2021, but did participate in 2022. As part of CCAR, DFS submitted an annual capital plan by the April 5, 2022 due date (“2022 Capital Plan”). On June 23, 2022, the Federal Reserve released results of the 2022 CCAR stress test. Discover’s results showed strong capital levels under stress, well above regulatory minimums. These results were used to set the new SCB effective October 1, 2022. On August 4, 2022, the Federal Reserve disclosed the new SCB for DFS is 2.5%, the lowest possible requirement.
At December 31, 2022, DFS and Discover Bank met the requirements for “well-capitalized” status under the Federal Reserve’s Regulation Y and the prompt corrective action rules and corresponding FDIC requirements, respectively, exceeding the regulatory minimums to which they were subject under the applicable rules.
Basel III rules also require disclosures relating to market discipline. This series of disclosures is commonly referred to as "Pillar 3." The objective is to increase the transparency of capital requirements for banking organizations. We are required to make prescribed regulatory disclosures quarterly regarding our capital structure, capital adequacy, risk exposures and risk-weighted assets. We make the Pillar 3 disclosures publicly available on our website in a report called "Basel III Regulatory Capital Disclosures."
We disclose tangible common equity, which represents common equity less goodwill and intangibles. Management believes that common stockholders’ equity excluding goodwill and intangibles is meaningful to investors as a measure of our true net asset value. At December 31, 2022, tangible common equity is considered to be a non-GAAP financial measure as it is not formally defined by GAAP or codified in the federal banking regulations. Other financial services companies may also disclose this measure and definitions may vary. We advise users of this information to exercise caution in comparing this measure for different companies.
The following table reconciles total common stockholders’ equity (a GAAP financial measure) to tangible common equity (dollars in millions):
December 31,
2022 2021
Total common stockholders’ equity(1)
$ 13,534 $ 12,352
Less: goodwill (255) (255)
Tangible common equity $ 13,279 $ 12,097
(1)Total common stockholders’ equity is calculated as total stockholders’ equity less preferred stock.
Our Board of Directors declared the following common stock dividends during 2022, 2021 and 2020:
Declaration Date Record Date Payment Date Dividend per Share
October 18, 2022 November 23, 2022 December 08, 2022 $ 0.60
July 20, 2022 August 25, 2022 September 08, 2022 0.60
April 27, 2022 May 26, 2022 June 09, 2022 0.60
January 18, 2022 February 17, 2022 March 03, 2022 0.50
Total common stock dividends $ 2.30
October 19, 2021 November 24, 2021 December 09, 2021 $ 0.50
July 20, 2021 August 19, 2021 September 02, 2021 0.50
April 20, 2021 May 20, 2021 June 03, 2021 0.44
January 19, 2021 February 18, 2021 March 04, 2021 0.44
Total common stock dividends $ 1.88
October 20, 2020 November 19, 2020 December 03, 2020 $ 0.44
July 21, 2020 August 20, 2020 September 03, 2020 0.44
April 21, 2020 May 21, 2020 June 04, 2020 0.44
January 21, 2020 February 20, 2020 March 05, 2020 0.44
Total common stock dividends $ 1.76
On January 17, 2023, we declared a quarterly cash dividend on our common stock of $0.60 per share, payable on March 9, 2023 to holders of record on February 23, 2023, which is consistent with the quarterly amount paid in 2022.
Our Board of Directors declared the following Series C preferred stock dividends during 2022, 2021 and 2020:
Declaration Date Record Date Payment Date Dividend per Depositary Share
July 20, 2022 October 14, 2022 October 31, 2022 $ 27.50
January 18, 2022 April 15, 2022 May 02, 2022 27.50
Total Series C preferred stock dividends $ 55.00
July 20, 2021 October 15, 2021 November 01, 2021 $ 27.50
January 19, 2021 April 15, 2021 April 30, 2021 27.50
Total Series C preferred stock dividends $ 55.00
July 21, 2020 October 15, 2020 October 30, 2020 $ 27.50
January 21, 2020 April 15, 2020 April 30, 2020 27.50
Total Series C preferred stock dividends $ 55.00
Our Board of Directors declared the following Series D preferred stock dividends during 2022 and 2021:
Declaration Date Record Date Payment Date Dividend per Depositary Share
July 20, 2022 September 08, 2022 September 23, 2022 $ 30.625
January 18, 2022 March 08, 2022 March 23, 2022 30.625
Total Series D preferred stock dividends $ 61.250
July 20, 2021 September 08, 2021 September 23, 2021 $ 30.625
January 19, 2021(1)
March 08, 2021 March 23, 2021 46.110
Total Series D preferred stock dividends $ 76.735
(1)The dividend includes $30.63 semi-annual dividend per depositary share plus $15.48 to account for the long first dividend period.
On January 17, 2023, we declared a semi-annual cash dividend on our Series C and Series D preferred stock of $27.50 and $30.625 per depositary share, respectively, payable on May 1, 2023 and March 23, 2023, respectively, to holders of record on April 14, 2023 and March 8, 2023, respectively.
Our Board of Directors approved a new share repurchase program in April 2022. The new program authorizes up to $4.2 billion of share repurchases through June 30, 2023. This share repurchase authorization replaced a $2.4 billion share repurchase program, which expired on March 31, 2022. During the three months ended December 31, 2022, we repurchased approximately 5.9 million shares, or 2.2% of our outstanding common stock as of September 30, 2022, for approximately $600 million. During the year ended December 31, 2022, we repurchased approximately 21.5 million shares, or 7.5% of our outstanding common stock as of December 31, 2021, for $2.3 billion. We may use various methods to repurchase shares under the program, including open market purchases, privately negotiated transactions or other purchases, including block trades, accelerated share repurchase transactions, or any combination of such methods.
The amount and size of any future dividends and share repurchases will depend on our results of operations, financial condition, capital levels, cash requirements, future prospects, regulatory review and other factors. In July 2022, we suspended our existing share repurchase program because of an internal investigation related to our student loan servicing practices and related compliance matters conducted under the oversight of a board-appointed independent special committee. In November 2022, the investigation was completed and we resumed share repurchases under the existing program. We continue to communicate with the supervisory staff of our regulators regarding the internal investigation, and we may be subject to reviews, investigations, proceedings, fines or other actions in connection with our student loan servicing practices and related compliance matters. The declaration and payment of future dividends and the amount thereof are subject to the discretion of our Board of Directors. Holders of our shares of common stock are subject to the prior dividend rights of holders of our preferred stock or the depositary shares representing such preferred stock outstanding. No dividend may be declared or paid or set aside for payment on our common stock if full dividends have not been declared and paid on all outstanding shares of preferred stock in any dividend period. In addition, as noted above, banking laws and regulations and our banking regulators may limit our ability to pay dividends and make share repurchases, including limitations on the extent our banking subsidiary (Discover Bank) can provide funds to us through dividends, loans or otherwise. Further, current or future regulatory reforms may require us to hold more capital or could adversely impact our capital level. As a result, there can be no assurance that we will declare and pay any dividends or repurchase any shares of our common stock in the future.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses for an investment position or portfolio. We are exposed to market risk primarily from changes in interest rates.
Interest Rate Risk
We borrow money from various depositors and institutions to provide loans to our customers and invest in other assets and our business. These loans to customers and other assets earn interest, which we use to pay interest on the money borrowed. Our net interest income and, therefore, earnings will be reduced if the interest rate earned on assets increases at a slower pace than the interest rate paid on our borrowings. Changes in interest rates and our competitors’ responses to those changes may influence customer payment rates, loan balances or deposit account activity. As a result, we may incur higher funding costs that could decrease our earnings.
Our interest rate risk management policies are designed to measure and manage the potential volatility of earnings that may arise from changes in interest rates by having a portfolio that reflects our mix of variable- and fixed-rate assets and liabilities. To the extent that the repricing characteristics of the assets and liabilities in a particular portfolio are not sufficiently matched, we may utilize interest rate derivative contracts, such as swap agreements, to achieve our objectives. Interest rate swap agreements effectively convert the underlying asset or liability from fixed- to floating-rate or from floating- to fixed-rate. See Note 21: Derivatives and Hedging Activities to our consolidated financial statements for information on our derivatives activity.
We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12 months from our reporting date, we assume that all interest-rate-sensitive assets and liabilities are subject to a hypothetical, immediate 100 basis point change in interest rates relative to market consensus expectations as of the beginning of the period. The sensitivity simulation includes the hypothetical assumption that all relevant types of interest rates would change instantaneously, simultaneously and to the same degree.
Our interest-rate-sensitive assets include our variable-rate loan receivables and certain assets in our liquidity portfolio. We have limitations on our ability to mitigate interest rate risk by adjusting rates on existing balances. Further, competitive actions may limit our ability to increase the rates that we charge to customers for new loans. At December 31, 2022, the majority of our credit card and private student loans charge variable rates. Fixed-rate assets that will mature or otherwise contractually reset to a market-based indexed rate or other fixed-rate prior to the end of the 12-month measurement period are considered to be rate sensitive. The latter category includes certain revolving credit card loans that may be offered at below-market rates for an introductory period, such as balance transfers and special promotional programs, after which the loans will contractually reprice in accordance with our normal market-based pricing structure. For assets with a fixed interest rate that contractually will, or is assumed to, reset to a market-based indexed rate or other fixed rate during the next 12 months, earnings sensitivity is measured from the expected repricing date. In addition, for all interest-rate-sensitive assets, earnings sensitivity is calculated net of expected credit losses. For purposes of this analysis, expected credit losses are assumed to remain unchanged relative to our baseline expectations over the analysis horizon.
Interest-rate-sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12 months. Thus, liabilities that vary with changes in a market-based index, such as the federal funds rate or Secured Overnight Financing Rate (“SOFR”), which will reset before the end of the next 12 months, or liabilities that have fixed rates at the fiscal period end but will mature and are assumed to be replaced with a market-based indexed rate prior to the end of the next 12 months, are also considered to be rate sensitive. For these fixed-rate liabilities, earnings sensitivity is measured from the expected maturity date.
Net interest income sensitivity simulations require assumptions regarding market conditions, consumer behavior and the growth and composition of our balance sheet. The degree by which our deposit rates change when benchmark interest rates change, our deposit “beta,” is one of the most significant of these assumptions. Assumptions about deposit beta and other matters are inherently uncertain and, as a result, actual earnings may differ from the simulated earnings presented below. Our actual earnings depend on multiple factors including, but not limited to, the direction and timing of changes in interest rates, the movement of short-term interest rates relative to long-term rates, balance sheet composition, competitor actions affecting pricing decisions in our loans and deposits, the mix of promotional balances in our card portfolio, the level of interest charge-offs and recoveries, the influence of loan repayment rates on revolving balances and strategic actions undertaken by our management.
Our current short-term interest rate risk position is modestly asset-sensitive. We believe this position is prudent given benchmark interest rates have been prone to rise as the Federal Reserve has raised its federal funds rate target in response to high inflation. The following table shows the impacts to net interest income over the following 12-month period that we estimate would result from an immediate and parallel change in interest rates affecting all interest rate sensitive assets and liabilities (dollars in millions):
December 31,
2022 2021
Basis point change $ % $ %
+100 $ 183 1.40 % $ 154 1.51 %
-100 $ (190) (1.45) % NM NM
An estimated impact on net interest income of a decrease in interest rates at December 31, 2021, was not provided as many of our interest-rate-sensitive assets and liabilities were tied to interest rates (i.e., prime and federal funds) that were near their historical minimum levels and, therefore, could not materially decrease.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Discover Financial Services
Riverwoods, IL
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Discover Financial Services (the “Company”) as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial condition, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows as of and for the year ended December 31, 2022, of the Company and our report dated February 23, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 23, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Discover Financial Services
Riverwoods, IL
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Discover Financial Services (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - Refer to Notes 1, 2 and 4 to the financial statements.
Critical Audit Matter Description
Estimates of expected credit losses under the Current Expected Credit Losses (“CECL”) model, in accordance with ASU 2016-13, are based on relevant information about current conditions, historical experience and reasonable and supportable forward-looking forecasts regarding collectability of the loan portfolio.
Assumptions used to estimate expected credit losses under the CECL model included, but were not limited to, key economic assumptions applied over a reasonable and supportable forecast period and, for the credit card portfolio, the application of a credit card payment allocation policy.
During the year ended December 31, 2022, the economic environment resulted in increased uncertainty and more
judgment to derive the CECL estimate. Specifically, the unknown impacts of the cessation of fiscal policy assistance and recent monetary policy actions, in response to inflation, have increased the uncertainty associated with the macroeconomic outlook and CECL estimate. The selection of key assumptions and evaluation of model output required significant judgment from management. At December 31, 2022, the total allowance for loans was $7.4 billion.
Given the significant estimates and assumptions management makes to estimate the allowance for credit losses and the economic environment, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit modeling specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the allowance for credit losses balance included the following procedures, among others:
•We tested the design and operating effectiveness of management’s controls over the determination and review of model methodology, significant assumptions and model overlays, if applicable
•We evaluated whether the method (including the model), data, and significant assumptions are appropriate in the context of the applicable financial reporting framework
•We tested the relevance and reliability of internal and external data used within the models, including whether the data is accurate and complete when internally derived
•With assistance from credit modeling specialists, we evaluated whether the model is suitable for determining the estimate, which included understanding the model methodology and logic and whether the selected method for estimating loan losses is appropriate for each loan portfolio
•We evaluated whether the significant economic assumptions were reasonable and internally and externally consistent
•We evaluated the reasonableness and consistency of the reasonable and supportable forecast period
•We evaluated whether judgments have been applied consistently to the model and that any adjustments to the output of the model are consistent with the measurement objective of the applicable financial reporting framework and are appropriate in the circumstances
•We considered any contradictory evidence that arose while performing our procedures, and whether or not this evidence was indicative of management bias
•We evaluated the completeness and accuracy of the Company’s allowance for credit losses disclosures
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 23, 2023
We have served as the Company’s auditor since the spin-off from its former parent company in 2007 and as Discover Bank’s (a wholly owned subsidiary of the Company) auditor since 1985.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Financial Condition
(dollars in millions, except for share amounts)
December 31,
2022 2021
Assets
Cash and cash equivalents $ 8,856 $ 8,750
Restricted cash 41 2,582
Investment securities (includes available-for-sale securities of $11,987 and $6,700 reported at fair value with associated amortized cost of $12,167 and $6,549 at December 31, 2022 and 2021, respectively)
12,208 6,904
Loan receivables
Loan receivables 112,120 93,684
Allowance for credit losses (7,374) (6,822)
Net loan receivables 104,746 86,862
Premises and equipment, net 1,003 983
Goodwill 255 255
Other assets 4,519 3,906
Total assets $ 131,628 $ 110,242
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Interest-bearing deposit accounts $ 90,151 $ 70,818
Non-interest-bearing deposit accounts 1,485 1,575
Total deposits 91,636 72,393
Short-term borrowings - 1,750
Long-term borrowings 20,108 18,477
Accrued expenses and other liabilities 5,294 4,214
Total liabilities 117,038 96,834
Commitments, contingencies and guarantees (Notes 15, 18 and 19)
Stockholders’ Equity
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 569,689,007 and 568,830,897 shares issued at December 31, 2022 and 2021, respectively
6 6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at December 31, 2022 and 2021
1,056 1,056
Additional paid-in capital 4,468 4,369
Retained earnings 28,453 24,766
Accumulated other comprehensive loss (339) (94)
Treasury stock, at cost; 302,305,216 and 280,502,577 shares at December 31, 2022 and 2021, respectively
(19,054) (16,695)
Total stockholders’ equity 14,590 13,408
Total liabilities and stockholders’ equity $ 131,628 $ 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 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.
December 31,
2022 2021
Assets
Restricted cash $ 41 $ 2,582
Loan receivables $ 25,937 $ 25,449
Allowance for credit losses allocated to securitized loan receivables $ (1,152) $ (1,371)
Other assets $ 3 $ 4
Liabilities
Short- and long-term borrowings $ 10,259 $ 9,539
Accrued expenses and other liabilities $ 14 $ 6
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Income
(dollars in millions, except for share amounts)
For the Years Ended December 31,
2022 2021 2020
Interest income
Credit card loans $ 10,632 $ 8,717 $ 8,985
Other loans 1,870 1,734 1,817
Investment securities 179 182 252
Other interest income 183 18 41
Total interest income 12,864 10,651 11,095
Interest expense
Deposits 1,257 661 1,231
Short-term borrowings 2 - 32
Long-term borrowings 606 473 602
Total interest expense 1,865 1,134 1,865
Net interest income 10,999 9,517 9,230
Provision for credit losses 2,359 218 5,134
Net interest income after provision for credit losses 8,640 9,299 4,096
Other income
Discount and interchange revenue, net 1,424 1,224 933
Protection products revenue 172 165 180
Loan fee income 632 464 414
Transaction processing revenue 249 227 195
(Losses) gains on equity investments (214) 424 80
Other income 75 66 56
Total other income 2,338 2,570 1,858
Other expense
Employee compensation and benefits 2,139 1,986 1,894
Marketing and business development 1,035 810 659
Information processing and communications 513 500 540
Professional fees 871 797 717
Premises and equipment 118 92 113
Other expense 560 620 596
Total other expense 5,236 4,805 4,519
Income before income taxes 5,742 7,064 1,435
Income tax expense 1,350 1,615 294
Net income $ 4,392 $ 5,449 $ 1,141
Net income allocated to common stockholders $ 4,304 $ 5,351 $ 1,104
Basic earnings per common share $ 15.52 $ 17.85 $ 3.60
Diluted earnings per common share $ 15.50 $ 17.83 $ 3.60
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Comprehensive Income
(dollars in millions)
For the Years Ended December 31,
2022 2021 2020
Net income $ 4,392 $ 5,449 $ 1,141
Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax (250) (170) 172
Unrealized (losses) gains on cash flow hedges, net of tax (5) 3 5
Unrealized pension and post-retirement plan gains (losses), net of tax 10 28 (13)
Other comprehensive (loss) income (245) (139) 164
Comprehensive income $ 4,147 $ 5,310 $ 1,305
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Changes in Stockholders’ Equity
(dollars in millions, shares in thousands)
Preferred Stock Common Stock Additional
Paid-in
Capital Retained
Earnings Accumulated Other Comprehensive (Loss) Income Treasury
Stock Total
Stockholders’
Equity
Shares Amount Shares Amount
Balance at December 31, 2019 6 $ 563 566,654 $ 6 $ 4,206 $ 21,290 $ (119) $ (14,087) $ 11,859
Cumulative effect of ASU No. 2016-13 adoption - - - - - (1,902) - - (1,902)
Net income - - - - - 1,141 - - 1,141
Other comprehensive income - - - - - - 164 - 164
Purchases of treasury stock - - - - - - - (348) (348)
Common stock issued under employee benefit plans - - 192 - 10 - - - 10
Common stock issued and stock-based compensation expense - - 1,052 - 41 - - - 41
Preferred stock issued 5 493 - - - - - - 493
Dividends - common stock ($1.76 per share)
- - - - - (543) - - (543)
Dividends - Series C preferred stock ($5,500 per share)
- - - - - (31) - - (31)
Balance at December 31, 2020 11 1,056 567,898 6 4,257 19,955 45 (14,435) 10,884
Net income - - - - - 5,449 - - 5,449
Other comprehensive loss - - - - - - (139) - (139)
Purchases of treasury stock - - - - - - - (2,260) (2,260)
Common stock issued under employee benefit plans - - 88 - 9 - - - 9
Common stock issued and stock-based compensation expense - - 845 - 103 - - - 103
Dividends - common stock ($1.88 per share)
- - - - - (569) - - (569)
Dividends - Series C preferred stock ($5,500 per share)
- - - - - (31) - - (31)
Dividends - Series D preferred stock ($7,674 per share)
- - - - - (38) - - (38)
Balance at December 31, 2021 11 1,056 568,831 6 4,369 24,766 (94) (16,695) 13,408
Net income - - - - - 4,392 - - 4,392
Other comprehensive loss - - - - - - (245) - (245)
Purchases of treasury stock - - - - - - - (2,359) (2,359)
Common stock issued under employee benefit plans - - 107 - 10 - - - 10
Common stock issued and stock-based compensation expense - - 751 - 89 - - - 89
Dividends - common stock ($2.30 per share)
- - - - - (643) - - (643)
Dividends - Series C preferred stock ($5,500 per share)
- - - - - (31) - - (31)
Dividends - Series D preferred stock ($6,125 per share)
- - - - - (31) - - (31)
Balance at December 31, 2022 11 $ 1,056 569,689 $ 6 $ 4,468 $ 28,453 $ (339) $ (19,054) $ 14,590
See Notes to the Consolidated Financial Statements.
DISCOVER FINANCIAL SERVICES
Consolidated Statements of Cash Flows
(dollars in millions)
For the Years Ended December 31,
2022 2021 2020
Cash flows provided by operating activities
Net income $ 4,392 $ 5,449 $ 1,141
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 2,359 218 5,134
Deferred income taxes (427) 327 (672)
Depreciation and amortization
561 531 485
Amortization of deferred revenues (365) (295) (320)
Net losses (gains) on investments and other assets 261 (382) (26)
Other, net
125 257 200
Changes in assets and liabilities:
(Increase) decrease in other assets (846) (496) 118
Increase in accrued expenses and other liabilities 1,080 410 136
Net cash provided by operating activities 7,140 6,019 6,196
Cash flows provided by (used for) investing activities
Maturities of other short-term investments - 2,200 5,850
Purchases of other short-term investments - - (8,046)
Maturities of available-for-sale investment securities 2,084 2,727 1,007
Purchases of available-for-sale investment securities (7,682) (9) (113)
Maturities of held-to-maturity investment securities 32 82 54
Purchases of held-to-maturity investment securities (50) (28) (44)
Net change in principal on loans originated for investment (19,961) (4,574) 3,045
Proceeds from the sale of available for sale securities - 5 -
Proceeds from the sale of other investments 336 1 94
Purchases of other investments (169) (170) (72)
Proceeds from sale of premises and equipment 9 - -
Purchases of premises and equipment (236) (194) (261)
Net cash (used for) provided by investing activities (25,637) 40 1,514
Cash flows (used for) provided by financing activities
Net change in short-term borrowings (1,750) 1,750 -
Net change in deposits 19,208 (4,533) 4,128
Proceeds from issuance of securitized debt 5,620 1,727 -
Maturities and repayment of securitized debt (4,395) (3,451) (3,531)
Proceeds from issuance of other long-term borrowings 1,265 - 494
Maturities and repayments of other long-term borrowings (834) (922) (1,755)
Proceeds from issuance of common stock 10 9 10
Proceeds from issuance of preferred stock - - 493
Dividends paid on common and preferred stock (703) (636) (576)
Purchases of treasury stock (2,359) (2,260) (348)
Net cash provided by (used for) financing activities 16,062 (8,316) (1,085)
Net (decrease) increase in cash, cash equivalents and restricted cash (2,435) (2,257) 6,625
Cash, cash equivalents and restricted cash, at the beginning of the period 11,332 13,589 6,964
Cash, cash equivalents and restricted cash, at the end of the period $ 8,897 $ 11,332 $ 13,589
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents $ 8,856 $ 8,750 $ 13,564
Restricted cash 41 2,582 25
Cash, cash equivalents and restricted cash, at the end of the period $ 8,897 $ 11,332 $ 13,589
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest expense
$ 1,666 $ 1,077 $ 1,799
Income taxes, net of income tax refunds
$ 1,865 $ 1,305 $ 901
See Notes to the Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
1.Background and Basis of Presentation
Description of Business
Discover Financial Services (“DFS” or the “Company”) is a digital banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act. Therefore, the Company is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company provides digital banking products and services and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home loans and deposit products. The Company also operates the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”), collectively known as the Discover Global Network. The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as merchant acceptance throughout the United States of America (“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 credit and charge cards and/or provide card acceptance services.
The Company manages its business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. See Note 22: Segment Disclosures for a detailed description of each segment’s operations and the allocation conventions used in business segment reporting.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. The Company believes that the estimates used in the preparation of the consolidated financial statements are reasonable. Actual results could differ from these estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock unless it does not control the entity. However, the Company did not have a controlling voting interest in any entity other than its wholly-owned subsidiaries in the periods presented in the accompanying consolidated financial statements.
It is also the Company’s policy to consolidate any VIEs for which the Company is the primary beneficiary, as defined by GAAP. On this basis, the Company consolidates the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust (“DCENT”) as well as the student loan securitization trust. The Company is deemed to be the primary beneficiary of each of these trusts since it is, for each, the trust Servicer and the holder of both the residual interest and the majority of the most subordinated interests. Because of those involvements, the Company has, for each trust, (i) the power to direct the activities that most significantly impact the economic performance of the trust and (ii) the obligation (or right) to absorb losses (or receive benefits) of the trust that could potentially be significant. The Company has determined that it was not the primary beneficiary of any other VIE during the years ended December 31, 2022, 2021 and 2020.
For investments in any entities in which the Company owns 50% or less of the outstanding voting stock but in which the Company has significant influence over operating and financial decisions, the Company applies the equity method of accounting. The Company also applies the equity method to its investments in qualified affordable housing projects and similar tax credit partnerships. In cases where the Company’s equity investment is less than 20% and significant influence does not exist, such investments are carried at cost as they typically do not have readily determinable fair values, and are adjusted for any impairment in value. Investments in actively traded stock are carried at fair value with changes in fair value recorded as an adjustment to earnings.
Recently Issued Accounting Pronouncements (Not Yet Adopted)
In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the troubled debt restructuring ("TDR") recognition and measurement guidance and enhances disclosures for modifications of receivables to borrowers experiencing financial difficulty. Under ASU 2022-02, the use of a discounted cash flow method is no longer required when measuring expected credit losses on modified loans. The ASU also refines existing credit-related disclosures by requiring disclosure of current-period gross charge-offs of receivables by year of origination. The amendments in the ASU are to be applied prospectively to modifications and disclosures of gross charge-offs; however, adoption on a modified retrospective basis is permitted for the effect on the allowance for credit losses related to the elimination of the TDR recognition and measurement guidance. The ASU is effective for the Company on January 1, 2023. Management does not expect the amendments to have a material impact on the Company's financial statements.
In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The temporary reference rate transition guidance provided in Topic 848, which was originally set to expire on December 31, 2022, is designed to ease the operational cost and burden of accounting for the discontinuation of the London Interbank Offered Rate (“LIBOR”). The ASU extends the expiration date of Topic 848 to December 31, 2024. The ASU was effective upon issuance and the Company intends to apply the optional exemption from contract modification accounting provided in Topic 848 to LIBOR-indexed variable-rate private student loans. These outstanding student loans will convert to a Secured Overnight Financing Rate (“SOFR”) index in 2023 when 3-month U.S. dollar (“USD”) LIBOR ceases to be a representative reference rate. The Company does not expect the conversion of these loans to a SOFR index to have a material impact on the Company’s financial statements.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents is defined by the Company as cash on deposit with banks, including time deposits and other highly liquid investments with maturities of 90 days or less when purchased, excluding amounts restricted by certain contractual or other obligations. Cash and cash equivalents included $1.5 billion and $1.2 billion of cash and due from banks and $7.4 billion and $7.6 billion of interest-earning deposits at other banks at December 31, 2022 and 2021, respectively.
Restricted Cash
Restricted cash includes cash in accounts from which the Company’s ability to withdraw funds at any time is contractually limited. Restricted cash is generally designated for specific purposes arising out of certain contractual or other obligations.
Investment Securities
At December 31, 2022, investment securities consisted of debt obligations of the U.S. Treasury and government-sponsored enterprises of the U.S. (“U.S. GSEs”) and mortgage-backed securities issued by government agencies or U.S. GSEs. Investment securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost. All other investment securities are classified as available-for-sale, as the Company does not hold investment securities for trading purposes. Available-for-sale investment securities are reported at fair value with unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (“AOCI”) included in stockholders’ equity. The Company estimates the fair value of available-for-sale investment securities as more fully discussed in Note 20: Fair Value Measurements. The amortized cost for each held-to-maturity and available-for-sale investment security is adjusted for amortization of premiums or accretion of discounts, as appropriate. Such amortization or accretion is included in interest income. Interest on investment securities is accrued each month in accordance with their contractual terms and recorded in other assets in the consolidated statements of financial condition. The U.S. Treasury and U.S. GSE obligations and mortgage-backed securities issued by government agencies or U.S. GSEs in which the Company invests have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments.
Loan Receivables
Loan receivables consist of credit card receivables and other loan receivables. The carrying values of all classes of loan receivables include unamortized net deferred loan origination fees and costs (also see “- Significant Revenue Recognition Accounting Policies - Loan Interest and Fee Income”). The credit card loan receivables carrying amount includes the principal amounts outstanding and uncollected billed interest and fees and is reduced for unearned revenue related to balance transfer fees (also see “- Significant Revenue Recognition Accounting Policies - Loan Interest and Fee Income”). Other loans consist of private student loans, personal loans and other loans and the carrying amount of those loans includes principal amounts outstanding. For private student loans, principal amounts outstanding also include accrued interest that has been capitalized. The Company’s loan receivables are deemed to be held-for-investment at origination or acquisition because management has the intent and ability to hold them for the foreseeable future. Cash flows associated with loans originated or acquired for investment are classified as cash flows from investing activities, regardless of a subsequent change in intent.
Delinquent Loans and Net Charge-Offs
The entire balance of an account is contractually past due if the minimum payment is not received by the specified date on the customer’s billing statement. Delinquency is reported on loans that are 30 days or more past due.
Credit card loans are charged off at the end of the month during which an account becomes 180 days past due. Closed-end unsecured consumer loan receivables are charged off at the end of the month during which an account becomes 120 days contractually past due. Customer bankruptcies and probate accounts are charged off by the end of the month 60 days following the receipt of notification of the bankruptcy or death, but not later than the 180-day or 120-day time frame described above. Receivables associated with alleged or potential fraudulent transactions are reserved for at their net realizable value upon receipt of notification of such fraud through a charge to other expense and are subsequently written off at the end of the month 90 days following notification, but not later than the contractual 180-day or 120-day time frame described above. The Company’s charge-off policies are designed to comply with guidelines established by the Federal Financial Institutions Examination Council (“FFIEC”).
The Company’s net charge-offs include the principal amount of loans charged off less principal recoveries and exclude charged-off interest and fees, recoveries of interest and fees and fraud losses.
The practice of re-aging an account also may affect loan delinquencies and charge-offs. A re-age is intended to assist delinquent customers who have experienced financial difficulties but who demonstrate both an ability and willingness to repay. Accounts meeting specific criteria are re-aged when the Company and the customer agree on a temporary repayment schedule that may include concessionary terms. With re-aging, the outstanding balance of a delinquent account is returned to a current status. Customers may also qualify for a workout re-age when either a longer term or permanent hardship exists. The Company’s re-age practices are designed to comply with FFIEC guidelines.
Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level that is appropriate to absorb net credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. The estimate of expected credit losses considers uncollectible principal, interest and fees associated with the Company's loan receivables existing as of the balance sheet date. Additionally, the estimate includes expected recoveries of amounts that were either previously charged off or are expected to be charged off. The allowance is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for credit losses. Charge-offs of principal amounts of loans outstanding are deducted from the allowance and subsequent recoveries of such amounts increase the allowance. Charge-offs of loan balances representing unpaid interest and fees result in a reversal of interest and fee income, respectively, which is effectively a reclassification of the provision for credit losses.
The Company calculates its allowance for credit losses by estimating expected credit losses separately for classes of receivables with similar risk characteristics. This results in segmenting the portfolio by loan product type, which is the level that the Company develops and documents its methodology for determining the allowance for credit losses. The estimate of expected credit losses for each loan product type is based on: (i) a reasonable and supportable forecast period; (ii) a reversion period; and (iii) a post-reversion period based on historical information covering the remaining life of the loan, all of which is netted with expected recoveries. The lengths of the reasonable and supportable forecast and reversion periods can vary and are subject to a quarterly assessment that considers the economic outlook and level of variability among macroeconomic forecasts. In benign economic conditions, the Company expects to apply a
straight-line method to revert from the reasonable and supportable forecast period to the post-reversion period, but in certain stressed scenarios, a weighted approach may be deemed more appropriate.
Several analyses are used to help estimate credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. The Company's estimation process includes models that predict customer losses based on risk characteristics and portfolio attributes, macroeconomic variables and historical data and analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance.
For credit card loans, the Company uses a modeling framework that includes the following components for estimating expected credit losses:
•Probability of default: this component estimates the probability of charge-off at different points in time over the life of each loan.
•Exposure at default: this component estimates the portion of the balance sheet date balance remaining at any given time of charge-off for each loan. Given that there is no stated life of a receivable balance on a revolving credit card account, the Company applies a percentage of expected payments to estimate the portion of the balance that would remain at the time of charge-off.
•Loss given default: this component estimates the percentage of exposure (i.e., net loss) at time of charge-off that cannot be recovered, with the offsetting forecast recoveries being the driver of this estimate.
•Recoveries from previously charged-off accounts are estimated separately and are netted as part of the aggregation of all of the components of the card loss modeling framework.
For private student loans and personal loans, the Company uses vintage-based models that estimate expected credit losses over the life of the loan, net of recovery estimates, impacted mainly by time elapsed since origination, credit quality of origination vintages and macroeconomic forecasts.
The components described above for credit card, private student and personal loans are developed utilizing historical data and applicable macroeconomic variable inputs based on statistical analysis and customer behavioral relationships with credit performance. Expected recoveries from loans charged off as of the balance sheet date are modeled separately and included in the allowance estimate. The Company leverages these models and recent macroeconomic forecasts for the portion of the estimate associated with the reasonable and supportable forecast period. To estimate expected credit losses for the remainder of the life of the credit card loans, the Company reverts to historical experience of credit card loans with characteristics similar to those as of the balance sheet date and observed over various phases of a credit cycle. To estimate expected credit losses for the remainder of the life of private student and personal loans, the Company generally reverts to use of average macroeconomic variables over an appropriate historical period.
The considerations in these models include past and current loan performance, loan growth and seasoning, risk management practices, account collection strategies, economic conditions, bankruptcy filings, policy changes and forecasting uncertainties. Consideration of past and current loan performance includes the post-modification performance of loans modified in a troubled debt restructuring. For the credit card loan portfolio, the Company estimates its credit losses on a loan-level basis, which includes loans that are delinquent and/or no longer accruing interest and/or loans that have been restructured. For the remainder of its portfolio, including private student, personal and other loans, the Company estimates its credit losses on a pooled basis. For all loan types, recoveries are estimated at a pooled level based on estimates of future cash flows derived using historical experience.
Accrued interest receivable on credit card loans is included in the estimate of expected credit losses once billed to the customer (i.e., once the interest becomes part of the loan balance). Except as noted in the following sentence, an allowance for credit losses is not recorded for unbilled credit card interest or accrued interest receivable on other loan classes as the impact to the allowance for credit losses is not material. Accrued interest receivable on student loans that have not yet entered repayment is included in the estimate of expected credit losses.
No liability for expected credit losses is required for unused lines of credit on the Company’s credit card loans because they are unconditionally cancellable. The Company records a liability for expected credit losses for unfunded commitments on all other loans, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition. This liability is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for credit losses.
As part of certain collection strategies, the Company may modify the terms of loans to customers experiencing financial hardship. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on private student loans and certain grants of private student loan forbearance are generally accounted for as troubled debt restructurings. The Company classifies a modified loan in which a concession has been granted to the borrower as a troubled debt restructuring based on the cumulative length of the concession period and credit quality of the borrower.
Loan receivables that have been modified are subject to the same requirements for the accrual of expected credit loss over their expected remaining lives as described above for unmodified loans. The effects of all loan modifications, whether the TDR designation applies or not, are reflected in the allowance for credit losses. An adjustment to the allowance for credit losses is not recorded for reasonably expected TDRs as the impact is not material. When the impact of the concession can only be captured by use of a discounted cash flow method (or a reconcilable method), such method is used to measure the allowance for credit losses.
Premises and Equipment, net
Premises and equipment, net, are stated at cost less provisions for impairment and accumulated depreciation and amortization. Accumulated depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. The Company periodically reviews the estimated useful lives and may adjust them as necessary. Buildings are depreciated over a period of thirty-nine years. The costs of improvements are capitalized and depreciated either over the asset’s estimated useful life, typically ten years to fifteen years, or over the remaining term of the lease, when applicable. Furniture and fixtures are depreciated over a period of five years to ten years. Equipment is depreciated over three years to ten years. Maintenance and repairs are immediately expensed when incurred, while the costs of significant improvements are capitalized.
Purchased software and capitalized costs related to internally developed software are amortized over their useful lives of three years to ten years. Costs incurred during the application development stage related to internally developed software are capitalized. Costs are expensed as incurred during the preliminary project stage and post implementation stage. Once the capitalization criteria as defined in GAAP have been met, external direct costs incurred for materials and services used in developing or obtaining internal-use computer software and payroll and payroll-related costs for employees who are directly associated with the internal-use computer software project (to the extent those employees devoted time directly to the project) are capitalized. Amortization of capitalized costs begins when the software is ready for its intended use. Capitalized software is included in premises and equipment, net in the Company’s consolidated statements of financial condition. See Note 6: Premises and Equipment for further information about the Company’s premises and equipment.
Cloud computing arrangements involving the licensing of software that meet certain criteria are recognized as the acquisition of software. Such assets are measured at the present value of the license obligation, if the license is to be paid over time, in addition to any capitalized upfront costs and amortized over the life of the arrangement. Cloud computing arrangements that do not meet the criteria to be recognized as acquired software are accounted for as service contracts. To date, none of the Company’s cloud computing arrangements have met the criteria to be recognized as acquired software.
Premises and equipment are subject to impairment testing when events or conditions indicate that the carrying value of the asset may not be fully recoverable from future cash flows. A test for recoverability is done by comparing the asset’s carrying value to the sum of the undiscounted future net cash inflows expected to be generated from the use of the asset over its remaining useful life. Impairment exists if the sum of the undiscounted expected future net cash inflows is less than the carrying amount of the asset. Impairment would result in a write-down of the asset to its estimated fair value. The estimated fair values of these assets are based on the discounted present value of the stream of future net cash inflows expected to be derived over the remaining useful lives of the assets. If an impairment write-down is recorded, the remaining useful life of the asset will be evaluated to determine whether revision of the remaining amortization or depreciation period is appropriate.
Goodwill
Goodwill is recorded as part of the Company’s acquisitions of businesses when the purchase price exceeds the fair value of the net tangible and separately identifiable intangible assets acquired. The Company’s goodwill is not amortized, but rather is subject to an impairment test at the reporting unit level annually as of October 1, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. The Company’s reported goodwill relates to PULSE, which it acquired in 2005. The Company’s goodwill is tested for impairment by comparing the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. No impairment was identified during the impairment test conducted as of October 1, 2022.
Stock-based Compensation
The Company measures the cost of services received from employees and non-employee directors in exchange for an award of stock-based compensation based on the grant-date fair value of the award. The cost, net of estimated forfeitures, is recognized over the requisite service period. Awards to employees who are retirement-eligible at any point during the year are amortized over 12 months in accordance with the vesting terms that apply under those circumstances. No compensation cost is recognized for awards that are subsequently forfeited.
Advertising Costs
The Company expenses television and radio advertising costs in the period in which the advertising is first aired and all other advertising costs as incurred. Advertising costs are recorded in marketing and business development and were $307 million, $262 million and $212 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Income Taxes
Income tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and income tax bases of assets and liabilities using currently enacted tax rates. Deferred tax assets are recognized when their realization is determined to be more likely than not. A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances and which causes a change in management’s judgment about the realizability of the related deferred tax asset is included in the current tax provision. Uncertain tax positions are measured at the highest amount of tax benefit for which realization is judged to be more likely than not. Tax benefits that do not meet these criteria are unrecognized tax benefits. The Company recognizes and reports interest and penalties, if necessary, related to uncertain tax positions within its provision for income tax expense. See Note 15: Income Taxes for more information about the Company’s income taxes.
Accumulated Other Comprehensive Income
The Company records unrealized gains and losses on available-for-sale securities, changes in the fair value of cash flow hedges and certain pension and foreign currency translation adjustments in other comprehensive income (“OCI”) on an after-tax basis where applicable. The Company’s policy is to adjust the tax effects of a component of AOCI in the same period in which the item is sold or otherwise derecognized, or when the carrying value of the item is remeasured. Details of OCI, net of tax, are presented in the statement of comprehensive income and a roll forward of AOCI is presented in the consolidated statements of changes in stockholders’ equity and Note 13: Accumulated Other Comprehensive Income.
Significant Revenue Recognition Accounting Policies
Loan Interest and Fee Income
Interest on loans is composed largely of interest on credit card loans and is recognized based on the amount of loans outstanding and their contractual interest rate. Interest on credit card loans is included in loan receivables when billed to the customer. The Company accrues unbilled interest revenue each month from a customer’s billing cycle date to the end of the month. The Company applies an estimate of the percentage of loans that will revolve in the next cycle in the estimation of the accrued unbilled portion of interest revenue that is included in other assets on the consolidated statements of financial condition. Interest on other loan receivables is accrued each month in accordance with their contractual terms and recorded in other assets in the consolidated statements of financial condition.
The Company recognizes fees (except balance transfer fees and certain product fees) on loan receivables in interest income or loan fee income as the fees are assessed. Balance transfer fees and certain product fees are
recognized in interest income or loan fee income ratably over the periods to which they relate. Balance transfer fees are accreted to interest income over the estimated life of the related balance. As of December 31, 2022 and 2021, deferred revenues related to balance transfer fees, recorded as a reduction of loan receivables, were $85 million and $62 million, respectively. Loan fee income consists of fees on credit card loans and includes late, cash advance, returned check and other miscellaneous fees and is reflected net of waivers and charge-offs.
Direct loan origination costs on credit card loans are deferred and amortized on a straight-line basis over a one year period and recorded in interest income from credit card loans. Direct loan origination costs on other loan receivables are deferred and amortized over the life of the loan using the interest method and are recorded in interest income from other loans. As of December 31, 2022 and 2021, the remaining unamortized deferred costs related to loan origination were $298 million and $222 million, respectively, and were recorded in loan receivables.
The Company accrues interest and fees on credit card and closed-end loan receivables until the loans are paid or charged off, except in instances of customer bankruptcy, death or suspected fraud, where no further interest and fee accruals occur following notification. Upon completion of the fraud investigation, non-fraudulent credit card and closed-end consumer loan receivables may resume accruing interest. Payments received on non-accrual loans are allocated according to the same payment hierarchy applied to loans that are accruing interest. When loan receivables are charged off, unpaid accrued interest and fees are reversed against the income line items in which they were originally recorded in the consolidated statements of income. Charge-offs and recoveries of amounts that relate to capitalized interest on private student loans are treated as principal charge-offs and recoveries, affecting the provision for credit losses rather than interest income. The Company considers uncollectible interest and fee revenues in assessing the adequacy of the allowance for credit losses.
Interest income from loans accounted for as troubled debt restructurings is accounted for in the same manner as other accruing loans. Cash collections on these loans are allocated according to the same payment hierarchy applied to loans that are not in such programs.
Discount and Interchange Revenue
The Company earns discount revenue from fees charged to merchants with whom it has entered into card acceptance agreements for processing credit card purchase transactions. The Company earns acquirer interchange revenue primarily from merchant acquirers on Discover Network, Diners Club and PULSE transactions made by credit and debit card customers at merchants with whom merchant acquirers have entered into card acceptance agreements for processing payment card transactions. These card acceptance arrangements generally renew automatically and do not have fixed durations. Under these agreements, the Company stands ready to process payment transactions as and when each is presented. The Company earns discount, interchange and similar fees only when transactions are processed. Contractually defined per-transaction fee amounts typically apply to each type of transaction processed and are recognized as revenue at the time each transaction is captured for settlement. These fees are typically collected by the Company as part of the process of settling transactions daily with merchants and acquirers and are fully earned at the time settlement is made.
The Company pays issuer interchange to card-issuing entities that have entered into contractual arrangements to issue cards on the Discover Network and on certain transactions on the Diners Club and PULSE networks. This cost is contractually established and is based on the card-issuing organization’s transaction volume. The Company classifies this cost as a reduction of discount and interchange revenue. Costs of cardholder reward arrangements, including the Cashback Bonus reward program, are classified as reductions of discount and interchange revenue pursuant to guidance under Accounting Standards Codification (“ASC”) Topic 606 governing consideration payable to a customer. For both issuer interchange and transaction-based cardholder rewards, the Company accrues the cost at the time each underlying card transaction is captured for settlement.
Customer Rewards
The Company offers its customers various reward programs, including the Cashback Bonus reward program, pursuant to which the Company pays certain customers a reward equal to a percentage of their credit card purchase amounts based on the type and volume of the customer’s purchases. The liability for customer rewards is recorded on an individual customer basis and is accumulated as qualified customers earn rewards through their ongoing credit card purchase activity or other defined actions. The Company recognizes customer rewards costs as a reduction of the related revenue, if any. In instances where a reward is not associated with a revenue-generating transaction, such as when a reward is given for opening an account, the reward cost is recorded as an operating expense. For the years
ended December 31, 2022, 2021 and 2020, rewards costs amounted to $3.0 billion, $2.5 billion and $1.9 billion, respectively. The liability for customer rewards was $2.2 billion and $2.0 billion at December 31, 2022 and 2021, respectively, and is included in accrued expenses and other liabilities on the consolidated statements of financial condition.
Protection Products Revenue
The Company earns revenue related to fees received for providing ancillary products and services, including payment protection and identity theft protection services, to its credit card customers. A portion of this revenue comprises amounts earned for arranging for the delivery of products offered by third-party service providers. The amount of revenue recorded is generally based on either a percentage of a customer’s outstanding balance or a flat fee, in either case assessed monthly and recognized as earned. These contracts are month-to-month arrangements that are cancellable at any time. The Company recognizes each monthly fee in the period to which the service or coverage relates.
Transaction Processing Revenue
Transaction processing revenue represents switch fees charged to financial institutions and merchants under network participation agreements for processing ATM and debit transactions over the PULSE network, as well as various participation and membership fees. Network participation agreements generally renew automatically and do not have fixed durations, although the Company does enter into fixed-term pricing or incentive arrangements with certain network participants. Similar to discount and interchange fees, switch fees are contractually defined per-transaction fee amounts and are assessed and recognized as revenue at the time each transaction is captured for settlement. These fees are typically collected by the Company as part of the process of settling transactions with network participants. Membership and other participation fees are recognized over the periods to which each fee relates.
Other Income
Other income includes gains and losses on equity investments, sales-based royalty revenues earned by Diners Club, merchant fees, revenues from network partners and other miscellaneous revenue items. Unrealized gains and losses on equity investments carried at fair value are recognized quarterly based on changes in their respective fair values. Sales-based royalty revenues are recognized as the related sales are reported by Diners franchisees. All remaining items of other income are recognized as the related performance obligations are satisfied.
Future Revenue Associated with Customer Contracts
For contracts under which the Company processes payment card transactions, the Company has the right to assess fees for services performed and to collect those fees through the settlement process. The Company generates essentially all of its discount and interchange revenue and transaction processing revenue, as well as some revenue reported as other income, through such contracts. There is no specified quantity of service promised in these contracts as the number of payment transactions is dependent upon cardholder behavior, which is outside the control of the Company and its network customers (i.e., merchants, acquirers, issuers and other network participants). As noted above, these contracts are typically without fixed durations and renew automatically. For these reasons, the Company does not make or disclose an estimate of revenue associated with performance obligations attributable to the remaining terms of these contracts. Future revenue associated with the Company’s sales-based royalty revenues earned from Diners Club licensees is similarly variable and open-ended and therefore the Company does not make or disclose an estimate of royalties associated with performance obligations attributable to the remaining terms of the licensing and royalty arrangements. Because of the nature of the services and the manner of collection associated with the majority of the Company’s revenue from contracts with customers, material receivables or deferred revenues are not generated.
Incentive Payments
The Company makes certain incentive payments under contractual arrangements with financial institutions, Diners Club licensees, merchants, acquirers and certain other customers. These payments are generally classified as contra-revenue unless a distinct good or service is received by the Company in exchange for the payment and the fair value of the good or service can be reasonably estimated. If no such good or service is identified, then the entire payment is classified as contra-revenue and included in the consolidated statements of income in the line item where the related revenues are recorded. If the payment gives rise to an asset because it is expected to directly or indirectly contribute to future net cash inflows, it is deferred and recognized over the expected benefit period. The unamortized portion of the
deferred incentive payments included in other assets on the consolidated statements of financial condition was $32 million and $33 million at December 31, 2022 and 2021, respectively.
3. Investments
The Company’s other short-term investments and investment securities consist of the following (dollars in millions):
December 31,
2022 2021
U.S. Treasury securities(1) and U.S. GSE(2) securities
$ 11,423 $ 6,514
Residential mortgage-backed securities - Agency(3)
785 390
Total investment securities $ 12,208 $ 6,904
(1)$97 million and $27 million of U.S. Treasury securities pledged as swap collateral as of December 31, 2022 and 2021, respectively.
(2)Consists of a security issued by the Federal Home Loan Bank.
(3)Consists of securities issued by Fannie Mae, Freddie Mac, or 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
December 31, 2022
Available-for-Sale Investment Securities(1)
U.S. Treasury and U.S. GSE securities $ 11,580 $ 21 $ (178) $ 11,423
Residential mortgage-backed securities - Agency 587 - (23) 564
Total available-for-sale investment securities $ 12,167 $ 21 $ (201) $ 11,987
Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)
$ 221 $ - $ (22) $ 199
Total held-to-maturity investment securities $ 221 $ - $ (22) $ 199
December 31, 2021
Available-for-Sale Investment Securities(1)
U.S. Treasury and U.S. GSE securities $ 6,368 $ 146 $ - $ 6,514
Residential mortgage-backed securities - Agency 181 5 - 186
Total available-for-sale investment securities $ 6,549 $ 151 $ - $ 6,700
Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)
$ 204 $ 3 $ (1) $ 206
Total held-to-maturity investment securities $ 204 $ 3 $ (1) $ 206
(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 (“RMBS”) that were classified as held-to-maturity as they were entered into as a part of the Company’s community reinvestment initiatives.
The Company invests in U.S. Treasury obligations and securities issued by U.S. GSEs, which have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. federal government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments. In addition, the Company did not have the intent to sell any available-for-sale securities with an unrealized loss position and did not believe it is more likely than not that it will be required to sell any such security before recovery of its amortized cost basis.
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):
Less than 12 months More than 12 months
Number of Securities in a Loss Position Fair Value Unrealized Losses Fair Value Unrealized Losses
December 31, 2022
Available-for-Sale Investment Securities
U.S. Treasury securities 123 $ 9,060 $ (175) $ 106 $ (3)
Residential mortgage-backed securities - Agency 34 $ 559 $ (22) $ 5 $ (1)
December 31, 2021
Available-for-Sale Investment Securities
U.S. Treasury securities 2 $ 110 NM $ - $ -
Residential mortgage-backed securities - Agency 1 $ 7 NM $ - $ -
During the year ended December 31, 2022, the Company had no sales of available-for-sale securities. During the year ended December 31, 2021, the Company received $5 million of proceeds from the sale of available-for-sale securities. As a result of the sale, the Company recognized an immaterial gain during the year ended December 31, 2021. There were no sales of available-for-sale securities during the year ended December 31, 2020. See Note 13: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the years ended December 31, 2022, 2021 and 2020.
Maturities and weighted-average yields of available-for-sale debt securities and held-to-maturity debt securities are provided in the following tables (dollars in millions):
At December 31, 2022 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 and U.S. GSE securities $ 1,726 $ 9,025 $ 829 $ - $ 11,580
Residential mortgage-backed securities - Agency(1)
1 87 25 474 587
Total available-for-sale investment securities $ 1,727 $ 9,112 $ 854 $ 474 $ 12,167
Held-to-Maturity Investment Securities - Amortized Cost
Residential mortgage-backed securities - Agency(1)
$ - $ - $ - $ 221 $ 221
Total held-to-maturity investment securities $ - $ - $ - $ 221 $ 221
Available-for-Sale Investment Securities - Fair Values
U.S. Treasury and U.S. GSE securities $ 1,706 $ 8,890 $ 827 $ - $ 11,423
Residential mortgage-backed securities - Agency(1)
1 83 24 456 564
Total available-for-sale investment securities $ 1,707 $ 8,973 $ 851 $ 456 $ 11,987
Held-to-Maturity Investment Securities - Fair Values
Residential mortgage-backed securities - Agency(1)
$ - $ - $ - $ 199 $ 199
Total held-to-maturity investment securities $ - $ - $ - $ 199 $ 199
Available-for-Sale Investment Securities - Weighted-Average Yields(2)
U.S. Treasury and U.S. GSE securities 2.48 % 3.39 % 3.94 % - % 3.30 %
Residential mortgage-backed securities - Agency(1)
1.82 % 1.94 % 2.50 % 3.51 % 3.23 %
Total available-for-sale investment securities 2.48 % 3.38 % 3.90 % 3.51 % 3.29 %
Held-to-Maturity Investment Securities - Weighted-Average Yields
Residential mortgage-backed securities(1)
- % - % - % 3.05 % 3.05 %
Total held-to-maturity investment securities - % - % - % 3.05 % 3.05 %
(1)Maturities of RMBS are reflective of the contractual maturities of the investment.
(2)The weighted-average yield for available-for-sale investment securities is calculated based on the amortized cost.
Taxable interest on investment securities was $179 million, $182 million and $252 million for the years ended December 31, 2022, 2021 and 2020, respectively. There was no U.S. federal income tax-exempt interest on investment securities for the years ended December 31, 2022, 2021 and 2020.
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 and 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 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 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 tax credits allocated to the affordable housing projects and the community revitalization projects. The Company does not consolidate these investments as the Company does not have a controlling financial interest in the investee entities. As of December 31, 2022 and 2021, the Company had outstanding investments in these entities of $416 million and $388 million, respectively, and related contingent liabilities for unconditional and legally binding delayed equity contributions of $111 million and $92 million, respectively. Of the above outstanding equity investments, the Company had $375 million and $350 million of investments related to
affordable housing projects as of December 31, 2022 and 2021, respectively, which had $100 million and $80 million of related contingent liabilities for unconditional and legally binding delayed equity contributions, respectively.
The Company holds non-controlling equity positions in several payment services entities. Most of these investments are not subject to equity method accounting because the Company does not have significant influence over the investee. The common or preferred equity securities that the Company holds typically do not have readily determinable fair values. As a result, the majority of these investments are carried at cost minus impairment, if any. As of December 31, 2022 and 2021, the carrying value of these investments, which are recorded within other assets on the Company’s consolidated statements of financial condition, was $39 million and $36 million, respectively.
The Company also holds non-controlling equity positions in payment service entities that have actively traded stock and therefore have readily determinable fair values. As a result, these investments are carried at fair value based on the quoted share prices. As of December 31, 2022 and 2021, the carrying value of these investments, which are recorded within other assets on the Company's consolidated statements of financial condition, were $41 million and $461 million, respectively. During the year ended December 31, 2022, the Company recognized a net loss of $214 million on the consolidated statements of income related to these investments. The Company recognized a net gain of $423 million during the year ended December 31, 2021. The Company recognized no gains or losses during the year ended December 31, 2020.
4. Loan Receivables
The Company has two loan portfolio segments: credit card loans and other loans.
The Company’s classes of receivables within the two portfolio segments are depicted in the following table (dollars in millions):
December 31,
2022 2021
Credit card loans(1)(2)
$ 90,113 $ 74,369
Other loans(3)
Private student loans(4)
10,308 10,113
Personal loans 7,998 6,936
Other loans 3,701 2,266
Total other loans 22,007 19,315
Total loan receivables 112,120 93,684
Allowance for credit losses (7,374) (6,822)
Net loan receivables $ 104,746 $ 86,862
(1)Amounts include carrying values of $13.5 billion and $13.3 billion underlying investors’ interest in trust debt at December 31, 2022 and 2021, respectively, and $12.2 billion and $11.9 billion in seller’s interest at December 31, 2022 and 2021, respectively. See Note 5: Credit Card and Private Student Loan Securitization Activities for additional information.
(2)Unbilled accrued interest receivable on credit card loans, which is presented as part of other assets in the Company’s consolidated statements of financial condition, was $611 million and $423 million at December 31, 2022 and 2021, respectively.
(3)Accrued interest receivable on private student, personal and other loans, which is presented as part of other assets in the Company’s consolidated statements of financial condition, was $468 million, $49 million and $11 million, respectively, at December 31, 2022 and $443 million, $42 million and $6 million, respectively, at December 31, 2021.
(4)Amounts include carrying values of $176 million and $207 million in loans pledged as collateral against the note issued from a private student loan securitization trust at December 31, 2022 and 2021, respectively. See Note 5: Credit Card and Private Student Loan Securitization Activities for additional information.
Credit Quality Indicators
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 and information from credit bureaus, such as FICO or other credit scores, relating to the customer's broader credit performance. The Company actively monitors key credit quality indicators, including FICO scores and delinquency status, for credit card, private student and personal loans. These indicators are important to understand the overall credit performance of the Company's customers and their ability to repay.
FICO scores are generally obtained at the origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that accounts with FICO scores below 660 have larger delinquencies and credit losses than those with higher credit scores.
The following table provides the distribution of the amortized cost basis (excluding accrued interest receivable presented in other assets) by the most recent FICO scores available for the Company's customers for credit card, private student and personal loan receivables (dollars in millions):
Credit Risk Profile by FICO Score
December 31,
2022 2021
660 and Above Less than 660
or No Score 660 and Above Less than 660
or No Score
$ % $ % $ % $ %
Credit card loans(1)
$ 73,827 82 % $ 16,286 18 % $ 62,262 84 % $ 12,107 16 %
Private student loans by origination year(2)(3)
2022 $ 1,172 94 % $ 77 6 %
2021 1,668 95 % 81 5 % $ 1,251 94 % $ 73 6 %
2020 1,365 95 % 65 5 % 1,561 96 % 59 4 %
2019 1,221 95 % 67 5 % 1,439 96 % 61 4 %
2018 945 94 % 62 6 % 1,147 95 % 59 5 %
Prior 3,361 94 % 224 6 % 4,215 94 % 248 6 %
Total private student loans $ 9,732 94 % $ 576 6 % $ 9,613 95 % $ 500 5 %
Personal loans by origination year
2022 $ 4,270 98 % $ 77 2 %
2021 1,958 96 % 91 4 % $ 3,326 99 % $ 37 1 %
2020 790 95 % 40 5 % 1,622 98 % 39 2 %
2019 444 92 % 38 8 % 1,052 94 % 62 6 %
2018 164 88 % 23 12 % 435 91 % 44 9 %
Prior 85 83 % 18 17 % 276 87 % 43 13 %
Total personal loans $ 7,711 96 % $ 287 4 % $ 6,711 97 % $ 225 3 %
(1)Amounts include $645 million and $813 million of revolving line-of-credit arrangements that were converted to term loans as a result of a TDR program as of December 31, 2022 and 2021, respectively.
(2)A majority of private student loan originations occur in the third quarter and disbursements can span multiple calendar years.
(3)FICO score represents the higher credit score of the cosigner or borrower.
Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.
The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent loans in the Company’s loan portfolio is shown below for credit card, private student and personal loan receivables (dollars in millions):
December 31,
2022 2021
30-89 Days
Delinquent 90 or
More Days
Delinquent Total Past
Due 30-89 Days
Delinquent 90 or
More Days
Delinquent Total Past
Due
Credit card loans $ 1,250 $ 1,028 $ 2,278 $ 670 $ 562 $ 1,232
Private student loans by origination year(1)
2022 $ - $ - $ -
2021 6 1 7 $ - $ - $ -
2020 14 3 17 4 1 5
2019 19 5 24 9 2 11
2018 21 6 27 14 4 18
Prior 107 30 137 94 29 123
Total private student loans $ 167 $ 45 $ 212 $ 121 $ 36 $ 157
Personal loans by origination year
2022 $ 12 $ 3 $ 15
2021 15 6 21 $ 5 $ 1 $ 6
2020 8 2 10 7 2 9
2019 6 2 8 11 4 15
2018 3 2 5 6 3 9
Prior 3 1 4 6 3 9
Total personal loans $ 47 $ 16 $ 63 $ 35 $ 13 $ 48
(1)Private student loans may include a deferment period, during which borrowers are not required to make payments while enrolled in school at least half time as determined by the school. During a deferment period, these loans do not advance into delinquency.
Allowance for Credit Losses
The following tables provide changes in the Company’s allowance for credit losses (dollars in millions):
For the Year Ended December 31, 2022
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2021 $ 5,273 $ 843 $ 662 $ 44 $ 6,822
Additions
Provision for credit losses(1)
2,233 99 24 13 2,369
Deductions
Charge-offs (2,417) (126) (159) - (2,702)
Recoveries 794 23 68 - 885
Net charge-offs (1,623) (103) (91) - (1,817)
Balance at December 31, 2022 $ 5,883 $ 839 $ 595 $ 57 $ 7,374
For the Year Ended December 31, 2021
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2020 $ 6,491 $ 840 $ 857 $ 38 $ 8,226
Additions
Provision for credit losses(1)
229 67 (75) 6 227
Deductions
Charge-offs (2,255) (89) (190) - (2,534)
Recoveries 808 25 70 - 903
Net charge-offs (1,447) (64) (120) - (1,631)
Balance at December 31, 2021 $ 5,273 $ 843 $ 662 $ 44 $ 6,822
For the Year Ended December 31, 2020
Credit Card Loans Private Student
Loans Personal Loans Other Loans Total Loans
Balance at December 31, 2019(2)
$ 2,883 $ 148 $ 348 $ 4 $ 3,383
Cumulative effect of ASU No. 2016-13 adoption(3)
1,667 505 265 24 2,461
Balance at January 1, 2020 4,550 653 613 28 5,844
Additions
Provision for credit losses(1)
4,379 251 476 11 5,117
Deductions
Charge-offs (3,101) (85) (289) (1) (3,476)
Recoveries 663 21 57 - 741
Net charge-offs (2,438) (64) (232) (1) (2,735)
Balance at December 31, 2020 $ 6,491 $ 840 $ 857 $ 38 $ 8,226
(1)Excludes a $10 million, $9 million and $17 million reclassification of the liability for expected credit losses on unfunded commitments for the years ended December 31, 2022, 2021 and 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in the Company’s consolidated statements of financial condition.
(2)Prior to the adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.
(3)Represents the adjustment to the allowance for credit losses as a result of the adoption of ASU No. 2016-13 on January 1, 2020.
The allowance for credit losses was approximately $7.4 billion at December 31, 2022, which reflects a $552 million build from the amount of the allowance for credit losses at December 31, 2021. The build in the allowance for credit losses between December 31, 2022 and December 31, 2021, was primarily driven by loan growth.
The allowance estimation process begins with a loss forecast that uses certain macroeconomic variables and multiple macroeconomic scenarios among its inputs. In estimating the allowance at December 31, 2022, the Company used a macroeconomic forecast that resulted in the following weighted average amounts: (i) peak unemployment rate of 4.68%, decreasing to 4.63% by the end of 2023 and (ii) 1.05% annualized growth in the real gross domestic product in 2023.
In estimating expected credit losses, the Company considered the uncertainties associated with borrower behavior and payment trends, as well as higher consumer price inflation experienced during 2022 and the fiscal and monetary policy responses to that inflation. In 2022, the Federal Reserve raised its federal funds rate target range and financial market participants expect additional increases during 2023 in an effort to reduce inflation. In recognition of the risks related to the macroeconomic environment, the estimation of the allowance for credit losses has required significant management judgment.
The forecast period the Company deemed to be reasonable and supportable was 18 months for all periods presented. The 18-month reasonable and supportable forecast period was deemed appropriate given the current economic conditions. For all periods presented, the Company determined that a reversion period of 12 months was appropriate for the same reason. The Company applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented.
The net charge-offs on the Company’s credit card loans for the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, due to continued credit normalization and the seasoning of vintages from the past two years. The net charge-offs on private student loans for the year ended December 31, 2022, increased when compared to the year ended December 31, 2021, primarily driven by credit normalization. The net charge-offs on personal loans for the year ended December 31, 2022, decreased when compared to the year ended December 31, 2021, primarily driven by continued benefit from tighter credit underwriting standards implemented in 2020.
Net charge-offs of principal are recorded against the allowance for credit 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 Years Ended December 31,
2022 2021 2020
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income) $ 303 $ 286 $ 484
Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income) $ 100 $ 75 $ 117
Delinquent and Non-Accruing Loans
The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent and non-accruing loans in the Company’s loan portfolio is shown below for each class of loan receivables (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)
December 31, 2022
Credit card loans $ 1,250 $ 1,028 $ 2,278 $ 1,003 $ 176
Other loans
Private student loans 167 45 212 45 8
Personal loans 47 16 63 16 7
Other loans 13 12 25 1 23
Total other loans 227 73 300 62 38
Total loan receivables $ 1,477 $ 1,101 $ 2,578 $ 1,065 $ 214
December 31, 2021
Credit card loans $ 670 $ 562 $ 1,232 $ 527 $ 194
Other loans
Private student loans 121 36 157 35 8
Personal loans 35 13 48 12 7
Other loans 7 7 14 1 16
Total other loans 163 56 219 48 31
Total loan receivables $ 833 $ 618 $ 1,451 $ 575 $ 225
(1)The Company estimates that the gross interest income that would have been recorded under the original terms of non-accruing credit card loans was $23 million, $28 million and $33 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company does not separately track the amount of gross interest income that would have been recorded under the original terms of loans. Instead, the Company estimated this amount based on customers’ current balances and most recent interest rates.
The payment status of modified loans, whether the TDR designation applies or not, is reflected in the Company’s delinquency reporting.
Troubled Debt Restructurings
The Company has internal loan modification programs that provide relief to credit card, private student and personal loan borrowers who may be experiencing financial hardship. The Company considers a modified loan in which a concession has been granted to the borrower to be a TDR based on the cumulative length of the concession period and credit quality of the borrower. The internal loan modification programs include both temporary and permanent programs, which vary by product. External loan modification programs are also available for credit card and personal loans. The Company evaluates new programs to determine which of them meet the definition of a TDR. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on private student loans and certain grants of private student loan forbearance, generally result in the loans being classified as TDRs. In addition, loans that defaulted from, or successfully completed, a loan modification program or forbearance continue to be classified as TDRs, except as noted in the following paragraph. See the table below that presents the carrying value of loans that entered a TDR program and experienced a default during the period for more information.
For credit card customers, the Company offers both temporary and permanent hardship programs. The temporary hardship programs consist of an interest rate reduction and in some cases a reduced minimum payment, both lasting for a period no longer than 12 months. Charging privileges on these accounts are generally suspended while in the program. However, if the customer meets certain criteria, charging privileges may be reinstated following completion of the program. Credit card accounts of borrowers who have previously participated in a temporary interest rate reduction program and that have both demonstrated financial stability and had their charging privileges reinstated at a market-based interest rate, are excluded from the balance of TDRs.
The permanent modification program involves closing the account, changing the structure of the loan to a fixed payment loan with a maturity no longer than 72 months and reducing the interest rate on the loan. The permanent modification program does not typically provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. The Company also makes permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans typically receive a reduced interest rate, generally reflect fixed payment terms and do not normally include waiver of unpaid principal, interest or fees. These permanent loan modifications remain in the population of TDRs until they are paid off or charged off.
At December 31, 2022 and 2021, there were $6.0 billion and $5.8 billion, respectively, of private student loans in repayment and $81 million and $64 million, respectively, in forbearance. To assist private student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance, payment deferral, a temporary payment reduction, a temporary interest rate reduction or extended terms. A modified loan typically meets the definition of a TDR based on the cumulative length of the concession period and a determination of financial distress based on an evaluation of the borrower’s credit quality using FICO scores.
For personal loan customers, the Company offers various payment programs, including temporary and permanent programs, in certain situations. The temporary programs normally consist of reducing the minimum payment for no longer than 12 months and, in certain circumstances, the interest rate on the loan is reduced. The permanent programs involve extending the loan term and, in certain circumstances, reducing the interest rate on the loan. The total term of the loan, including modification, may not exceed nine years. The Company also allows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are classified as TDRs.
The Company monitors borrower performance after using payment programs or forbearance. The Company believes the programs are useful in assisting customers experiencing financial difficulties and allowing them to make timely payments. In addition to helping customers with their credit needs, these programs are designed to maximize collections and ultimately the Company’s profitability. The Company plans to continue to use payment programs and forbearance to provide relief to customers experiencing temporary financial difficulties and expects to have additional loans classified as TDRs in the future as a result.
To evaluate the primary financial effects that resulted from credit card loans entering into a TDR program during the years ended December 31, 2022, 2021 and 2020, the Company quantified the amount by which interest and fees were reduced during the periods. During the years ended December 31, 2022, 2021 and 2020, the Company forgave approximately $29 million, $33 million and $66 million, respectively, of interest and fees resulting from accounts entering into a credit card loan TDR program. For all loan products, interest income on modified loans is recognized based on the modified contractual terms.
The following table provides information on loans that entered a TDR program during the period (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Number of Accounts Balances Number of Accounts Balances Number of Accounts Balances
Accounts that entered a TDR program during the period
Credit card loans(1)
237,339 $ 1,545 64,359 $ 399 152,055 $ 1,022
Private student loans 6,841 $ 127 477 $ 8 1,916 $ 35
Personal loans 6,303 $ 86 4,066 $ 51 8,805 $ 114
(1)Accounts that entered a credit card TDR program include $322 million, $351 million and $670 million that were converted from revolving line-of-credit arrangements to term loans during the years ended December 31, 2022, 2021 and 2020, respectively.
The number and balance of enrollments in credit card, private student loan and personal loan modification programs designated as TDRs increased during the year ended December 31, 2022, when compared to the same period in 2021. The increase is primarily driven by the impact of accounting and financial reporting exemptions
provided by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which expired on January 1, 2022, during the prior periods.
The following table presents the carrying value of loans that experienced a default during the period that had been modified in a TDR during the 15 months preceding the end of each period (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Number of Accounts Aggregated Outstanding Balances Upon Default Number of Accounts Aggregated Outstanding Balances Upon Default Number of Accounts Aggregated Outstanding Balances Upon Default
TDRs that subsequently defaulted
Credit card loans(1)(2)
28,231 $ 141 17,953 $ 104 48,075 $ 276
Private student loans(3)
1,145 $ 22 290 $ 6 1,119 $ 22
Personal loans(2)
1,140 $ 20 1,589 $ 22 3,145 $ 46
(1)For credit card loans that default from a temporary loan modification program, accounts revert back to the pre-modification terms and charging privileges remain suspended in most cases.
(2)For credit card loans and personal loans, a customer defaults from a loan modification program after either two consecutive missed payments or at charge-off, depending on the program. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.
(3)For student loans, a customer defaults from a loan modification after they are 60 or more days delinquent. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.
Of the account balances that defaulted as shown above for the years ended December 31, 2022, 2021 and 2020, approximately 65%, 66% and 53%, respectively, of the total balances were charged off at the end of the month in which they defaulted from a TDR program. For accounts that have defaulted from a TDR program and have not been subsequently charged off, the balances are included in the allowance for credit loss analysis discussed above under “- Allowance for Credit Losses.”
Geographical Distribution of Loans
The Company originates credit card loans throughout the U.S. The geographic distribution of the Company’s credit card loan receivables was as follows (dollars in millions):
December 31,
2022 2021
$ % $ %
Texas $ 7,996 8.9 % $ 6,543 8.8 %
California 7,888 8.7 6,334 8.5
Florida 6,465 7.2 5,199 7.0
New York 5,895 6.5 4,908 6.6
Illinois 4,528 5.0 3,838 5.2
Pennsylvania 4,484 5.0 3,757 5.1
Ohio 3,759 4.2 3,149 4.2
New Jersey 3,127 3.5 2,599 3.5
Georgia 2,849 3.2 2,328 3.1
Michigan 2,521 2.8 2,081 2.8
Other 40,601 45.0 33,633 45.2
Total credit card loans $ 90,113 100.0 % $ 74,369 100.0 %
The Company originates private student, personal and other loans throughout the U.S. The geographic distribution of private student, personal and other loan receivables was as follows (dollars in millions):
December 31,
2022 2021
$ % $ %
California $ 2,015 9.2 % $ 1,686 8.7 %
New York 1,900 8.6 1,771 9.2
Texas 1,595 7.2 1,305 6.8
Pennsylvania 1,431 6.5 1,341 6.9
Florida 1,248 5.7 1,017 5.3
Illinois 1,247 5.7 1,162 6.0
New Jersey 1,114 5.1 1,009 5.2
Ohio 849 3.9 770 4.0
Michigan 656 3.0 599 3.1
Massachusetts 626 2.8 583 3.0
Other 9,326 42.3 8,072 41.8
Total other loans $ 22,007 100.0 % $ 19,315 100.0 %
5. Credit Card and Private Student Loan Securitization Activities
The Company’s securitizations are accounted for as secured borrowings and the related trusts are treated as consolidated subsidiaries of the Company. For a description of the Company’s principles of consolidation with respect to VIEs, see Note 1: Background and Basis of Presentation.
Credit Card Securitization Activities
The Company accesses the term asset securitization market through DCMT and DCENT. Credit card loan receivables are transferred into DCMT and beneficial interests in DCMT are transferred into DCENT. DCENT issues debt securities to investors that are reported primarily in long-term borrowings.
The DCENT debt structure consists of four classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. To issue senior, higher-rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower-rated or more highly subordinated classes of notes. Wholly-owned subsidiaries of Discover Bank hold the subordinated classes of notes. The Company is exposed to credit risk associated with trust receivables as of the balance sheet date through the retention of these subordinated interests. The estimate of expected credit losses on trust receivables is included in the allowance for credit losses estimate.
The Company’s retained interests in the trust’s assets, consisting of investments in DCENT notes held by subsidiaries of Discover Bank, constitute intercompany positions that are eliminated in the preparation of the Company’s consolidated statements of financial condition.
Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the trust’s creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to the Company’s third-party creditors. The trusts have ownership of cash balances, the amounts of which are reported in restricted cash within the Company’s consolidated statements of financial condition. Except for the seller’s interest in trust receivables, the Company’s interests in trust assets are generally subordinate to the interests of third-party investors in trust debt and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to those investors. Apart from the restricted assets related to securitization activities, the investors and the securitization trusts have no recourse to the Company’s other assets or the Company’s general credit for a shortage in cash flows.
The carrying values of these restricted assets, which are presented on the Company’s consolidated statements of financial condition as relating to securitization activities, are shown in the following table (dollars in millions):
December 31,
2022 2021
Restricted cash $ 33 $ 2,574
Investors’ interests held by third-party investors 10,200 9,425
Investors’ interests held by wholly-owned subsidiaries of Discover Bank 3,341 3,899
Seller’s interest 12,220 11,918
Loan receivables(1)
25,761 25,242
Allowance for credit losses allocated to securitized loan receivables(1)
(1,152) (1,371)
Net loan receivables 24,609 23,871
Other assets 2 3
Carrying value of assets of consolidated variable interest entities $ 24,644 $ 26,448
(1)The Company maintains its allowance for credit losses at an amount equal to lifetime expected credit losses associated with all loan receivables, which includes all loan receivables in the trusts. Therefore, the credit risk associated with the transferred receivables is fully reflected on the Company’s statements of financial condition in accordance with GAAP.
The debt securities issued by the consolidated trusts are subject to credit, payment and interest rate risks on the transferred credit card loan receivables. To protect investors in the securities, there are certain features or triggering events that will cause an early amortization of the debt securities, including triggers related to the impact of the performance of the trust receivables on the availability and adequacy of cash flows to meet contractual requirements. As of December 31, 2022, no economic or other early amortization events have occurred.
The Company continues to own and service the accounts that generate the loan receivables held by the trusts. Discover Bank receives servicing fees from the trusts based on a percentage of the monthly investor principal balance outstanding. Although the fee income to Discover Bank offsets the fee expense to the trusts and thus is eliminated in consolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead to a termination of the servicing rights and the loss of future servicing income, net of related expenses.
Private Student Loan Securitization Activities
The Company’s private student loan trust receivables reported in loan receivables and the related debt issued by the trust reported in long-term borrowings were immaterial as of December 31, 2022 and 2021. The amounts are included, together with amounts related to the Company’s credit card securitizations, in the supplemental information about assets and liabilities of consolidated variable interest entities, which is presented with the Company’s consolidated statements of financial condition.
6. Premises and Equipment
A summary of premises and equipment, net is as follows (dollars in millions):
December 31,
2022 2021
Land $ 37 $ 38
Buildings and improvements 587 676
Furniture, fixtures and equipment 1,111 1,126
Software 1,125 992
Premises and equipment 2,860 2,832
Less: accumulated depreciation (1,339) (1,415)
Less: accumulated amortization of software (518) (434)
Premises and equipment, net $ 1,003 $ 983
Depreciation expense was $80 million, $86 million and $98 million for the years ended December 31, 2022, 2021 and 2020, respectively. Amortization expense on capitalized software was $114 million, $103 million and $100 million for the years ended December 31, 2022, 2021 and 2020, respectively.
7. Goodwill
As of December 31, 2022 and 2021, the Company had goodwill of $255 million related to PULSE, which is part of the Payment Services segment. The Company conducted its annual goodwill impairment test as of October 1, 2022 and 2021 and no impairments were identified.
8. Deposits
The Company obtains deposits from consumers directly or through affinity relationships (“direct-to-consumer deposits”). Additionally, the Company obtains deposits through third-party securities brokerage firms that offer the Company’s deposits to their customers (“brokered deposits”). Direct-to-consumer deposit products include savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts. Brokered deposit products include certificates of deposit and sweep accounts.
Customer deposits held with Discover Bank are currently insured for up to $250,000 per account holder through the Federal Deposit Insurance Corporation (“FDIC”). At December 31, 2022 and 2021, the Company had approximately $8.9 billion and $8.2 billion of uninsured deposits, respectively. Uninsured deposits are the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit or similar state deposit insurance regime, and amounts in any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regime. The amounts of uninsured deposits above were estimated based on the same methodologies and assumptions used for Discover Bank’s regulatory reporting requirements.
The following table summarizes certificates of deposit in uninsured accounts and accounts that are in excess of the FDIC insurance limit by time remaining until maturity (dollars in millions):
At December 31, 2022
Three months or less $ 64
Over three months through six months 62
Over six months through twelve months 255
Over twelve months 188
Total $ 569
The following table summarizes certificates of deposit maturing over each of the next five years and thereafter (dollars in millions):
At December 31, 2022
2023 $ 18,024
2024 6,413
2025 2,672
2026 2,015
2027 3,318
Thereafter 628
Total $ 33,070
9. Long-Term Borrowings
Long-term borrowings consist of borrowings having original maturities of one year or more. The following table provides a summary of the Company’s long-term borrowings and weighted-average interest rates on outstanding balances (dollars in millions):
December 31,
2022 2021
Maturity Interest
Rate Weighted-Average Interest Rate Outstanding Amount Outstanding Amount
Securitized Debt
Fixed-rate asset-backed securities(1)
2023-2026 0.58% - 5.03%
2.78% $ 8,401 $ 5,588
Floating-rate asset-backed securities(2)
2023-2024 4.65% - 4.92%
4.80% 1,774 3,347
Total Discover Card Master Trust I and Discover Card Execution Note Trust 10,175 8,935
Floating-rate asset-backed security(3)(4)
2031 8.50%
8.50% 84 104
Total private student loan securitization trust 84 104
Total long-term borrowings - owed to securitization investors 10,259 9,039
Discover Financial Services (Parent Company)
Fixed-rate senior notes 2024-2032 3.75% - 6.70%
4.68% 3,333 3,382
Fixed-rate retail notes 2023-2031 2.85% - 4.40%
3.77% 154 166
Discover Bank
Fixed-rate senior bank notes(1)
2023-2030 2.45% - 4.65%
3.63% 5,348 5,385
Fixed-rate subordinated bank notes(1)
2028 4.68%
4.68% 489 505
Floating-rate Federal Home Loan Bank advance(5)
2023 4.53% 4.53% 525 -
Total long-term borrowings $ 20,108 $ 18,477
(1)The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in the applicable benchmark interest rates. The use of these interest rate swaps impacts the carrying value of the debt. See Note 21: Derivatives and Hedging Activities.
(2)DCENT floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 33 to 60 basis points as of December 31, 2022.
(3)The private student loan securitization trust floating-rate asset-backed security includes an issuance with the following interest rate term: Prime rate + 100 basis points as of December 31, 2022.
(4)Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying private student loans. The date shown represents the final maturity date.
(5)The floating-rate Federal Home Loan Bank (“FHLB”) advance includes an issuance with the following interest rate term: SOFR + 23 basis points as of December 31, 2022.
The following table summarizes long-term borrowings maturing over each of the next five years and thereafter (dollars in millions):
At December 31, 2022
2023 $ 3,815
2024 3,729
2025 6,158
2026 2,659
2027 1,000
Thereafter 2,747
Total $ 20,108
As a member of the FHLB of Chicago, the Company has access to both short- and long-term advance structures with maturities ranging from overnight to 30 years. As of December 31, 2022, the Company had total committed borrowing capacity of $2.2 billion based on the amount and type of assets pledged, of which the outstanding balance was comprised solely of a $525 million long-term advance. As of December 31, 2021, the Company had total committed borrowing capacity of $1.4 billion, of which the outstanding balance was comprised solely of a $1.3 billion short-term advance. These advances are presented as short- or long-term borrowings on the consolidated statements of financial condition as appropriate.
Additionally, the Company has access to committed borrowing capacity through private securitizations to support the funding of its credit card loan receivables. As of December 31, 2022, the total commitment of secured credit facilities through private providers was $3.5 billion, none of which was drawn. As of December 31, 2021, the total commitment of secured credit facilities through private providers was $4.0 billion, $500 million of which was outstanding as a short-term draw. Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers. The secured credit facilities have various expirations in 2024. Borrowings outstanding under each facility bear interest at a margin above LIBOR, Term SOFR or the asset-backed commercial paper costs of each provider. The terms of each agreement provide for a commitment fee to be paid on the unused capacity and include various affirmative and negative covenants, including performance metrics and legal requirements similar to those required to issue any term securitization transaction.
10. Stock-Based Compensation Plans
The Company has two stock-based compensation plans: the Discover Financial Services Omnibus Incentive Plan (“Omnibus Plan”) and the Discover Financial Services Directors’ Compensation Plan (“Directors’ Compensation Plan”).
Omnibus Plan
The Omnibus Plan, which is stockholder-approved, provides for the award of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance stock units (“PSUs”) and other stock-based and/or cash awards (collectively, “awards”). Currently, the Company does not have any stock options, stock appreciation rights or restricted stock outstanding. The total number of shares that may be granted is 45 million shares, subject to adjustments for certain transactions as described in the Omnibus Plan document. Shares granted under the Omnibus Plan may be the following: (i) authorized but unissued shares and (ii) treasury shares that the Company acquires in the open market, in private transactions or otherwise.
Directors’ Compensation Plan
The Directors’ Compensation Plan, which is stockholder-approved, permits the grant of RSUs to non-employee directors. Under the Directors’ Compensation Plan, the Company may issue awards of up to a total of 1 million shares of common stock to non-employee directors. Shares of stock that are issuable pursuant to the awards granted under the Directors’ Compensation Plan may be one of the following: authorized but unissued shares, treasury shares or shares that the Company acquires in the open market. Annual awards for eligible directors are calculated by dividing $170,000 by the fair market value of a share of stock on the date of grant and are subject to a restriction period whereby 100% of such units shall vest in full on the earlier of the one year anniversary of the date of grant or immediately prior to the first annual meeting of shareholders following the date of grant. RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Company common shareholders.
Stock-Based Compensation
The following table details the compensation cost, net of forfeitures (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
RSUs $ 58 $ 46 $ 49
PSUs(1)
31 57 (8)
Total stock-based compensation expense $ 89 $ 103 $ 41
Income tax benefit $ 16 $ 15 $ 9
(1)Total PSU expense for the year ended December 31, 2021, includes an incremental $1 million, representing a modification to the 2019 PSU award. Total PSU expense for the year ended December 31, 2020, includes an incremental $2 million, representing a modification to the 2018 PSU award. The nature of the modifications was to adjust the payout to compensate for the 2020 CECL adoption impact on earnings per share (“EPS”).
RSUs
The following table sets forth the activity related to vested and unvested RSUs:
Number of Units Weighted-Average Remaining Contractual Term (in years) Aggregate
Intrinsic Value
(in millions)
RSUs at December 31, 2021 1,816,244 $ 210
Granted 739,388
Conversions to common stock (509,254)
Forfeited (108,095)
RSUs at December 31, 2022 1,938,283 0.91 $ 190
Vested and convertible RSUs at December 31, 2022 752,223 0.00 $ 74
The following table sets forth the activity related to unvested RSUs:
Number of Units Weighted-Average Grant-Date Fair Value
Unvested RSUs at December 31, 20211)
890,484 $ 90.40
Granted 739,388 $ 116.50
Vested (462,094) $ 88.18
Forfeited (108,095) $ 111.11
Unvested RSUs at December 31, 2022(1)
1,059,683 $ 107.47
(1)Unvested RSUs represent awards where recipients have yet to satisfy either explicit vesting terms or retirement-eligibility requirements.
Compensation cost associated with RSUs is determined based on the number of units granted and the fair value on the date of grant. The fair value is amortized on a straight-line basis, net of estimated forfeitures, over the requisite service period for each separately vesting tranche of the award. The requisite service period is generally the vesting period.
The following table summarizes the total intrinsic value of the RSUs converted to common stock and the total grant-date fair value of RSUs vested (dollars in millions, except weighted-average grant-date fair value amounts):
For the Years Ended December 31,
2022 2021 2020
Intrinsic value of RSUs converted to common stock $ 59 $ 62 $ 55
Grant-date fair value of RSUs vested $ 41 $ 47 $ 51
Weighted-average grant-date fair value of RSUs granted $ 116.50 $ 101.47 $ 76.58
As of December 31, 2022, there was $47 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 0.92 years.
RSUs provide for accelerated vesting if there is a change in control or upon certain terminations (as defined in the Omnibus Plan or the award certificate). RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Company common shareholders.
PSUs
The following table sets forth the activity related to vested and unvested PSUs:
Number of Units Weighted-Average Grant-Date Fair Value Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in millions)
PSUs at December 31, 2021(1)
764,135 $ 84.58 $ 88
Granted 247,458 $ 124.01
Conversions to common stock (242,682) $ 71.62
Forfeited (52,439) $ 99.33
PSUs at December 31, 2022(1)(2)(3)(4)
716,472 $ 99.21 1.05 $ 70
(1) All PSUs outstanding at December 31, 2022 and December 31, 2021, are unvested PSUs.
(2) Includes 271,588 PSUs granted in 2020 that are earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ended December 31, 2022, and are subject to the requisite service period, which ended February 1, 2023.
(3) Includes 244,498 PSUs granted in 2021 that are earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ends December 31, 2023, and are subject to the requisite service period, which ends February 1, 2024.
(4) Includes 200,386 PSUs granted in 2022 that may be earned based on the Company’s cumulative EPS as measured over the three-year performance period, which ends December 31, 2024, and are subject to the requisite service period, which ends February 1, 2025.
Compensation cost associated with PSUs is determined based on the number of instruments granted, the fair value on the date of grant and the performance factor. The fair value is amortized on a straight-line basis, net of estimated forfeitures, over the requisite service period. Each PSU outstanding at December 31, 2022, is a restricted stock instrument that is subject to additional conditions and constitutes a contingent and unsecured promise by the Company to pay up to 1.5 shares per unit of the Company’s common stock on the conversion date for the PSU, contingent on the number of PSUs to be issued. PSUs have a performance period of three years and a vesting period of three years. The requisite service period of an award having both performance and service conditions is the longest of the explicit, implicit and derived service periods.
The following table summarizes the total intrinsic value of the PSUs converted to common stock and the total grant-date fair value of PSUs vested (dollars in millions, except weighted-average grant-date fair value amounts):
For the Years Ended December 31,
2022 2021 2020
Intrinsic value of PSUs converted to common stock $ 29 $ 15 $ 21
Grant-date fair value of PSUs vested $ 17 $ 18 $ 17
Weighted-average grant-date fair value of PSUs granted $ 124.01 $ 94.21 $ 85.25
As of December 31, 2022, there was $20 million of total unrecognized compensation cost related to non-vested PSUs. The cost is expected to be recognized over a weighted-average period of 1.05 years.
PSUs provide for accelerated vesting if there is a change in control or upon certain terminations (as defined in the Omnibus Plan or the award certificate). PSUs include the right to receive dividend equivalents, which will accumulate and pay out in cash if and when the underlying shares are issued.
11. Employee Benefit Plans
The Company sponsors the Discover Financial Services Pension Plan (the “Discover Pension Plan”), which is a non-contributory defined benefit plan that is qualified under Section 401(a) of the Internal Revenue Code, for eligible employees in the U.S. Effective December 31, 2008, the Discover Pension Plan was amended to discontinue the accrual of future benefits. The Company also sponsors the Discover Financial Services 401(k) Plan (the “Discover 401(k) Plan”), which is a defined contribution plan that is qualified under Section 401(a) of the Internal Revenue Code, for its eligible U.S. employees.
Discover Pension Plan
The Discover Pension Plan generally provides retirement benefits that are based on each participant’s years of credited service prior to 2009 and on compensation specified in the Discover Pension Plan. The Company’s policy is to fund at least the amounts sufficient to meet minimum funding requirements under the Employee Retirement Income Security Act of 1974, as amended. Net periodic benefit cost (income) is recorded in employee compensation and benefits within the consolidated statements of income. For this plan, the net periodic benefit cost was immaterial for all periods presented.
The Company recognizes the funded status of the defined benefit pension plan, measured as the difference between the fair value of plan assets and the projected benefit obligation, in accrued expenses and other liabilities on the consolidated statements of financial condition. As of December 31, 2022 and 2021, the unfunded status related to the defined benefit pension plan was $101 million and $106 million, respectively. Pending review by internal governance committees, the Company expects to contribute approximately $115 million to the pension plan during 2023. Expected benefit payments from the Discover Pension Plan for each of the next five years range from $25 million and $30 million annually.
Discover 401(k) Plan
Under the Discover 401(k) Plan, eligible U.S. employees receive 401(k) matching contributions. Eligible employees also receive fixed employer contributions. The pretax expense associated with the Company contributions for the years ended December 31, 2022, 2021 and 2020 was $104 million, $97 million and $99 million, respectively.
12. Common and Preferred Stock
Common Stock Repurchase Program
In July 2021, the Board of Directors approved a share repurchase program authorizing up to $2.4 billion of share repurchases. The program expired on March 31, 2022. On April 27, 2022, the Company’s Board of Directors approved a new share repurchase program authorizing the repurchase of up to $4.2 billion of its outstanding shares of common stock. This program expires on June 30, 2023. During the three months ended December 31, 2022, the Company repurchased approximately 5.9 million shares for approximately $600 million. During the year ended December 31, 2022, the Company repurchased approximately 21.5 million shares for approximately $2.3 billion.
Preferred Stock
The table below presents a summary of the Company's non-cumulative perpetual preferred stock that is outstanding at December 31, 2022 (dollars in millions, except per depositary share amounts):
Series Description Initial Issuance Date Liquidation Preference and Redemption Price per Depositary Share(1)
Per Annum Dividend Rate in effect at December 31, 2022
Total Depositary Shares Authorized, Issued and Outstanding Carrying Value
December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021
C(2)(3)(4)
Fixed-to-Floating Rate 10/31/2017 $ 1,000 5.500 % 570,000 570,000 $ 563 $ 563
D(2)(5)(6)
Fixed-Rate Reset 6/22/2020 $ 1,000 6.125 % 500,000 500,000 493 493
Total Preferred Stock 1,070,000 1,070,000 $ 1,056 $ 1,056
(1)Redeemable at the redemption price plus declared and unpaid dividends.
(2)Issued as depositary shares, each representing 1/100th interest in a share of the corresponding series of preferred stock. Each preferred share has a par value of $0.01.
(3)Redeemable at the Company’s option, subject to regulatory approval, either (i) in whole or in part on any dividend payment date on or after October 30, 2027, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series C preferred stock).
(4)Any dividends declared are payable semi-annually in arrears at a rate of 5.50% per annum until October 30, 2027. Thereafter, dividends declared will be payable quarterly in arrears at a floating rate equal to 3-month LIBOR plus a spread of 3.076% per annum.
(5)Redeemable at the Company’s option, subject to regulatory approval, either (i) in whole or in part during the three-month period prior to, and including, each reset date (as defined in the certificate of designations for the Series D preferred stock) or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series D Preferred Stock).
(6)Any dividends declared are payable semi-annually in arrears at a rate of 6.125% per annum until September 23, 2025, after which the dividend rate will reset every 5 years to a fixed annual rate equal to the 5-year Treasury plus a spread of 5.783%.
13. Accumulated Other Comprehensive Income
Changes in each component of AOCI were as follows (dollars in millions):
Unrealized Gains (Losses) on Available-for-Sale Investment Securities, Net of Tax Losses on Cash Flow Hedges, Net of Tax Losses on Pension Plan, Net of Tax AOCI
For the Year Ended December 31, 2022
Balance at December 31, 2021 $ 114 $ (9) $ (199) $ (94)
Net change
(250) (5) 10 (245)
Balance at December 31, 2022 $ (136) $ (14) $ (189) $ (339)
For the Year Ended December 31, 2021
Balance at December 31, 2020 $ 284 $ (12) $ (227) $ 45
Net change
(170) 3 28 (139)
Balance at December 31, 2021 $ 114 $ (9) $ (199) $ (94)
For the Year Ended December 31, 2020
Balance at December 31, 2019 $ 112 $ (17) $ (214) $ (119)
Net change
172 5 (13) 164
Balance at December 31, 2020 $ 284 $ (12) $ (227) $ 45
The following table presents each component of OCI before reclassifications and amounts reclassified from AOCI for each component of OCI before- and after-tax (dollars in millions):
Before Tax Tax Benefit (Expense) Net of Tax
For the Year Ended December 31, 2022
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period $ (331) $ 81 $ (250)
Net change $ (331) $ 81 $ (250)
Cash Flow Hedges
Net unrealized losses arising during the period $ (13) $ 3 $ (10)
Amounts reclassified from AOCI 4 1 5
Net change $ (9) $ 4 $ (5)
Pension Plan
Unrealized gains arising during the period $ 13 $ (3) $ 10
Net change $ 13 $ (3) $ 10
For the Year Ended December 31, 2021
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period $ (226) $ 56 $ (170)
Net change $ (226) $ 56 $ (170)
Cash Flow Hedges
Net unrealized losses arising during the period $ (1) $ 1 $ -
Amounts reclassified from AOCI 3 - 3
Net change $ 2 $ 1 $ 3
Pension Plan
Unrealized gains arising during the period $ 37 $ (9) $ 28
Net change $ 37 $ (9) $ 28
For the Year Ended December 31, 2020
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period $ 227 $ (55) $ 172
Net change $ 227 $ (55) $ 172
Cash Flow Hedges
Net unrealized losses arising during the period $ (7) $ 3 $ (4)
Amounts reclassified from AOCI 12 (3) 9
Net change $ 5 $ - $ 5
Pension Plan
Unrealized losses arising during the period $ (17) $ 4 $ (13)
Net change $ (17) $ 4 $ (13)
14. Other Expense
Total other expense includes the following components (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Postage $ 97 $ 91 $ 93
Fraud losses and other charges 149 92 96
Supplies 35 46 51
Incentive expense 32 44 57
Impairment charges - 95 59
Other expense 247 252 240
Total other expense $ 560 $ 620 $ 596
15. Income Taxes
Income tax expense consisted of the following (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Current
U.S. federal $ 1,465 $ 1,084 $ 807
U.S. state and local 312 204 159
Total 1,777 1,288 966
Deferred
U.S. federal (376) 288 (585)
U.S. state and local (51) 39 (87)
Total (427) 327 (672)
Income tax expense $ 1,350 $ 1,615 $ 294
The following table reconciles the Company’s effective tax rate to the U.S. federal statutory income tax rate:
For the Years Ended December 31,
2022 2021 2020
U.S. federal statutory income tax rate 21.0 % 21.0 % 21.0 %
U.S. state, local and other income taxes, net of U.S. federal income tax benefits 3.4 3.4 3.4
Tax credits (1.3) (1.2) (4.4)
Other 0.4 (0.3) 0.5
Effective income tax rate 23.5 % 22.9 % 20.5 %
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. The Company evaluates the likelihood of realizing its deferred tax assets by estimating sources of future taxable income and the impact of tax planning strategies.
Significant components of the Company’s net deferred income taxes, which are included in other assets in the Company’s consolidated statements of financial condition, were as follows (dollars in millions):
December 31,
2022 2021
Deferred tax assets
Allowance for credit losses $ 1,791 $ 1,660
Customer fees and rewards 166 45
Unrealized losses 53 -
Other 140 158
Total deferred tax assets before valuation allowance 2,150 1,863
Valuation allowance (1) (1)
Total deferred tax assets, net of valuation allowance 2,149 1,862
Deferred tax liabilities
Depreciation and software amortization (71) (167)
Unrealized gains - (125)
Deferred loan origination costs (48) (35)
Other (26) (41)
Total deferred tax liabilities (145) (368)
Net deferred tax assets $ 2,004 $ 1,494
A reconciliation of beginning and ending unrecognized tax benefits is as follows (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Balance at beginning of period $ 39 $ 56 $ 61
Additions
Current year tax positions 4 13 5
Prior year tax positions 1 8 3
Reductions
Prior year tax positions (20) (14) -
Settlements with taxing authorities - (14) (2)
Expired statute of limitations (5) (10) (11)
Balance at end of period(1)
$ 19 $ 39 $ 56
(1)For the years ended December 31, 2022, 2021 and 2020, amounts included $18 million, $37 million and $51 million, respectively, of unrecognized tax benefits, which, if recognized, would favorably affect the effective tax rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties related to unrecognized tax benefits were $2 million and $3 million for the years ended December 31, 2022 and 2021, respectively.
The Company is subject to examination by the Internal Revenue Service (“IRS”) and tax authorities in various state, local and foreign tax jurisdictions. The Company’s federal income tax filings are open to examinations for the tax year ended December 31, 2019 and forward. The Company regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions. At this time, the potential change in unrecognized tax benefits is not expected to be significant over the next 12 months. The Company believes that its reserves are sufficient to cover any tax, penalties and interest that would result from such examinations.
The Company has an immaterial amount of state net operating loss carryforwards that are subject to a partial valuation allowance as of December 31, 2022 and 2021.
16. Earnings Per Share
The following table presents the calculation of basic and diluted EPS (dollars and shares in millions, except per share amounts):
For the Years Ended December 31,
2022 2021 2020
Numerator
Net income $ 4,392 $ 5,449 $ 1,141
Preferred stock dividends (62) (69) (31)
Net income available to common stockholders 4,330 5,380 1,110
Income allocated to participating securities (26) (29) (6)
Net income allocated to common stockholders $ 4,304 $ 5,351 $ 1,104
Denominator
Weighted-average shares of common stock outstanding 277 300 307
Effect of dilutive common stock equivalents 1 - -
Weighted-average shares of common stock outstanding and common stock equivalents 278 300 307
Basic earnings per common share $ 15.52 $ 17.85 $ 3.60
Diluted earnings per common share $ 15.50 $ 17.83 $ 3.60
Anti-dilutive securities were not material and had no impact on the computation of diluted EPS for the years ended December 31, 2022, 2021 and 2020.
17. Capital Adequacy
DFS is subject to the capital adequacy guidelines of the Federal Reserve. Discover Bank, the Company’s banking subsidiary, is subject to various regulatory capital requirements as administered by the FDIC. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit the Company’s business activities and have a direct material effect on the financial condition and operating results of DFS and Discover Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, DFS and Discover Bank must meet specific risk-based capital requirements and leverage ratios that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidelines. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
DFS and Discover Bank are subject to regulatory and capital rules issued by the Federal Reserve and FDIC, respectively, under the Basel Committee’s December 2010 framework (“Basel III rules”). Under the Basel III rules, DFS and Discover Bank are classified as “standardized approach” entities. Standardized approach entities are defined as U.S. banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposure less than $10 billion.
In March 2020, federal bank regulatory agencies announced an interim and now final rule that allows banks that have implemented the CECL accounting model to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, the Company has elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, which ended December 31, 2021, the estimated impact of CECL on regulatory capital will be phased in over three years beginning in 2022. Accordingly, the Company’s Common Equity Tier 1 (“CET1”) capital ratios in 2021 and 2020 are higher than they otherwise would have been. The Company's CET1 capital ratios will continue to be favorably impacted by this election over the phase-in period.
As of December 31, 2022 and 2021, DFS and Discover Bank met all Basel III minimum capital ratio requirements to which they were subject. DFS and Discover Bank also met the requirements to be considered “well-capitalized” under Regulation Y and prompt corrective action rules, respectively. There have been no conditions or events that management believes have changed DFS’ or Discover Bank’s category. To be categorized as “well-capitalized,” DFS and Discover Bank must maintain minimum capital ratios outlined in the table below.
The following table shows the actual capital amounts and ratios of DFS and Discover Bank and comparisons of each to the regulatory minimum and “well-capitalized” requirements (dollars in millions):
Actual Minimum Capital
Requirements Capital Requirements
To Be Classified as
Well-Capitalized
Amount Ratio(1)
Amount Ratio Amount(2)
Ratio(2)
December 31, 2022
Total capital (to risk-weighted assets)
Discover Financial Services $ 18,250 16.0 % $ 9,133 ≥8.0%
$ 11,416 ≥10.0%
Discover Bank $ 16,579 14.7 % $ 9,015 ≥8.0%
$ 11,268 ≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services $ 16,285 14.3 % $ 6,850 ≥6.0%
$ 6,850 ≥6.0%
Discover Bank $ 13,683 12.1 % $ 6,761 ≥6.0%
$ 9,015 ≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services $ 16,285 12.7 % $ 5,147 ≥4.0%
N/A N/A
Discover Bank $ 13,683 10.8 % $ 5,086 ≥4.0%
$ 6,357 ≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services $ 15,229 13.3 % $ 5,137 ≥4.5%
N/A N/A
Discover Bank $ 13,683 12.1 % $ 5,071 ≥4.5%
$ 7,324 ≥6.5%
December 31, 2021
Total capital (to risk-weighted assets)
Discover Financial Services $ 17,150 17.6 % $ 7,775 ≥8.0%
$ 9,719 ≥10.0%
Discover Bank $ 15,957 16.9 % $ 7,573 ≥8.0%
$ 9,466 ≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services $ 15,395 15.8 % $ 5,831 ≥6.0%
$ 5,831 ≥6.0%
Discover Bank $ 13,932 14.7 % $ 5,680 ≥6.0%
$ 7,573 ≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services $ 15,395 13.9 % $ 4,432 ≥4.0%
N/A N/A
Discover Bank $ 13,932 12.8 % $ 4,365 ≥4.0%
$ 5,456 ≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services $ 14,339 14.8 % $ 4,373 ≥4.5%
N/A N/A
Discover Bank $ 13,932 14.7 % $ 4,260 ≥4.5%
$ 6,153 ≥6.5%
(1)Capital ratios are calculated based on the Basel III standardized approach rules, subject to applicable transition provisions, including CECL transition provisions.
(2)The Basel III rules do not establish well-capitalized thresholds for these measures for bank holding companies. Existing well-capitalized thresholds established in the Federal Reserve’s Regulation Y have been included where available.
The amount of dividends that a bank may pay in any year is subject to certain regulatory restrictions. Under the current banking regulations, a bank may not pay dividends if such a payment would leave the bank inadequately capitalized. Discover Bank paid dividends of $4.0 billion, $3.3 billion and $555 million in the years ended December 31, 2022, 2021 and 2020, respectively, to DFS.
18. Commitments, Contingencies and Guarantees
In the normal course of business, the Company enters into a number of off-balance sheet commitments, transactions and obligations under guarantee arrangements that expose the Company to varying degrees of risk. The Company’s commitments, contingencies and guarantee relationships are described below.
Commitments
Unused Credit Arrangements
At December 31, 2022, the Company had unused credit arrangements for loans of approximately $224.7 billion. Such arrangements arise primarily from agreements with customers for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions in the related agreements. These arrangements, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification. As the Company’s credit card loans are unconditionally cancellable, no liability for expected credit losses is required for unused lines of credit. For all other loans, the Company records a liability for expected credit losses for unfunded commitments, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition.
Contingencies
See Note 19: Litigation and Regulatory Matters for a description of potential liability arising from pending litigation or regulatory proceedings involving the Company.
Guarantees
The Company has obligations under certain guarantee arrangements, including contracts, indemnification agreements and representations and warranties, which contingently require the Company to make payments to the guaranteed party based on changes in an underlying asset, liability or equity security of a guaranteed party, rate or index. Also included as guarantees are contracts that contingently require the Company to make payments to a guaranteed party based on another entity’s failure to perform under an agreement. The Company’s use of guarantees is disclosed below by type of guarantee.
Securitizations Representations and Warranties
As part of the Company’s financing activities, the Company provides representations and warranties that certain assets pledged as collateral in secured borrowing arrangements conform to specified guidelines. Due diligence is performed by the Company, which is intended to ensure that asset guideline qualifications are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company may be required to replace, repurchase or sell such assets. In its credit card securitization activities, the Company would replace nonconforming receivables through the allocation of excess seller’s interest or from additional transfers from the unrestricted pool of receivables. If the Company could not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors’ interests would be triggered. In its student loan securitizations, the Company would generally repurchase the loans from the trust at the outstanding principal amount plus interest.
The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of third-party investor interests in credit card asset-backed securities and the principal amount of any private student loan secured borrowings, plus any unpaid interest for the corresponding secured borrowings. The Company has recorded substantially all of the maximum potential amount of future payments in long-term borrowings on the Company’s consolidated statements of financial condition. The Company has not recorded any incremental contingent liability associated with its secured borrowing representations and warranties. Management believes that the probability of having to replace, repurchase or sell assets pledged as collateral under secured borrowing arrangements, including an early amortization event, is low.
Counterparty Settlement Guarantees
Diners Club and DFS Services LLC (on behalf of PULSE) have various counterparty exposures, which are listed below:
•Merchant Guarantee. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants.
•ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.
•Global Network Alliance Guarantee. Discover Network, Diners Club and PULSE have entered into contractual relationships with certain international payment networks in which DFS Services LLC retains the counterparty exposure if a network fails to fulfill its settlement obligation.
The maximum potential amount of future payments related to such contingent obligations is dependent upon the transaction volume processed between the time a potential counterparty defaults on its settlement and the time at which the Company disables the settlement of any further transactions for the defaulting party. The Company has some contractual remedies to offset these counterparty settlement exposures (such as letters of credit or pledged deposits), however, there is no limitation on the maximum amount the Company may be liable to pay.
The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether particular counterparties will fail to meet their settlement obligations. In the event all licensees and/or issuers were to become unable to settle their transactions, the Company estimates its maximum potential counterparty exposures to these settlement guarantees would be approximately $90 million as of December 31, 2022.
The Company believes that the estimated amounts of maximum potential future payments are not representative of the Company’s actual potential loss exposure given Diners Club’s and PULSE’s insignificant historical losses from these counterparty exposures. As of December 31, 2022, the Company had not recorded any contingent liability in the consolidated financial statements for these counterparty exposures and management believes that the probability of any payments under these arrangements is low.
Discover Network Merchant Chargeback Guarantees
The Company operates the Discover Network, issues payment cards and permits third parties to issue payment cards. The Company is contingently liable for certain transactions processed on the Discover Network in the event of a dispute between the payment card customer and a merchant. The contingent liability arises if the disputed transaction involves a merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in the customer’s favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn credits its customer’s account. The Discover Network will then charge back the disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by the applicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect the amount subject to dispute from the merchant or merchant acquirer (e.g., in the event of merchant default or dissolution or after expiration of the time period for chargebacks in the applicable agreement), the Discover Network will bear the loss for the amount credited or refunded to the customer. In most instances, a loss by the Discover Network is unlikely to arise in connection with payments on card transactions because most products or services are delivered when purchased and credits are issued by merchants on returned items in a timely fashion, thus minimizing the likelihood of cardholder disputes with respect to amounts paid by the Discover Network. However, where the product or service is not scheduled to be provided to the customer until a later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases. Losses related to merchant chargebacks were not material for the years ended December 31, 2022, 2021 and 2020.
The maximum potential amount of obligations of the Discover Network arising from such contingent obligations is estimated to be the portion of the total Discover Network transaction volume processed to date for which timely and valid disputes may be raised under applicable law and relevant issuer and customer agreements. There is no limitation on the maximum amount the Company may be liable to pay to issuers. However, the Company believes that such amount is not representative of the Company’s actual potential loss exposure based on the Company’s historical
experience. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes may include or result in disputed transactions.
The following table summarizes certain information regarding merchant chargeback guarantees (dollars in millions):
For the Years Ended December 31,
2022 2021 2020
Aggregate sales transaction volume(1)
$ 256,237 $ 223,360 $ 175,026
(1)Represents transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume.
The Company did not record any contingent liability in the consolidated financial statements for merchant chargeback guarantees as of December 31, 2022 and 2021. The Company mitigates the risk of potential loss exposure by withholding settlement from merchants, obtaining third-party guarantees, or obtaining escrow deposits or letters of credit from certain merchant acquirers or merchants that are considered a higher risk due to various factors such as time delays in the delivery of products or services. As of December 31, 2022 and 2021, the Company had escrow deposits and settlement withholdings of $11 million and $15 million, respectively, which are recorded in interest-bearing deposit accounts and accrued expenses and other liabilities on the Company’s consolidated statements of financial condition.
19. Litigation and Regulatory Matters
In the normal course of business, from time to time, the Company has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The litigation process is not predictable and can lead to unexpected results. The Company contests liability and/or the amount of damages as appropriate in each pending matter.
The Company has historically offered its customers an arbitration clause in its customer agreements. The arbitration clause allows the Company and its customers to quickly and economically resolve disputes. Additionally, the arbitration clause has in some instances limited the costs of, and the Company’s exposure to, litigation. Future legal and regulatory challenges and prohibitions may cause the Company to discontinue its offering and use of such clauses. From time to time, the Company is involved in legal actions challenging its arbitration clause. Bills may be periodically introduced in Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses.
The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company’s business including, among other matters, consumer regulatory, accounting, tax and other operational matters. The investigations and proceedings may result in significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief. These outcomes could materially impact the Company’s consolidated financial statements, increase its cost of operations, or limit the Company’s ability to execute its business strategies and engage in certain business activities. Certain subsidiaries of the Company are subject to a consent order with the Consumer Financial Protection Bureau (“CFPB”) regarding certain private student loan servicing practices, as described below. Pursuant to powers granted under federal banking laws, regulatory agencies have broad and sweeping discretion and may assess civil money penalties, require changes to certain business practices or require customer restitution at any time.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matters present loss contingencies that are both probable and estimable. Litigation and regulatory settlement-related expense was $15 million, $59 million and $31 million for the years ended December 31, 2022, 2021 and 2020, respectively.
There may be an exposure to loss in excess of any amounts accrued. The Company believes the estimate of the aggregate range of reasonably possible losses (meaning the likelihood of losses is more than remote but less than likely), in excess of the amounts that the Company has accrued for legal and regulatory proceedings, is up to $190 million as of December 31, 2022. This estimated range of reasonably possible losses is based on currently available information for those proceedings in which the Company is involved and considers the Company’s best estimate of such losses for those matters for which an estimate can be made. It does not represent the Company’s maximum potential
loss exposure. Various aspects of the legal proceedings underlying the estimated range will change from time to time and actual results may vary significantly from the estimate.
The Company’s estimated range noted above involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years and, in some cases, a wide range of business activities), unspecified damages and/or the novelty of the legal issues presented. The outcome of pending matters could adversely affect the Company’s reputation and be material to the Company’s consolidated financial condition, operating results and cash flows for a particular future period, depending on, among other things, the level of the Company’s income for such period.
In July 2015, the Company announced that its subsidiaries, Discover Bank, The Student Loan Corporation and Discover Products Inc. (the “Discover Subsidiaries”), agreed to a consent order with the CFPB with respect to certain private student loan servicing practices (the “2015 Order”). The 2015 Order expired in July 2020. In December 2020, the Discover Subsidiaries agreed to a consent order (the “2020 Order”) with the CFPB resolving the agency’s investigation into Discover Bank’s compliance with the 2015 Order. In connection with the 2020 Order, Discover is required to implement a redress and compliance plan and must pay at least $10 million in consumer redress to consumers who may have been harmed and has paid a $25 million civil money penalty to the CFPB.
On March 8, 2016, a class-action lawsuit was filed against the Company, other credit card networks, other issuing banks and EMVCo in the U.S. District Court for the Northern District of California (B&R Supermarket, Inc., d/b/a Milam’s Market, et al. v. Visa, Inc. et al.) alleging a conspiracy by defendants to shift fraud liability to merchants with the migration to the EMV security standard and chip technology. The plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys’ fees, costs and injunctive relief. In May 2017, the Court entered an order transferring the entire action to a federal court in New York that is presiding over certain related claims that are pending in the actions consolidated as MDL 1720. In August 2020, the Court granted the plaintiffs’ Motion to Certify a Class. The defendants appealed the ruling, which was denied in January 2021. Expert discovery closed on February 28, 2022. On June 3, 2022, the Court granted Plaintiffs’ Motion to Approve Class Notices. The Company filed its renewed motion to compel arbitration, motion for summary judgment, and Daubert challenges on November 30, 2022, with briefing scheduled to close on July 27, 2023. The Company is not in a position at this time to assess the likely outcome or its exposure, if any, with respect to this matter. However, the Company will seek to defend itself vigorously against all claims asserted by the plaintiffs.
20. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820, Fair Value Measurement, provides a three-level hierarchy for classifying the inputs to valuation techniques used to measure fair value of financial instruments based on whether the inputs are observable or unobservable. It also requires certain disclosures about those measurements. The three-level valuation hierarchy is as follows:
•Level 1: Fair values determined by Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
•Level 2: Fair values determined by Level 2 inputs are those that utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive markets, quoted prices for the identical assets in an inactive market and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company evaluates factors such as the frequency of transactions, the size of the bid-ask spread and the significance of adjustments made when considering transactions involving similar assets or liabilities to assess the relevance of those observed prices. If relevant and observable prices are available, the fair values of the related assets or liabilities would be classified as Level 2.
•Level 3: Fair values determined by Level 3 inputs are those based on unobservable inputs and include situations where there is little, if any, market activity for the asset or liability being valued. In instances where the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy in which the measurements are classified is based on the lowest level input that is significant to the fair value measurement in its entirety. Accordingly, the Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.
The Company evaluates the classification of each fair value measurement within the hierarchy at least quarterly.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and involves consideration of factors specific to the asset or liability. Furthermore, certain techniques used to measure fair value involve some degree of judgment and, as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are as follows (dollars in millions):
Quoted Price in Active Markets
for Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3) Total
Balance at December 31, 2022
Assets
Fair value - OCI
U.S. Treasury and U.S. GSE securities $ 11,416 $ 7 $ - $ 11,423
Residential mortgage-backed securities - Agency - 564 - 564
Available-for-sale investment securities $ 11,416 $ 571 $ - $ 11,987
Derivative financial instruments - cash flow hedges(1)
$ - $ 1 $ - $ 1
Fair value - Net income
Marketable equity securities $ 41 $ - $ - $ 41
Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges(1)
$ - $ 3 $ - $ 3
Fair value - Net income
Derivative financial instruments - fair value hedges(1)
$ - $ 2 $ - $ 2
Balance at December 31, 2021
Assets
Fair value - OCI
U.S. Treasury and U.S. GSE securities $ 6,505 $ 9 $ - $ 6,514
Residential mortgage-backed securities - Agency - 186 - 186
Available-for-sale investment securities $ 6,505 $ 195 $ - $ 6,700
Fair value - Net income
Marketable equity securities $ 461 $ - $ - $ 461
(1)Derivative instrument carrying values in an asset or liability position are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company’s consolidated statements of financial condition.
Available-for-Sale Investment Securities
Investment securities classified as available-for-sale consist of U.S. Treasury and U.S. GSE securities and RMBS. The fair value estimates of investment securities classified as Level 1, consisting of U.S. Treasury securities, are determined based on quoted market prices for the same securities. The fair value estimates of U.S. GSE securities and RMBS are classified as Level 2 and are valued by maximizing the use of relevant observable inputs, including quoted prices for similar securities, benchmark yield curves and market-corroborated inputs.
The Company validates the fair value estimates provided by pricing services primarily by comparing to valuations obtained through other pricing sources. The Company evaluates pricing variances among different pricing sources to ensure that the valuations utilized are reasonable. The Company also corroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as market interest rate curves. The Company further performs
due diligence in understanding the procedures and techniques performed by the pricing services to derive fair value estimates.
At December 31, 2022, amounts reported in RMBS reflect U.S. government agency and U.S. GSE obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac with an aggregate par value of $586 million, a weighted-average coupon of 4.05% and a weighted-average remaining maturity of four years.
Marketable Equity Securities
The Company holds non-controlling equity positions in payment service entities that have actively traded stock and therefore have readily determinable fair values. The Company classifies these equity securities as Level 1, the fair value estimates of which are determined based on quoted share prices for the same securities.
Derivative Financial Instruments
The Company’s derivative financial instruments consist of interest rate swaps and foreign exchange forward contracts. These instruments are classified as Level 2 as their fair values are estimated using proprietary pricing models, containing certain assumptions based on readily observable market-based inputs, including interest rate curves, option volatility and foreign currency forward and spot rates. In determining fair values, the pricing models use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity and the observable market-based inputs. The fair values of the interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments are based on an expectation of future interest rates derived from the observable market interest rate curves. The Company considers collateral and master netting agreements that mitigate credit exposure to counterparties in determining the counterparty credit risk valuation adjustment. The fair values of the currency instruments are valued by comparing the contracted forward exchange rate pertaining to the specific contract maturities to the current market exchange rate.
The Company validates the fair value estimates of interest rate swaps primarily through comparison to the fair value estimates computed by the counterparties to each of the derivative transactions. The Company evaluates pricing variances among different pricing sources to ensure that the valuations utilized are reasonable. The Company also corroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as market interest rate curves. The Company performs due diligence in understanding the impact of any changes to the valuation techniques performed by proprietary pricing models before implementation, working closely with the third-party valuation service and reviewing the service’s control objectives at least annually. The Company corroborates the fair value of foreign exchange forward contracts through independent calculation of the fair value estimates.
In October 2020, the Company revised its valuation methodology to reflect changes made by central clearinghouses that changed the discounting methodology and interest calculation of cash variation margin from Federal Funds Overnight Index Swap (“OIS”) to SOFR OIS for U.S. Dollar cleared interest rate swaps. The Company’s revised valuation methodology results in valuations for cleared interest rate swaps that better reflect cleared swap prices obtainable in the markets in which the Company transacts. Pursuant to ASC Topic 848, the Company has elected and applied certain optional expedients and exceptions that provide contract modification and hedge accounting relief to eligible interest rate swaps affected by the change in the discounting methodology. The changes in valuation methodology are applied prospectively as a change in accounting estimate and are immaterial to the Company’s financial statements.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill. For these assets, measurement at fair value in periods subsequent to the initial recognition of the assets may be applicable whenever one is tested for impairment. No impairments were recognized related to these assets for the year ended December 31, 2022. The Company recognized $95 million of impairments related to these assets for the year ended December 31, 2021.
Financial Instruments Measured at Other Than Fair Value
The following tables disclose the estimated fair value of the Company’s financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions):
Balance at December 31, 2022 Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Carrying Value
Assets
Amortized cost
Residential mortgage-backed securities - Agency $ - $ 199 $ - $ 199 $ 221
Held-to-maturity investment securities $ - $ 199 $ - $ 199 $ 221
Net loan receivables $ - $ - $ 110,796 $ 110,796 $ 104,746
Carrying value approximates fair value(1)
Cash and cash equivalents $ 8,856 $ - $ - $ 8,856 $ 8,856
Restricted cash $ 41 $ - $ - $ 41 $ 41
Accrued interest receivables(2)
$ - $ 1,211 $ - $ 1,211 $ 1,211
Liabilities
Amortized cost
Time deposits(3)
$ - $ 32,710 $ - $ 32,710 $ 33,070
Long-term borrowings - owed to securitization investors $ - $ 9,862 $ 84 $ 9,946 $ 10,259
Other long-term borrowings - 9,468 - 9,468 9,849
Long-term borrowings $ - $ 19,330 $ 84 $ 19,414 $ 20,108
Carrying value approximates fair value(1)
Accrued interest payables(2)
$ - $ 308 $ - $ 308 $ 308
Balance at December 31, 2021 Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Carrying Value
Assets
Amortized cost
Residential mortgage-backed securities - Agency $ - $ 206 $ - $ 206 $ 204
Held-to-maturity investment securities $ - $ 206 $ - $ 206 $ 204
Net loan receivables $ - $ - $ 94,176 $ 94,176 $ 86,862
Carrying value approximates fair value(1)
Cash and cash equivalents $ 8,750 $ - $ - $ 8,750 $ 8,750
Restricted cash $ 2,582 $ - $ - $ 2,582 $ 2,582
Accrued interest receivables(2)
$ - $ 948 $ - $ 948 $ 948
Liabilities
Amortized cost
Time deposits(3)
$ - $ 21,490 $ - $ 21,490 $ 21,125
Short-term borrowings $ - $ 1,750 $ - $ 1,750 $ 1,750
Long-term borrowings - owed to securitization investors $ - $ 8,953 $ 104 $ 9,057 $ 9,039
Other long-term borrowings - 10,013 - 10,013 9,438
Long-term borrowings $ - $ 18,966 $ 104 $ 19,070 $ 18,477
Carrying value approximates fair value(1)
Accrued interest payables(2)
$ - $ 184 $ - $ 184 $ 184
(1) The carrying values of these assets and liabilities approximate fair value due to their short-term nature.
(2) Accrued interest receivable and payable carrying values are presented as part of other assets and accrued expenses and other liabilities, respectively, in the Company’s consolidated statements of financial condition.
(3) Excludes deposits without contractually defined maturities for all periods presented.
21. Derivatives and Hedging Activities
The Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or speculative purposes. Certain derivatives used to manage the Company’s exposure to foreign currency are not designated as hedges and do not qualify for hedge accounting.
Derivatives may give rise to counterparty credit risk, which generally is mitigated through collateral arrangements as described under the sub-heading “- Collateral Requirements and Credit-Risk Related Contingency Features.” The Company enters into derivative transactions with established dealers that meet minimum credit criteria established by the Company. All counterparties must be pre-approved before engaging in any transaction with the Company. The Company regularly monitors counterparties to ensure compliance with the Company’s risk policies and limits. In determining the counterparty credit risk valuation adjustment for the fair values of derivatives, if any, the Company considers collateral and legally enforceable master netting agreements that mitigate credit exposure to related counterparties.
All derivatives are recorded in other assets at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values. See Note 20: Fair Value Measurements for a description of the valuation methodologies used for derivatives. Cash collateral amounts associated with derivative positions that are cleared through an exchange are legally characterized as settlement of the derivative positions. Such collateral amounts are reflected as offsets to the associated derivatives balances recorded in other assets or in accrued expenses and other liabilities. Other cash collateral posted and held balances are recorded in other assets and deposits, respectively, in the
consolidated statements of financial condition. Collateral amounts recorded in the consolidated statements of financial condition are based on the net collateral posted or held position for each applicable legal entity’s master netting arrangement with each counterparty.
Derivatives Designated as Hedges
Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows arising from changes in interest rates, or other types of forecasted transactions, are considered cash flow hedges. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.
Cash Flow Hedges
The Company uses interest rate swaps to manage its exposure to variability in cash flows related to changes in interest rates on interest-earning assets and funding instruments. These interest rate swaps qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). At December 31, 2022 and 2021, the Company’s outstanding cash flow hedges primarily relate to interest receipts from credit card receivables and had an initial maximum period of three years and two years, respectively.
The change in the fair value of derivatives designated as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows affect earnings. Amounts reported in AOCI related to derivatives at December 31, 2022, will be reclassified to interest income and interest expense as interest receipts and payments are accrued on the Company’s then outstanding credit card receivables and certain floating-rate debt, respectively. During the next 12 months, the Company estimates it will reclassify $32 million into pretax earnings related to its cash flow hedges.
Fair Value Hedges
The Company is exposed to changes in the fair value of its fixed-rate debt obligations due to changes in interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value of certain fixed-rate long-term borrowings, including securitized debt and bank notes, attributable to changes in the respective benchmark rates. These interest rate swaps qualify as fair value hedges in accordance with ASC 815. Changes in the fair values of both (i) the derivatives and (ii) the hedged long-term borrowings attributable to the interest rate risk being hedged are recorded in interest expense. The changes generally provide substantial offset to one another, with any difference recognized in interest expense.
Derivatives Not Designated as Hedges
Foreign Exchange Forward Contracts
The Company has foreign exchange forward contracts that are economic hedges and are not designated as accounting hedges. The Company enters into foreign exchange forward contracts to manage foreign currency risk. Changes in the fair value of these contracts are recorded in other income on the consolidated statements of income.
Derivatives Cleared Through an Exchange
Cash variation margin payments on derivatives cleared through an exchange are legally considered settlement payments and are accounted for with corresponding derivative positions as one unit of account and not presented separately as collateral. With settlement payments on derivative positions cleared through this exchange reflected as offsets to the associated derivative asset and liability balances, the fair values of derivative instruments and collateral balances shown are generally reduced.
Derivatives Activity
The following table summarizes the fair value (including accrued interest) and outstanding notional amounts of derivative instruments and related collateral balances (dollars in millions):
December 31,
2022 2021
Notional
Amount Number of
Outstanding Derivative Contracts Derivative Assets Derivative Liabilities Notional
Amount Derivative Assets(1)
Derivative Liabilities(1)
Derivatives designated as hedges
Interest rate swaps - cash flow hedge $ 5,000 9 $ 1 $ 3 $ 250 $ - $ -
Interest rate swaps - fair value hedge $ 4,425 5 - 2 $ 6,125 - -
Derivatives not designated as hedges
Foreign exchange forward contracts(2)
$ 25 7 - - $ 36 - -
Total gross derivative assets/liabilities(3)
1 5 - -
Less: collateral held/posted(4)
- (5) - -
Total net derivative assets/liabilities $ 1 $ - $ - $ -
(1)The gross and net derivative assets and liabilities were immaterial as of December 31, 2021.
(2)The foreign exchange forward contracts have notional amounts of EUR 6 million, GBP 6 million, SGD 1 million, INR 788 million and AUD 2 million as of December 31, 2022, and notional amounts of EUR 6 million, GBP 6 million, SGD 1 million, INR 788 million and AUD 14 million as of December 31, 2021.
(3)In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At December 31, 2022, the Company had one outstanding contract with a total notional amount of $48 million and an immaterial fair value. At December 31, 2021, the Company had one outstanding contract with a total notional amount of $50 million and an immaterial fair value.
(4)Collateral amounts, which consist of cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged.
The following amounts were recorded on the statements of financial condition related to cumulative basis adjustments for fair value hedges (dollars in millions):
December 31,
2022 2021
Carrying Amount of Hedged Liabilities Cumulative Amount of Fair Value Hedging Adjustment (Decreasing) the Carrying Amount of Hedged Liabilities(1)
Carrying Amount of Hedged Liabilities Cumulative Amount of Fair Value Hedging Adjustment Increasing the Carrying Amount of Hedged Liabilities(1)
Long-term borrowings $ 4,386 $ (3) $ 6,158 $ 83
(1)The balance includes $28 million and $48 million of cumulative hedging adjustments related to discontinued hedging relationships as of December 31, 2022 and 2021, respectively.
The following table summarizes the impact of the derivative instruments on income and indicates where within the consolidated financial statements such impact is reported (dollars in millions):
Location and Amount of (Losses) Gains Recognized on the Consolidated Statements of Income
Interest Expense Other Income
Deposits Long-Term
Borrowings Interest Income
(Credit Card)
For the Year Ended December 31, 2022
Total amounts of income and expense line items presented in the consolidated statements of income, where the effects of fair value or cash flow hedges are recorded $ (1,257) $ (606) $ 10,632 $ 75
The effects of cash flow and fair value hedging
Gains (Losses) on cash flow hedging relationships
Amounts reclassified from OCI into earnings $ - $ (2) $ (2) $ -
Gains (losses) on fair value hedging relationships
Gains on hedged items $ - $ 66 $ - $ -
Gains (losses) on interest rate swaps - (70) - -
Total gains (losses) on fair value hedging relationships $ - $ (4) $ - $ -
The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges $ - $ - $ - $ 1
For the Year Ended December 31, 2021
Total amounts of income and expense line items presented in the consolidated statements of income, where the effects of fair value or cash flow hedges are recorded $ (661) $ (473) $ 8,717 $ 66
The effects of cash flow and fair value hedging
Gains (losses) on cash flow hedging relationships
Amounts reclassified from OCI into earnings $ - $ (3) $ - $ -
Gains (losses) on fair value hedging relationships
Gains on hedged items $ - $ 246 $ - $ -
Gains (losses) on interest rate swaps - (93) - -
Total gains on fair value hedging relationships $ - $ 153 $ - $ -
For the Year Ended December 31, 2020
Total amounts of income and expense line items presented in the consolidated statements of income, where the effects of fair value or cash flow hedges are recorded $ (1,231) $ (602) $ 8,985 $ 56
The effects of cash flow and fair value hedging
(Losses) gains on cash flow hedging relationships
Amounts reclassified from OCI into earnings $ (9) $ (3) $ - $ -
Gains (losses) on fair value hedging relationships
Gains (losses) on hedged items $ - $ (268) $ - $ -
Gains on interest rate swaps - 423 - -
Total gains on fair value hedging relationships $ - $ 155 $ - $ -
For the impact of the derivative instruments on OCI, see Note 13: Accumulated Other Comprehensive Income.
Collateral Requirements and Credit-Risk Related Contingency Features
The Company has master netting arrangements and minimum collateral posting thresholds with its counterparties for its fair value and cash flow hedge interest rate swaps and foreign exchange forward contracts. The Company has not sought a legal opinion in relation to the enforceability of its master netting arrangements and, as such, does not report any of these positions on a net basis. Collateral is required by either the Company or its subsidiaries or the counterparty depending on the net fair value position of the derivatives held with that counterparty. These collateral receivable or payable amounts are generally not offset against the fair value of these derivatives but are recorded separately in other assets or deposits. Most of the Company’s cash collateral amounts relate to positions cleared through an exchange and are reflected as offsets to the associated derivatives balances recorded in other assets and accrued expenses and other liabilities.
The Company also has agreements with certain of its derivative counterparties that contain a provision under which the Company could be declared in default on any of its derivative obligations if the Company defaults on any of its indebtedness, including default where the lender has not accelerated repayment of the indebtedness.
22. Segment Disclosures
The Company manages its business activities in two segments: Digital Banking and Payment Services.
•Digital Banking: The Digital Banking segment includes Discover-branded credit cards issued to individuals on the Discover Network and other consumer products and services, including private student loans, personal loans, home loans and other consumer lending and deposit products. The majority of Digital 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.
•Payment Services: The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and the Company’s Network Partners business, which provides payment transaction processing and settlement services on the Discover Network. The majority of Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue from Diners Club.
The business segment reporting provided to and used by the Company’s chief operating decision-maker is prepared using the following principles and allocation conventions:
•The Company aggregates operating segments when determining reportable segments.
•Corporate overhead is not allocated between segments; all corporate overhead is included in the Digital Banking segment.
•Through its operation of the Discover Network, the Digital Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments, except for an allocation of direct and incremental costs driven by the Company’s Payment Services segment.
•The Company’s assets are not allocated among the operating segments in the information reviewed by the Company’s chief operating decision-maker.
•The revenues of each segment are derived from external sources. The segments do not earn revenue from intercompany sources.
•Income taxes are not specifically allocated between the operating segments in the information reviewed by the Company’s chief operating decision maker.
The following table presents segment data (dollars in millions):
Digital
Banking Payment
Services Total
For the Year Ended December 31, 2022
Interest income
Credit card loans $ 10,632 $ - $ 10,632
Private student loans 831 - 831
Personal loans 872 - 872
Other loans 167 - 167
Other interest income 362 - 362
Total interest income 12,864 - 12,864
Interest expense 1,865 - 1,865
Net interest income 10,999 - 10,999
Provision for credit losses 2,359 - 2,359
Other income 2,162 176 2,338
Other expense 5,069 167 5,236
Income before income taxes $ 5,733 $ 9 $ 5,742
For the Year Ended December 31, 2021
Interest income
Credit card loans $ 8,717 $ - $ 8,717
Private student loans 742 - 742
Personal loans 878 - 878
Other loans 114 - 114
Other interest income 200 - 200
Total interest income 10,651 - 10,651
Interest expense 1,134 - 1,134
Net interest income 9,517 - 9,517
Provision for credit losses 218 - 218
Other income 1,781 789 2,570
Other expense 4,549 256 4,805
Income before income taxes $ 6,531 $ 533 $ 7,064
For the Year Ended December 31, 2020
Interest income
Credit card loans $ 8,985 $ - $ 8,985
Private student loans 754 - 754
Personal loans 958 - 958
Other loans 106 - 106
Other interest income 292 - 292
Total interest income 11,095 - 11,095
Interest expense 1,865 - 1,865
Net interest income 9,230 - 9,230
Provision for credit losses 5,134 - 5,134
Other income 1,459 399 1,858
Other expense 4,292 227 4,519
Income before income taxes $ 1,263 $ 172 $ 1,435
23. Revenue from Contracts with Customers
ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), generally applies to the sales of any good or service for which no other specific accounting guidance is provided. ASC 606 defines 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. The Company’s revenue that is subject to this model includes discount and interchange, protection products fees, transaction processing revenue and certain amounts classified as other income.
The following table presents revenue from contracts with customers disaggregated by business segment and reconciles revenue from contracts with customers to total other income (dollars in millions):
Digital
Banking Payment
Services Total
For the Year Ended December 31, 2022
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 1,345 $ 79 $ 1,424
Protection products revenue 172 - 172
Transaction processing revenue - 249 249
Other income 11 64 75
Total other income subject to ASC 606(2)
1,528 392 1,920
Other income not subject to ASC 606
Loan fee income 632 - 632
Gains (losses) on equity investments 2 (216) (214)
Total other income (loss) not subject to ASC 606 634 (216) 418
Total other income by operating segment $ 2,162 $ 176 $ 2,338
For the Year Ended December 31, 2021
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 1,151 $ 73 $ 1,224
Protection products revenue 165 - 165
Transaction processing revenue - 227 227
Other income - 66 66
Total other income subject to ASC 606(2)
1,316 366 1,682
Other income not subject to ASC 606
Loan fee income 464 - 464
Gains on equity investments 1 423 424
Total other income not subject to ASC 606 465 423 888
Total other income by operating segment $ 1,781 $ 789 $ 2,570
For the Year Ended December 31, 2020
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 871 $ 62 $ 933
Protection products revenue 180 - 180
Transaction processing revenue - 195 195
Other (loss) income (7) 63 56
Total other income subject to ASC 606(2)
1,044 320 1,364
Other income not subject to ASC 606
Loan fee income 414 - 414
Gains on equity investments 1 79 80
Total other income not subject to ASC 606 415 79 494
Total other income by operating segment $ 1,459 $ 399 $ 1,858
(1) Net of rewards, including Cashback Bonus rewards, of $3.0 billion, $2.5 billion and $1.9 billion for the years ended December 31, 2022, 2021 and 2020, respectively.
(2) Excludes $10 million, $2 million and $2 million deposit product fees that are reported within net interest income for the years ended December 31, 2022, 2021 and 2020, respectively.
For a detailed description of the Company’s significant revenue recognition accounting policies, see Note 2: Summary of Significant Accounting Policies.
24. Related Party Transactions
In the ordinary course of business, the Company offers consumer financial products to its directors, executive officers and certain members of their families. These products are offered on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and these receivables are included in the loan receivables in the Company’s consolidated statements of financial condition. They were not material to the Company’s financial position or results of operations.
25. Parent Company Condensed Financial Information
The following Parent Company financial statements are provided in accordance with SEC rules, which require such disclosure when the restricted net assets of consolidated subsidiaries exceed 25% of consolidated net assets.
Discover Financial Services
(Parent Company Only)
Condensed Statements of Financial Condition
December 31,
2022 2021
(dollars in millions)
Assets
Cash and cash equivalents(1)
$ 3,155 $ 3,182
Restricted cash 20 20
Notes receivable from subsidiaries(2)
1,759 777
Investment in bank subsidiary 11,922 11,889
Investments in non-bank subsidiaries 886 1,209
Other assets 811 663
Total assets $ 18,553 $ 17,740
Liabilities and Stockholders’ Equity
Non-interest-bearing deposit accounts $ 2 $ 2
Short-term borrowings from subsidiaries 115 439
Long-term borrowings 3,487 3,548
Accrued expenses and other liabilities 359 343
Total liabilities 3,963 4,332
Stockholders’ equity 14,590 13,408
Total liabilities and stockholders’ equity $ 18,553 $ 17,740
(1)The Parent Company had $3.1 billion and $3.0 billion in a money market deposit account at Discover Bank as of December 31, 2022 and 2021, respectively, which is included in cash and cash equivalents. These funds are available to the Parent for liquidity purposes.
(2)The Parent Company advanced $1.3 billion to Discover Bank as of December 31, 2022 and 2021, which is included in notes receivable from subsidiaries.
Discover Financial Services
(Parent Company Only)
Condensed Statements of Comprehensive Income
For the Years Ended December 31,
2022 2021 2020
(dollars in millions)
Interest income $ 98 $ 33 $ 44
Interest expense 189 199 205
Net interest expense (91) (166) (161)
Dividends from bank subsidiary 4,000 3,250 555
Dividends from non-bank subsidiaries 688 - 200
Total income 4,597 3,084 594
Other expense 6 10 (16)
Income before income tax benefit and equity in undistributed net income of subsidiaries 4,591 3,074 610
Income tax benefit 25 25 30
Equity in undistributed net income of subsidiaries (224) 2,350 501
Net income 4,392 5,449 1,141
Other comprehensive (loss) income, net (245) (139) 164
Comprehensive income $ 4,147 $ 5,310 $ 1,305
Discover Financial Services
(Parent Company Only)
Condensed Statements of Cash Flows
For the Years Ended December 31,
2022 2021 2020
(dollars in millions)
Cash flows provided by operating activities
Net income $ 4,392 $ 5,449 $ 1,141
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiaries
224 (2,350) (501)
Non-cash dividend from subsidiary (188) - -
Stock-based compensation expense
89 103 42
Deferred income taxes
(8) (13) (5)
Depreciation and amortization
32 47 41
Changes in assets and liabilities:
(Increase) decrease in other assets (143) (91) 42
Increase (decrease) in accrued expenses and other liabilities 27 24 (30)
Net cash provided by operating activities 4,425 3,169 730
Cash flows (used for) provided by investing activities(1)
(Increase) decrease in loans to subsidiaries (982) 114 (15)
Net cash (used for) provided by investing activities (982) 114 (15)
Cash flows used for financing activities
Net (decrease) increase in short-term borrowings from subsidiaries (324) 156 -
Proceeds from issuance of common stock 10 9 10
Proceeds from issuance of long-term borrowings 740 - -
Maturities and repayment of long-term borrowings (834) (172) (3)
Purchases of treasury stock (2,359) (2,260) (348)
Proceeds from issuance of preferred stock - - 493
Dividends paid on common and preferred stock (703) (636) (576)
Net cash used for financing activities (3,470) (2,903) (424)
(Decrease) increase in cash, cash equivalents and restricted cash (27) 380 291
Cash, cash equivalents and restricted cash, at beginning of period 3,202 2,822 2,531
Cash, cash equivalents and restricted cash, at end of period $ 3,175 $ 3,202 $ 2,822
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents $ 3,155 $ 3,182 $ 2,802
Restricted cash 20 20 20
Cash, cash equivalents and restricted cash, at end of period $ 3,175 $ 3,202 $ 2,822
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest expense $ 159 $ 156 $ 168
Income taxes, net of income tax refunds
$ (39) $ (70) $ (31)
(1)Subsequent to the issuance of the audited financial statements for the year ended December 31, 2021, the Company identified an immaterial classification error within cash flows (used for)/provided by investing activities. The correction of this error had no impact on the net cash (used for)/provided by investing activities. Management has evaluated the materiality of this misstatement and concluded it was not material to the prior period.
26. Subsequent Events
The Company has evaluated events and transactions that have occurred subsequent to December 31, 2022, and determined that there were no subsequent events that would require recognition or disclosure in the consolidated financial statements.
Glossary of Acronyms
•ALCO: Asset and Liability Management Committee
•AOCI: Accumulated Other Comprehensive Income (Loss)
•ARRC: Alternative Reference Rates Committee
•ASC: Accounting Standards Codification
•ASU: Accounting Standards Update
•BCBS: Basel Committee on Banking Supervision
•CARES Act: Coronavirus Aid, Relief, and Economic Security Act
•CCAR: Comprehensive Capital Analysis and Review
•CCPA: California Consumer Privacy Act
•CECL: Current Expected Credit Loss
•CEO: Chief Executive Officer
•CET1: Common Equity Tier 1
•CFPB: Consumer Financial Protection Bureau
•CLDC: Compensation and Leadership Development Committee
•COSO: Committee of Sponsoring Organizations of the Treadway Commission
•COVID-19: Coronavirus Disease 2019
•CPPA: California Privacy Protection Agency
•CPRA: California Privacy Rights Act
•CRM: Corporate Risk Management
•CRO: Chief Risk Officer
•DCENT: Discover Card Execution Note Trust
•DCMT: Discover Card Master Trust
•DE&I: Diversity, Equity and Inclusion
•DFS: Discover Financial Services
•DRR: Designated Reserve Ratio
•EGRRCPA: Economic Growth, Regulatory Relief, and Consumer Protection Act
•EPS: Earnings Per Share
•ESG: Environmental, Social and Governance
•EWI: Early Warning Indicator
•FASB: Financial Accounting Standards Board
•FCA: UK Financial Conduct Authority
•FDIA: Federal Deposit Insurance Act
•FDIC: Federal Deposit Insurance Corporation
•FFIEC: Federal Financial Institutions Examination Council
•FHLB: Federal Home Loan Bank
•GAAP: Accounting Principles Generally Accepted in the United States
•IRS: Internal Revenue Service
•KRI: Key Risk Indicator
•LFI: Large Financial Institution
•LIBOR: London Interbank Offered Rate
•OCI: Other Comprehensive Income (Loss)
•OIS: Overnight Index Swap
•PCAOB: Public Company Accounting Oversight Board
•POS: Point-of-sale
•PSU: Performance Stock Unit
•Repo: Repurchase Agreement
•RMBS: Residential Mortgage-Backed Securities
•RSU: Restricted Stock Unit
•SCB: Stress Capital Buffer
•SEC: Securities and Exchange Commission
•SOFR: Secured Overnight Financing Rate
•TDR: Troubled Debt Restructuring
•UDAAP: Unfair, Deceptive or Abusive Acts or Practices
•U.S.: United States of America
•USD: United States Dollar
•U.S. GSE: Government-sponsored Enterprise of the U.S.
•VIE: Variable Interest Entity

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of human error, the circumvention or overriding of the system and reasonable resource constraints. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s assessments and those criteria, management has concluded that our internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and the firm’s report on this matter is included in Item 8 of this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
During the first quarter of 2022, we implemented a new general ledger and related infrastructure and systems. The implementation was completed in the ordinary course of business to modernize technology used in our financial reporting processes and was not implemented in response to identified material weaknesses in our internal control over financial reporting. In connection with the implementation, where applicable, modifications were made to the design of the control environment associated with the new general ledger and related technology.
Except for the implementation discussed above, there have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information regarding executive compensation under the following captions in our Proxy Statement is incorporated by reference herein.
“Corporate Governance - Director Compensation”
“Executive Compensation”
“Compensation Discussion and Analysis”
“2022 Executive Compensation Tables”

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information related to the compensation plans under which our equity securities are authorized for issuance as of December 31, 2022, is presented under the caption “Approval of the Discover Financial Services 2023 Omnibus Incentive Plan - Equity Compensation Plan Information” in our Proxy Statement and is incorporated by reference herein.
Information related to the beneficial ownership of our common stock is presented under the caption “Stock Ownership Information - Beneficial Ownership of Company Common Stock” in our Proxy Statement and is incorporated by reference herein.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions, and director independence under the following captions in our Proxy Statement is incorporated by reference herein.
“Other Matters - Certain Transactions”
“Corporate Governance - Information Concerning Nominees for Election as Directors - Director Independence”

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
Information regarding principal accounting fees and services is presented under the caption “Audit Matters” in our Proxy Statement and is incorporated by reference herein.
Part IV.
Part IV | Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Form 10-K:
1. Consolidated Financial Statements
The consolidated financial statements required to be filed in this annual report on Form 10-K are listed below and appear on pages 82 through 142 herein.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Statements of Financial Condition as of December 31, 2022 and 2021
Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements.
3. Exhibits
See the Exhibit Index below for a list of the exhibits being filed or furnished with or incorporated by reference into this annual report on Form 10-K.
Exhibit Index
Exhibit
Number Description
2.1*
Separation and Distribution Agreement, dated as of June 29, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 2.1 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto), as amended by the First Amendment to the Separation and Distribution Agreement dated as of June 29, 2007 between Discover Financial Services and Morgan Stanley, dated February 11, 2010 (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on February 12, 2010 and incorporated herein by reference thereto).
2.2*
Agreement for the Sale and Purchase of the Goldfish Credit Card Business, dated February 7, 2008, among Discover Financial Services, Goldfish Bank Limited, Discover Bank, SCFC Receivables Corporation, and Barclays Bank Plc (filed as Exhibit 2.1 to Discover Financial Services’ Current Report on Form 8-K filed on February 7, 2008 and incorporated herein by reference thereto), as amended and restated by Amended and Restated Agreement for the Sale and Purchase of the Goldfish Credit Card Business, dated March 31, 2008, among Discover Financial Services, Goldfish Bank Limited, Discover Bank, SCFC Receivables Corporation, Barclays Bank PLC, and Barclays Group US Inc. (filed as Exhibit 2.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 14, 2008 and incorporated herein by reference thereto).
2.3
Agreement and Plan of Merger by and among Discover Bank, Academy Acquisition Corp. and The Student Loan Corporation dated as of September 17, 2010 (filed as Exhibit 2.3 to Discover Financial Services’ Annual Report on Form 10-K for the fiscal year ended November 30, 2010 filed on January 26, 2011 and incorporated herein by reference thereto).
Exhibit
Number Description
3.1
Restated Certificate of Incorporation of Discover Financial Services (filed as Exhibit 3.2 to Discover Financial Services’ Current Report on Form 8-K filed on May 21, 2019 and incorporated herein by reference thereto).
3.2
Amended and Restated By-Laws of Discover Financial Services (filed as Exhibit 3.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on October 28, 2021 and incorporated herein by reference thereto).
3.3
Certificate of Elimination of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Discover Financial Services (filed as Exhibit 3.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on June 26, 2012 and incorporated herein by reference thereto).
3.4
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 16, 2012 and incorporated herein by reference thereto).
3.5
Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto).
3.6
Certificate of Elimination of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 4, 2017 and incorporated herein by reference thereto).
3.7
Certificate of Designations of Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).
4.1
Description of Discover Financial Services’ Securities.
4.2
Senior Indenture, dated as of June 12, 2007, by and between Discover Financial Services and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 12, 2007 and incorporated herein by reference thereto).
4.3
Subordinated Indenture, dated as of September 8, 2015, by and between Discover Financial Services and U.S. Bank National Association (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on September 8, 2015 and incorporated herein by reference thereto).
4.4
Deposit Agreement (Series C), dated October 31, 2017 (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto).
4.5
Form of Certificate Representing the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (filed as Exhibit 4.2 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto).
4.6
Deposit Agreement (Series D), dated June 22, 2020 (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).
4.7
Form of Certificate Representing the Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (filed as Exhibit 4.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).
4.8 Other instruments defining the rights of holders of long-term debt securities of Discover Financial Services and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Discover Financial Services agrees to furnish copies of these instruments to the SEC upon request.
10.1
Tax Sharing Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
10.2
U.S. Employee Matters Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
Exhibit
Number Description
10.3
Transition Services Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
10.4
Transitional Trade Mark License Agreement, dated as of June 30, 2007, between Morgan Stanley & Co. PLC and Goldfish Bank Limited (filed as Exhibit 10.4 to Discover Financial Services’ Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
10.5
Amended and Restated Trust Agreement, dated as of December 22, 2015, between Discover Funding LLC, as Beneficiary, and Wilmington Trust Company, as Owner Trustee (filed as Exhibit 4.6 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.6
Third Amended and Restated Pooling and Servicing Agreement, dated as of December 22, 2015, between Discover Bank, as Master Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.2 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.7
Amended and Restated Series Supplement for Series 2007-CC, dated as of December 22, 2015, among Discover Bank, as Master Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.3 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.8†
Discover Financial Services Omnibus Incentive Plan (filed as an attachment to Discover Financial Services’ Proxy Statement on Schedule 14A filed on February 27, 2009 and incorporated herein by reference thereto).
10.9†
Amended Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.6 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 12, 2007 and incorporated herein by reference thereto).
10.10†
Directors’ Compensation Plan of Discover Financial Services (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto), as amended and restated as of January 20, 2011 (filed as Exhibit A to the Discover Financial Services’ definitive proxy statement filed on February 18, 2011 and incorporated herein by reference thereto), as further amended by Amendment No. 2, effective as of December 1, 2011 (filed as Exhibit 10.10 to the Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2012 and incorporated herein by reference thereto).
10.11†
Amended Form of Restricted Stock Unit Award Under Discover Financial Services Directors’ Compensation Plan (filed as Exhibit 10.7 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 12, 2007 and incorporated herein by reference thereto).
10.12†
Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto) as amended by Amendment No. 1 to Discover Financial Services Employee Stock Purchase Plan effective as of May 1, 2008 (filed as Exhibit 10.12 to Discover Financial Services’ Annual Report on Form 10-K filed on January 28, 2009 and incorporated herein by reference thereto); Amendment No. 2 to Discover Financial Services Employee Stock Purchase Plan, effective as of December 1, 2009 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 9, 2010 and incorporated herein by reference thereto); and Amendment No. 3 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on September 28, 2011 and incorporated herein by reference thereto).
10.13†
Offer of Employment, dated as of January 8, 1999 (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 12, 2007 and incorporated herein by reference thereto).
10.14†
Waiver of Change of Control Benefits, dated September 24, 2007 (filed as Exhibit 10.15 to Discover Financial Services’ Registration Statement on Form S-4 filed on November 27, 2007 and incorporated herein by reference thereto).
10.15
Collateral Certificate Transfer Agreement, dated as of July 26, 2007 between Discover Bank, as Depositor and Discover Card Execution Note Trust (filed as Exhibit 4.4 to Discover Bank’s Current Report on Form 8-K filed on July 27, 2007 and incorporated herein by reference thereto).
Exhibit
Number Description
10.16
Amended and Restated Indenture, dated as of December 22, 2015, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.4 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.17
Second Amended and Restated Indenture Supplement for the DiscoverSeries Notes, dated as of December 22, 2015, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.5 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.18
Omnibus Amendment to Indenture Supplement and Terms Documents, dated as of July 2, 2009, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.1 to Discover Bank’s Current Report on Form 8-K filed on July 6, 2009 and incorporated herein by reference thereto).
10.19†
Discover Financial Services Change-in-Control Severance Policy Amended and Restated October 15, 2014 (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 16, 2014 and incorporated herein by reference thereto).
10.20
Release and Settlement Agreement, executed as of October 27, 2008, by and among Discover Financial Services, DFS Services, LLC, Discover Bank, and their Subsidiaries and Affiliates; MasterCard Incorporated and MasterCard International Incorporated and their Affiliates; and Visa Inc. and its Affiliates and Predecessors including Visa U.S.A. Inc. and Visa International Service Association (filed as Exhibit 99.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 28, 2008 and incorporated herein by reference thereto).
10.21
Form of Waiver, executed by each of Discover Financial Services’ senior executive officers and certain other employees (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on March 13, 2009 and incorporated herein by reference thereto).
10.22†
Form of Executive Compensation Agreement, dated March 13, 2009, executed by each of Discover Financial Services’ senior executive officers and certain other employees (filed as Exhibit 10.4 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 8, 2009 and incorporated herein by reference thereto).
10.23
Settlement Agreement and Mutual Release between Discover Financial Services and Morgan Stanley, dated February 11, 2010 (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on February 12, 2010 and incorporated herein by reference thereto).
10.24
Purchase Price Adjustment Agreement by and among Citibank, N.A., The Student Loan Corporation and Discover Bank, dated September 17, 2010 (filed as Exhibit 10.32 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto).
10.25
Amendment to Purchase Price Adjustment Agreement by and among Citibank, N.A., The Student Loan Corporation and Discover Bank, dated December 30, 2010 (filed as Exhibit 10.33 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto).
10.26
Indemnification Agreement by and between Citibank, N.A. and Discover Bank, dated September 17, 2010 (filed as Exhibit 10.34 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto).
10.27
First Amendment to Indemnification Agreement by and between Citibank, N.A. and Discover Bank, dated December 30, 2010 (filed as Exhibit 10.35 to Discover Financial Services’ Annual Report on Form 10-K filed on January 26, 2011 and incorporated herein by reference thereto).
10.28
Asset Purchase Agreement between Discover Bank and Citibank, N.A. dated August 31, 2011 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on September 28, 2011 and incorporated herein by reference thereto).
10.29†
Form 2012 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 4, 2012 and incorporated herein by reference thereto).
10.30†
Form 2012 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 4, 2012 and incorporated herein by reference thereto).
Exhibit
Number Description
10.31†
Form 2013 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2013 and incorporated herein by reference thereto).
10.32†
Form 2013 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2013 and incorporated herein by reference thereto).
10.33†
Amendment No. 3 to the Directors’ Compensation Plan of Discover Financial Services, effective as of July 1, 2013 (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on July 30, 2013 and incorporated herein by reference thereto).
10.34†
Form 2013 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 26, 2013 and incorporated herein by reference thereto).
10.35†
Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as an attachment to Discover Financial Services’ Proxy Statement on Schedule 14A filed on March 19, 2014 and incorporated herein by reference thereto).
10.36†
Form 2014 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and
Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly
Report on Form 10-Q filed on April 29, 2014 and incorporated herein by reference thereto).
10.37†
Form 2014 Award Certificate for Performance Stock Units Under Discover Financial Services Amended
and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’
Quarterly Report on Form 10-Q filed on April 29, 2014 and incorporated herein by reference thereto).
10.38†
Amendment No. 4 to the Directors’ Compensation Plan of Discover Financial Services, effective as of May 7, 2014 (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on
August 1, 2014 and incorporated herein by reference thereto).
10.39†
Form 2015 Award Certificate for Cash-Converted Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto).
10.40†
Form 2015 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto).
10.41†
Form 2015 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto).
10.42†
Form 2015 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on April 30, 2015 and incorporated herein by reference thereto).
10.43†
Amendment No. 4 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on October 29, 2015 and incorporated herein by reference thereto).
10.44†
Form 2015 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 21, 2015 and incorporated herein by reference thereto).
10.45
Receivables Sale and Contribution Agreement, dated as of December 22, 2015 between Discover Bank and Discover Funding LLC (filed as Exhibit 4.1 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
10.46†
Form 2016 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.52 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2016 and incorporated herein by reference thereto).
Exhibit
Number Description
10.47†
Form 2016 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.53 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2016 and incorporated herein by reference thereto).
10.48†
Amendment No. 5 to Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2017 (filed as Exhibit 10.54 to Discover Financial Services’ Annual Report on Form 10-K filed on February 23, 2017 and incorporated herein by reference thereto).
10.49†
Form 2017 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and
Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2017 and incorporated herein by reference thereto).
10.50†
Form 2017 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2017 and incorporated herein by reference thereto).
10.51†
Form 2018 Award Certificate for Restricted Stock Units under Discover Financial Services Director’s Compensation Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.52†
Form 2018 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.53†
Form 2018 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.54†
Amendment to 2017 Directors’ Annual Equity Award Certificate for Restricted Stock Units of Discover Financial Services, effective as of February 22, 2018 (filed as Exhibit 10.4 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.55†
Amendment No. 6 to the Directors’ Compensation Plan of Discover Financial Services, effective as of February 22, 2018 (filed as Exhibit 10.5 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 1, 2018 and incorporated herein by reference thereto).
10.56†
Amendment No. 7 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2019 (filed as Exhibit 10.62 to Discover Financial Services’ Annual Report on Form 10-K filed on February 20, 2019 and incorporated herein by reference thereto).
10.57†
Amendment No. 8 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2019 (filed as Exhibit 10.63 to Discover Financial Services’ Annual Report on Form 10-K filed on February 20, 2019 and incorporated herein by reference thereto).
10.58†
Amendment No. 9 to the Directors’ Compensation Plan of Discover Financial Services, effective as of January 1, 2022 (filed as Exhibit 10.58 to Discover Financial Services’ Annual Report on Form 10-K filed on February 24, 2022 and incorporated herein by reference thereto).
10.59†
Amendment No. 10 to the Directors’ Compensation Plan of Discover Financial Services, effective as of December 14, 2022.
10.60†
Form 2019 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2019 and incorporated herein by reference thereto).
10.61†
Form 2019 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 2, 2019 and incorporated herein by reference thereto).
10.62†
Form 2020 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2020 and incorporated herein by reference thereto).
10.63†
Form 2020 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 30, 2020 and incorporated herein by reference thereto).
Exhibit
Number Description
10.64†
Form 2021 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 4, 2021 and incorporated herein by reference thereto).
10.65†
Form 2021 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on May 4, 2021 and incorporated herein by reference thereto).
10.66†
Form 2022 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 22, 2022 and incorporated herein by reference thereto).
10.67†
Form 2022 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 28, 2022 and incorporated herein by reference thereto).
10.68†
Form 2022 Special Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on April 28, 2022 and incorporated herein by reference thereto).
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney (included on signature page).
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
101 Interactive Data File - the following financial statements from Discover Financial Services Annual Report on Form 10-K formatted in inline XBRL: (1) Consolidated Statements of Financial Condition, (2) Consolidated Statements of Income, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Changes in Stockholders' Equity, (5) Consolidated Statements of Cash Flows and (6) Notes to the Consolidated Financial Statements.
104 Cover Page Interactive Data File - the cover page from Discover Financial Services Annual Report on Form 10-K formatted in inline XBRL and contained in Exhibit 101.
* We agree to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to such agreement upon the request of the Commission in accordance with Item 601(b)(2) of Regulation S-K.
† Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 15(b) of this report.
Item 16. Form 10-K Summary
None.
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Discover Financial Services
(Registrant)
By: /s/ JOHN T. GREENE
John T. Greene
Executive Vice President, Chief Financial Officer
Date: February 23, 2023
Power of Attorney
We, the undersigned, hereby severally constitute Hope D. Mehlman and Philip J. Castrogiovanni, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the annual report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 23, 2023.
Signature Title
/s/ ROGER C. HOCHSCHILD
Chief Executive Officer and President, Director
Roger C. Hochschild
/s/ JOHN T. GREENE
Executive Vice President, Chief Financial Officer (Principal Financial Officer)
John T. Greene
/s/ SHIFRA C. KOLSKY
Senior Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
Shifra C. Kolsky
/s/ THOMAS G. MAHERAS
Chairman of the Board
Thomas G. Maheras
/s/ JEFFREY S. ARONIN
Director
Jeffrey S. Aronin
/s/ MARY K. BUSH
Director
Mary K. Bush
/s/ GREGORY C. CASE
Director
Gregory C. Case
/s/ CANDACE H. DUNCAN
Director
Candace H. Duncan
/s/ JOSEPH F. EAZOR
Director
Joseph F. Eazor
/s/ CYNTHIA A. GLASSMAN
Director
Cynthia A. Glassman
/s/ MICHAEL H. MOSKOW
Director
Michael H. Moskow
/s/ JOHN B. OWEN
Director
John B. Owen
/s/ DAVID L. RAWLINSON
Director
David L. Rawlinson
/s/ MARK A. THIERER
Director
Mark A. Thierer
/s/ JENNIFER L. WONG
Director
Jennifer L. Wong

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES