SECURITIES AND EXCHANGE COMMISSION

As of October ~~25, 2019,~~21, 2020, there were ~~313,468,253~~306,496,332 shares of the registrant's Common Stock, par value $0.01 per share, outstanding.

DISCOVER FINANCIAL SERVICES

Quarterly Report on Form 10-Q for the quarterly period ended September 30, ~~2019~~2020

TABLE OF CONTENTS

Except as otherwise indicated or unless the context otherwise requires, "Discover Financial Services," "Discover," "DFS," "we," "us," "our," and "the Company" refer to Discover Financial Services and its subsidiaries. See Glossary of Acronyms, located after Part I — Item 4, for terms and abbreviations used throughout the quarterly report.

We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to: Discover^®, PULSE^®, Cashback Bonus^®, Discover Cashback Checking^®, Discover it^®, Freeze it^®, College Covered^®, and Diners Club International^®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.


~~Part I.~~	~~FINANCIAL INFORMATION~~

Table of Contents


~~Item 1.~~	~~Financial Statements~~

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Financial Condition


	September 30, 2020		December 31, 2019
	(unaudited) (dollars in millions, except share amounts)
Assets
Cash and cash equivalents	$	9,513	$	6,924
Restricted cash	576		40
Other short-term investments⁽¹⁾	8,048		0

Investment securities (includes available-for-sale securities of $20,573 and $10,323 reported at fair value with associated amortized cost of $20,148 and $10,173 at September 30, 2020 and December 31, 2019, respectively)⁽¹⁾	20,854		10,595
Loan receivables
Loan receivables	88,660		95,894
Allowance for credit losses⁽²⁾	(8,226)		(3,383)
Net loan receivables	80,434		92,511
Premises and equipment, net	1,121		1,057
Goodwill	255		255
Intangible assets, net	95		155
Other assets	3,453		2,459
Total assets	$	124,349	$	113,996
Liabilities and Stockholders' Equity
Liabilities
Deposits
Interest-bearing deposit accounts	$	76,938	$	71,955
Non-interest bearing deposit accounts	1,077		791
Total deposits	78,015		72,746
Short-term borrowings⁽¹⁾	10,700		0
Long-term borrowings	21,841		25,701
Accrued expenses and other liabilities	3,541		3,690
Total liabilities	114,097		102,137
Commitments, contingencies and guarantees (Notes 10, 13 and 14)
Stockholders' Equity
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 567,743,876 and 566,653,650 shares issued at September 30, 2020 and December 31, 2019, respectively	6		6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 and 5,700 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively	1,056		563
Additional paid-in capital	4,235		4,206
Retained earnings	19,292		21,290
Accumulated other comprehensive income (loss)	93		(119)
Treasury stock, at cost; 261,247,516 and 256,496,492 shares at September 30, 2020 and December 31, 2019, respectively	(14,430)		(14,087)
Total stockholders' equity	10,252		11,859
Total liabilities and stockholders' equity	$	124,349	$	113,996

September 30,
2019 December 31,
2018

(unaudited)
(dollars in millions,
except share amounts)
Assets
Cash and cash equivalents $ 6,075
$ 13,299
Restricted cash 37
1,846
Other short-term investments 1,000
—
Investment securities (includes $10,380 and $3,133 at fair value at September 30, 2019 and December 31, 2018, respectively) 10,649
3,370
Loan receivables
Loan receivables 92,493
90,512
Allowance for loan losses (3,299 ) (3,041 )
Net loan receivables 89,194
87,471
Premises and equipment, net 1,028
936
Goodwill 255
255
Intangible assets, net 159
161
Other assets 2,389
2,215
Total assets $ 110,786
$ 109,553
Liabilities and Stockholders' Equity
Liabilities
Deposits
Interest-bearing deposit accounts $ 70,327
$ 67,084
Non-interest bearing deposit accounts 694
675
Total deposits 71,021
67,759
Long-term borrowings 24,454
27,228
Accrued expenses and other liabilities 3,594
3,436
Total liabilities 99,069
98,423
Commitments, contingencies and guarantees (Notes 8, 11 and 12)

Stockholders' Equity
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 566,604,226 and 564,851,848 shares issued at September 30, 2019 and December 31, 2018, respectively 6
6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 5,700 shares issued and outstanding and aggregate liquidation preference of $570 at September 30, 2019 and December 31, 2018 563
563
Additional paid-in capital 4,188
4,130
Retained earnings 20,720
18,906
Accumulated other comprehensive loss (74 ) (156 )
Treasury stock, at cost; 251,623,001 and 233,406,005 shares at September 30, 2019 and December 31, 2018, respectively (13,686 ) (12,319 )
Total stockholders' equity 11,717
11,130
Total liabilities and stockholders' equity $ 110,786
$ 109,553

(1)Includes amounts related to a securities lending transaction in September 2020. See Note 2: Investments for additional information.

(2)Prior to adoption of Accounting Standards Update ("ASU") No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.

The table below presents the carrying amounts of certain assets and liabilities of Discover Financial Services' consolidated variable interest entities ("VIEs"), which are included in the condensed consolidated statements of financial condition above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated VIEs. The liabilities in the table below include third-party liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts for which creditors have recourse to the general credit of Discover Financial Services.


	September 30, 2020		December 31, 2019
	(unaudited) (dollars in millions)
Assets
Restricted cash	$	576	$	40
Loan receivables	$	27,287	$	31,840
Allowance for credit losses allocated to securitized loan receivables⁽¹⁾	$	(1,964)	$	(1,179)
Other assets	$	6	$	5
Liabilities
Long-term borrowings	$	11,425	$	14,284
Accrued expenses and other liabilities	$	9	$	15

September 30,
2019 December 31,
2018

(unaudited)
(dollars in millions)
Assets
Restricted cash $ 37
$ 1,846
Loan receivables $ 31,145
$ 33,424
Allowance for loan losses allocated to securitized loan receivables $ (1,167 ) $ (1,150 )
Other assets $ 6
$ 7
Liabilities
Long-term borrowings $ 12,820
$ 16,917
Accrued expenses and other liabilities $ 14
$ 18

(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Income


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
	(unaudited) (dollars in millions, except per share amounts)
Interest income
Credit card loans	$	2,171	$	2,465	$	6,760	$	7,223
Other loans	446		472		1,369		1,389
Investment securities	58		53		171		120
Other interest income	6		50		35		222
Total interest income	2,681		3,040		8,335		8,954
Interest expense
Deposits	287		407		1,000		1,194
Short-term borrowings	3		0		3		0
Long-term borrowings	126		231		479		721
Total interest expense	416		638		1,482		1,915
Net interest income	2,265		2,402		6,853		7,039
Provision for credit losses⁽¹⁾	750		799		4,603		2,395
Net interest income after provision for credit losses	1,515		1,603		2,250		4,644
Other income
Discount and interchange revenue, net	238		255		691		785
Protection products revenue	44		48		135		146
Loan fee income	100		120		304		326
Transaction processing revenue	50		52		143		146
Gains on equity investments	0		0		79		0
Other income	17		23		59		73
Total other income	449		498		1,411		1,476
Other expense
Employee compensation and benefits	471		439		1,390		1,291
Marketing and business development	140		230		500		649
Information processing and communications	111		96		342		296
Professional fees	151		189		525		539
Premises and equipment	26		26		83		80
Other expense	106		127		401		354
Total other expense	1,005		1,107		3,241		3,209
Income before income taxes	959		994		420		2,911
Income tax expense	188		224		78		662
Net income	$	771	$	770	$	342	$	2,249
Net income allocated to common stockholders	$	751	$	749	$	309	$	2,203
Basic earnings per common share	$	2.45	$	2.36	$	1.00	$	6.83
Diluted earnings per common share	$	2.45	$	2.36	$	1.00	$	6.82

(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018

(unaudited)
(dollars in millions, except per share amounts)
Interest income
Credit card loans $ 2,465
$ 2,258
$ 7,223
$ 6,487
Other loans 472
437
1,389
1,275
Investment securities 53
10
120
23
Other interest income 50
76
222
201
Total interest income 3,040
2,781
8,954
7,986
Interest expense
Deposits 407
329
1,194
878
Long-term borrowings 231
229
721
656
Total interest expense 638
558
1,915
1,534
Net interest income 2,402
2,223
7,039
6,452
Provision for loan losses 799
742
2,395
2,235
Net interest income after provision for loan losses 1,603
1,481
4,644
4,217
Other income
Discount and interchange revenue, net 255
280
785
797
Protection products revenue 48
51
146
154
Loan fee income 120
103
326
294
Transaction processing revenue 52
47
146
132
Other income 23
20
73
73
Total other income 498
501
1,476
1,450
Other expense
Employee compensation and benefits 439
408
1,291
1,213
Marketing and business development 230
218
649
627
Information processing and communications 96
89
296
257
Professional fees 189
166
539
482
Premises and equipment 26
26
80
76
Other expense 127
108
354
312
Total other expense 1,107
1,015
3,209
2,967
Income before income tax expense 994
967
2,911
2,700
Income tax expense 224
247
662
645
Net income $ 770
$ 720
$ 2,249
$ 2,055
Net income allocated to common stockholders $ 749
$ 699
$ 2,203
$ 2,008
Basic earnings per common share $ 2.36
$ 2.05
$ 6.83
$ 5.77
Diluted earnings per common share $ 2.36
$ 2.05
$ 6.82
$ 5.77

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Comprehensive Income


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
	(unaudited) (dollars in millions)
Net income	$	771	$	770	$	342	$	2,249
Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax	(32)		17		208		119
Unrealized gains (losses) on cash flow hedges, net of tax	3		(8)		4		(38)
Unrealized pension and post-retirement plan gains, net of tax	0		0		0		1
Other comprehensive (loss) income	(29)		9		212		82
Comprehensive income	$	742	$	779	$	554	$	2,331

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018

(unaudited)
(dollars in millions)
Net income $ 770
$ 720
$ 2,249
$ 2,055
Other comprehensive income, net of tax
Unrealized gains (losses) on available-for-sale investment securities, net of tax 17
(2 ) 119
(10 )
Unrealized (losses) gains on cash flow hedges, net of tax (8 ) 4
(38 ) 30
Unrealized pension and post-retirement plan gains, net of tax —
—
1
1
Other comprehensive income 9
2
82
21
Comprehensive income $ 779
$ 722
$ 2,331
$ 2,076

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Changes in Stockholders' Equity


							Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive (Loss) Income				Treasury Stock				Total Stockholders' Equity
	Preferred Stock				Common Stock
	Shares	Amount		Shares	Amount
	(unaudited) (dollars in millions, shares in thousands)
For the Three Months Ended September 30, 2019
Balance at June 30, 2019	6	$	563	566,019	$	6			$	4,167			$	20,107			$	(83)			$	(13,267)			$	11,493
Net income	—	—		—	—		—				770				—				—				770
Other comprehensive income	—	—		—	—		—				—				9				—				9
Purchases of treasury stock	—	—		—	—		—				—				—				(419)				(419)
Common stock issued under employee benefit plans	—	—		25	0		3				—				—				—				3
Common stock issued and stock-based compensation expense	—	—		560	0		18				—				—				—				18
Dividends — common stock ($0.44 per share)	—	—		—	—		—				(142)				—				—				(142)
Dividends — preferred stock ($2,750 per share)	—	—		—	—		—				(15)				—				—				(15)
Balance at September 30, 2019	6	$	563	566,604	$	6	$	4,188			$	20,720			$	(74)			$	(13,686)			$	11,717

For the Three Months Ended September 30, 2020
Balance at June 30, 2020	11	$	1,056	567,653	$	6	$	4,216			$	18,673			$	122			$	(14,430)			$	9,643

Net income	—	—		—	—		—				771				—				—				771
Other comprehensive loss	—	—		—	—		—				—				(29)				—				(29)

Common stock issued under employee benefit plans	—	—		50	0		3				—				—				—				3
Common stock issued and stock-based compensation expense	—	—		41	0		16				—				—				—				16
Preferred stock issued	—	—		—	—		—				—				—				—				0
Dividends — common stock ($0.44 per share)	—	—		—	—		—				(137)				—				—				(137)
Dividends — preferred stock ($2,750 per share)	—	—		—	—		—				(15)				—				—				(15)
Balance at September 30, 2020	11	$	1,056	567,744	$	6	$	4,235			$	19,292			$	93			$	(14,430)			$	10,252

For the Nine Months Ended September 30, 2019
Balance at December 31, 2018	6	$	563	564,852	$	6	$	4,130			$	18,906			$	(156)			$	(12,319)			$	11,130
Net income	—	—		—	—		—				2,249				—				—				2,249
Other comprehensive income	—	—		—	—		—				—				82				—				82
Purchases of treasury stock	—	—		—	—		—				—				—				(1,367)				(1,367)
Common stock issued under employee benefit plans	—	—		76	0		6				—				—				—				6
Common stock issued and stock-based compensation expense	—	—		1,676	0		52				—				—				—				52
Dividends — common stock ($1.24 per share)	—	—		—	—		—				(404)				—				—				(404)
Dividends — Series C preferred stock ($5,500 per share)	—	—		—	—		—				(31)				—				—				(31)
Balance at September 30, 2019	6	$	563	566,604	$	6	$	4,188			$	20,720			$	(74)			$	(13,686)			$	11,717

For the Nine Months Ended September 30, 2020
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	—	—		—	—		—				342				—				—				342
Other comprehensive income	—	—		—	—		—				—				212				—				212
Purchases of treasury stock	—	—		—	—		—				—				—				(343)				(343)
Common stock issued under employee benefit plans	—	—		163	0		7				—				—				—				7
Common stock issued and stock-based compensation expense	—	—		927	0		22				—				—				—				22
Preferred stock issued	5	493		—	—		—				—				—				—				493
Dividends — common stock ($1.32 per share)	—	—		—	—		—				(407)				—				—				(407)
Dividends — preferred stock ($5,500 per share)	—	—		—	—		—				(31)				—				—				(31)
Balance at September 30, 2020	11	$	1,056	567,744	$	6	$	4,235			$	19,292			$	93			$	(14,430)			$	10,252

Additional
Paid-in
Capital

Retained
Earnings
Accumulated Other Comprehensive Loss
Treasury
Stock
Total
Stockholders'
Equity
Preferred Stock Common Stock
Shares Amount Shares Amount

(unaudited)
(dollars in millions, shares in thousands)
For the Three Months Ended September 30, 2018
Balance at June 30, 2018 6
$ 563
564,558
$ 6
$ 4,089
$ 17,787
$ (162 ) $ (11,394 ) $ 10,889
Net income —
—
—
—
—
720
—
—
720
Other comprehensive income —
—
—
—
—
—
2
—
2
Purchases of treasury stock —
—
—
—
—
—
—
(460 ) (460 )
Common stock issued under employee benefit plans —
—
25
—
2
—
—
—
2
Common stock issued and stock-based compensation expense —
—
31
—
16
—
—
—
16
Dividends — common stock
($0.40 per share)
—
—
—
—
—
(138 ) —
—
(138 )
Dividends — preferred stock
($2,750 per share)
—
—
—
—
—
(15 ) —
—
(15 )
Balance at September 30, 2018 6
$ 563
564,614
$ 6
$ 4,107
$ 18,354
$ (160 ) $ (11,854 ) $ 11,016

For the Three Months Ended September 30, 2019
Balance at June 30, 2019 6
$ 563
566,019
$ 6
$ 4,167
$ 20,107
$ (83 ) $ (13,267 ) $ 11,493
Net income —
—
—
—
—
770
—
—
770
Other comprehensive income —
—
—
—
—
—
9
—
9
Purchases of treasury stock —
—
—
—
—
—
—
(419 ) (419 )
Common stock issued under employee benefit plans —
—
25
—
3
—
—
—
3
Common stock issued and stock-based compensation expense —
—
560
—
18
—
—
—
18
Dividends — common stock
($0.44 per share)
—
—
—
—
—
(142 ) —
—
(142 )
Dividends — preferred stock
($2,750 per share)
—
—
—
—
—
(15 ) —
—
(15 )
Balance at September 30, 2019 6
$ 563
566,604
$ 6
$ 4,188
$ 20,720
$ (74 ) $ (13,686 ) $ 11,717

For the Nine Months Ended September 30, 2018
Balance at December 31, 2017 6
$ 563
563,498
$ 6
$ 4,042
$ 16,687
$ (152 ) $ (10,254 ) $ 10,892
Cumulative effect of ASU No. 2018-02 adoption —
—
—
—
—
29
(29 ) —
—
Net income —
—
—
—
—
2,055
—
—
2,055
Other comprehensive income —
—
—
—
—
—
21
—
21
Purchases of treasury stock —
—
—
—
—
—
—
(1,600 ) (1,600 )
Common stock issued under employee benefit plans —
—
70
—
5
—
—
—
5
Common stock issued and stock-based compensation expense —
—
1,046
—
60
—
—
—
60
Dividends — common stock
($1.10 per share)
—
—
—
—
—
(386 ) —
—
(386 )
Dividends — preferred stock
($5,500 per share)
—
—
—
—
—
(31 ) —
—
(31 )
Balance at September 30, 2018 6
$ 563
564,614
$ 6
$ 4,107
$ 18,354
$ (160 ) $ (11,854 ) $ 11,016

For the Nine Months Ended September 30, 2019
Balance at December 31, 2018 6
$ 563
564,852
$ 6
$ 4,130
$ 18,906
$ (156 ) $ (12,319 ) $ 11,130
Net income —
—
—
—
—
2,249
—
—
2,249
Other comprehensive income —
—
—
—
—
—
82
—
82
Purchases of treasury stock —
—
—
—
—
—
—
(1,367 ) (1,367 )
Common stock issued under employee benefit plans —
—
76
—
6
—
—
—
6
Common stock issued and stock-based compensation expense —
—
1,676
—
52
—
—
—
52
Dividends — common stock
($1.24 per share)
—
—
—
—
—
(404 ) —
—
(404 )
Dividends — preferred stock
($5,500 per share)
—
—
—
—
—
(31 ) —
—
(31 )
Balance at September 30, 2019 6
$ 563
566,604
$ 6
$ 4,188
$ 20,720
$ (74 ) $ (13,686 ) $ 11,717

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Cash Flows


	For the Nine Months Ended September 30,
	2020		2019
	(unaudited) (dollars in millions)
Cash flows provided by operating activities
Net income	$	342	$	2,249
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses⁽¹⁾	4,603		2,395
Deferred income taxes	(600)		(95)
Depreciation and amortization	362		315
Amortization of deferred revenues and accretion of accretable yield on acquired loans	(245)		(311)
Net (gain) loss on investments and other assets	(40)		30
Other, net	87		59
Changes in assets and liabilities:
Decrease (increase) in other assets	212		(33)
(Decrease) increase in accrued expenses and other liabilities	(158)		123
Net cash provided by operating activities	4,563		4,732

Cash flows used for investing activities

Purchases of other short-term investments	(8,046)		(1,000)
Maturities of available-for-sale investment securities	724		106
Purchases of available-for-sale investment securities	0		(7,183)
Maturities of held-to-maturity investment securities	34		21
Purchases of held-to-maturity investment securities	(44)		(54)
Net principal repaid (disbursed) on loans originated for investment	5,316		(3,848)
Proceeds from sale of other investments	94		0
Purchases of other investments	(54)		(49)

Purchases of premises and equipment	(206)		(212)
Net cash used for investing activities	(2,182)		(12,219)

Cash flows provided by (used for) financing activities
Proceeds from issuance of securitized debt	0		2,027
Maturities and repayment of securitized debt	(2,974)		(6,278)
Proceeds from issuance of other long-term borrowings	494		1,341
Maturities and repayment of other long-term borrowings	(1,754)		(86)
Proceeds from issuance of common stock	7		6
Purchases of treasury stock	(343)		(1,367)
Net increase in deposits	5,245		3,231
Proceeds from issuance of preferred stock	493		0
Dividends paid on common and preferred stock	(424)		(420)
Net cash provided by (used for) financing activities	744		(1,546)
Net increase (decrease) in cash, cash equivalents and restricted cash	3,125		(9,033)
Cash, cash equivalents and restricted cash, at beginning of period	6,964		15,145
Cash, cash equivalents and restricted cash, at end of period	$	10,089	$	6,112

Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	9,513	$	6,075
Restricted cash	576		37
Cash, cash equivalents and restricted cash, at end of period	$	10,089	$	6,112

For the Nine Months Ended September 30,
2019 2018

(unaudited)
(dollars in millions)
Cash flows from operating activities
Net income $ 2,249
$ 2,055
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 2,395
2,235
Depreciation and amortization 315
326
Amortization of deferred revenues and accretion of accretable yield on acquired loans (311 ) (302 )
Net loss on investments and other assets 30
33
Other, net (36 ) (122 )
Changes in assets and liabilities
(Increase) decrease in other assets (33 ) 43
Increase in accrued expenses and other liabilities 123
162
Net cash provided by operating activities 4,732
4,430

Cash flows from investing activities
Purchases of other short-term investments (1,000 ) —
Maturities of available-for-sale investment securities 106
802
Purchases of available-for-sale investment securities (7,183 ) (983 )
Maturities of held-to-maturity investment securities 21
13
Purchases of held-to-maturity investment securities (54 ) (82 )
Net principal disbursed on loans originated for investment (3,848 ) (4,318 )
Purchases of other investments (49 ) (20 )
Purchases of premises and equipment (212 ) (177 )
Net cash used for investing activities (12,219 ) (4,765 )

Cash flows from financing activities
Proceeds from issuance of securitized debt 2,027
3,076
Maturities and repayment of securitized debt (6,278 ) (3,888 )
Proceeds from issuance of other long-term borrowings 1,341
2,235
Maturities and repayment of other long-term borrowings (86 ) (756 )
Proceeds from issuance of common stock 6
5
Purchases of treasury stock (1,367 ) (1,600 )
Net increase in deposits 3,231
4,886
Dividends paid on common and preferred stock (420 ) (401 )
Net cash (used for) provided by financing activities (1,546 ) 3,557
Net (decrease) increase in cash, cash equivalents and restricted cash (9,033 ) 3,222
Cash, cash equivalents and restricted cash, at beginning of period 15,145
13,387
Cash, cash equivalents and restricted cash, at end of period $ 6,112
$ 16,609

Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents $ 6,075
$ 16,019
Restricted cash 37
590
Cash, cash equivalents and restricted cash, at end of period $ 6,112
$ 16,609

(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.

See Notes to the Condensed Consolidated Financial Statements.

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Notes to the Condensed Consolidated Financial Statements

(unaudited)


1.	~~Background and Basis of Presentation~~

1. Background and Basis of Presentation

Description of Business

Discover Financial Services ("DFS" or the "Company") is a direct banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 as well as a financial holding company under the Gramm-Leach-Bliley Act and therefore is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Company provides direct banking products and services and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home equity loans and deposit products. The Company also operates the Discover Network, the PULSE network ("PULSE") and Diners Club International ("Diners Club"). The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as merchant acceptance throughout the U.S. for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded charge cards and/or provide card acceptance services.

The Company's business activities are managed in 2 segments, Direct Banking and Payment Services, based on the products and services provided. For a detailed description of the operations of each segment, as well as the allocation conventions used in business segment reporting, see Note ~~15:~~17: Segment Disclosures.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments necessary for fair presentation of results for the interim period. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with the Company's ~~2018~~2019 audited consolidated financial statements filed with the Company's annual report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Recently Issued Accounting Pronouncements (Not Yet Adopted)

In ~~June 2016,~~March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU addresses operational challenges resulting from the discontinuation of the London Interbank Offered Rate (“LIBOR”) and other reference rates at the end of 2021. By providing optional practical expedients and exceptions to applying certain GAAP requirements, ASU No. 2020-04 provides temporary relief designed to ease the operational cost and burden of accounting for contract modifications, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. In general, the optional expedients and exceptions allow eligible contracts that are modified due to reference rate reform to be accounted for prospectively as a continuation of those contracts, permit companies to preserve hedge accounting for hedging relationships affected by reference rate reform and enable companies to make a one-time election to transfer or sell certain held-to-maturity debt securities indexed to LIBOR or another reference rate that is expected to be discontinued. The temporary expedients and exceptions are elective and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, with the exception of hedging relationships existing as of that date for which certain optional expedients have been elected and are expected to be retained through the end of the hedging relationships. The ASU is effective upon issuance and management expects to apply the practical expedients provided by the ASU. As part of its overall evaluation of reference rate reform, management is still evaluating the impact that LIBOR replacement will have on the Company’s financial statements. Any

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such impacts will be prospective in nature, affecting net interest income and fair value estimates after the effective date of such rate replacement.

Recently Adopted Accounting ~~Standards Update ("ASU")~~Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments. This ASU replaces~~Instruments. The FASB subsequently issued several additional ASUs that clarify the scope and application of the new credit loss guidance. Topic 326 replaced the incurred loss model with the current expected credit loss ("CECL") approach. For loans carried at amortized cost, the allowance for ~~loan~~credit losses ~~will be~~is now based on management's current estimate of all ~~expected~~anticipated credit losses over the remaining ~~contractual term~~expected life of the loans. Upon the origination of a loan, the Company ~~will have to record~~records its estimate of all expected credit losses on that loan through an immediate charge to earnings. Updates to that estimate each period ~~will be~~are recorded through provision expense. The CECL estimate is ~~to be~~ based on historical experience, current conditions and reasonable and supportable forecasts.

~~The~~As compared to prior GAAP, the CECL approach ~~is expected to increase~~increases the Company's allowance for credit losses on loan ~~losses~~receivables as a result of: (1) recording reserves for expected losses, not simply those deemed to be already incurred, (2) extending the loss estimate period over the entire life of the loan and (3) ~~reclassification of~~presenting the credit loss component of the purchased credit-impaired ("PCI") loan portfolio ~~out of loan carrying value and into~~in the allowance for credit losses rather than embedding it within the loan ~~losses.~~carrying value. The allowance for ~~loan~~credit losses on all loans carried at amortized cost, including loans previously referred to as PCI loans and loans modified in a troubled debt restructuring ("TDR") ~~will be~~are measured under the CECL approach. ~~Existing~~Previous specialized measurement guidance for PCI loans, which ~~the ASU refers~~are now referred to as purchased credit-deteriorated ("PCD"), and TDRs ~~will be~~was eliminated, although certain separate disclosure guidance ~~will be~~was retained.

Measurement of credit impairment of available-for-sale debt securities ~~will~~ generally ~~remain~~remains unchanged under the new rules, but any ~~such~~credit impairment ~~will be~~is recorded through an allowance, rather than a direct write-down of the security. The Company invests in U.S. Treasury and residential mortgage-backed securities issued by government agencies, which 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 ~~nonpayment~~non-payment on its investment securities and ~~will~~does not record an allowance for credit losses on these investments.

The ASU isbecame effective for the Company on January 1, ~~2020. A cross-functional governance structure is in place to oversee the implementation~~2020, and required modified-retrospective application, meaning a cumulative-effect adjustment was recorded as of the ~~standard.~~effective date without adjusting comparative prior periods. This cumulative-effect adjustment did not reflect the economic disruption resulting from the coronavirus disease 2019 ("COVID-19") since the global disruption occurred subsequent to January 1, 2020. As a result of adoption, the Company recorded:

•A $2.5 billion increase to the allowance for credit losses on loan receivables primarily representing the adjustment for recording reserves for expected losses, not simply those deemed to be already incurred, and extending the loss estimate period over the entire life of the loan;

•A $0.6 billion increase to other assets related to deferred tax assets on the larger allowance for credit losses;

•An offsetting $1.9 billion decrease, net of tax, to the opening balance of retained earnings; and

•Immaterial adjustments to the following:

◦The carrying value of PCD loans and related accrued interest reflected in other assets; and

◦Accrued expenses and other liabilities to record reserves for unfunded commitments.

As required by the ASU, financial statement results and balances prior to January 1, 2020, have not been retrospectively adjusted to reflect the amendments in ASU No. 2016-13. Therefore, current period results and balances are not comparable to prior period amounts, particularly with regard to the provision and allowance for credit losses (and their related subtotals).

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2. Investments

The Company's other short-term investments and investment securities consist of the following (dollars in millions):


	September 30, 2020		December 31, 2019
U.S. Treasury bills⁽¹⁾	$	2,139	$	0
U.S. Treasury bills - Pledged	5,909		0
Total other short-term investments	$	8,048	$	0

U.S. Treasury securities	$	3,930	$	9,785
U.S. Treasury securities - Pledged⁽²⁾	5,618		121
Total U.S. Treasury securities	9,548		9,906
Residential mortgage-backed securities - Agency⁽³⁾	11,306		689
Total investment securities	$	20,854	$	10,595

(1)Includes U.S. Treasury bills with maturity dates greater than 90 days but less than one year at the time of acquisition.

(2)As of September 30, 2020 and December 31, 2019, includes $135 million and $121 million, respectively, of U.S. Treasury securities pledged as swap collateral other than amounts associated with the September 2020 securities lending transaction.

(3)Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

In September 2020, the Company, in an initiative for one of Discover Bank's lending businesses, entered into a short-term securities lending transaction with a counterparty. Discover Bank lent $11.4 billion of U.S. Treasury bills and securities and received agency pass-through residential mortgage-backed securities (“RMBS”) as collateral from the borrower. Throughout the term of the transaction, the counterparty is required to adjust the RMBS collateral daily to ensure it is maintained at a fair value equal to $11.6 billion, which is 102% of the value of the U.S. Treasury bills and securities lent.

Of the $11.6 billion of RMBS, the Company has the right to sell or repledge $10.7 billion. As these investments are not held for trading purposes, they are designated as available-for-sale and recorded in investment securities on the condensed consolidated statements of financial position. As of September 30, 2020, the RMBS had a carrying value and fair value of $10.7 billion. NaN portion of the collateral was sold or repledged as of September 30, 2020.

To reflect the obligation to return the RMBS collateral, the Company recognized $10.7 billion in short-term borrowings, which are recorded within the condensed consolidated statements of financial condition as of September 30, 2020. The Company ~~has substantially finalized loss forecasting models~~will release the $11.6 billion of RMBS, and ~~technological solutions,~~receive the U.S. Treasury bills and ~~is refining processes~~securities lent, when the transaction matures in November 2020. The U.S. Treasury bills and ~~controls~~securities are recorded as other short-term investments and investment securities on the Company's condensed consolidated statement of financial position, respectively.

As the lender in ~~support~~the transaction, the Company earns a securities lending fee. This securities lending fee, as well as the interest income and interest expense associated with the transaction, were immaterial for the three and nine months ended September 30, 2020.

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The amortized cost, gross unrealized gains and losses and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in millions):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
At September 30, 2020
Available-for-Sale Investment Securities⁽¹⁾
U.S. Treasury securities	$	9,134	$	414	$	0	$	9,548
Residential mortgage-backed securities - Agency	11,014		11		0		11,025
Total available-for-sale investment securities	$	20,148	$	425	$	0	$	20,573
Held-to-Maturity Investment Securities⁽²⁾
Residential mortgage-backed securities - Agency⁽³⁾	$	281	$	9	$	0	$	290
Total held-to-maturity investment securities	$	281	$	9	$	0	$	290

At December 31, 2019
Available-for-Sale Investment Securities⁽¹⁾
U.S. Treasury securities	$	9,759	$	155	$	(8)	$	9,906
Residential mortgage-backed securities - Agency	414		3		0		417
Total available-for-sale investment securities	$	10,173	$	158	$	(8)	$	10,323
Held-to-Maturity Investment Securities⁽²⁾
Residential mortgage-backed securities - Agency⁽³⁾	$	272	$	3	$	(1)	$	274
Total held-to-maturity investment securities	$	272	$	3	$	(1)	$	274

(1)Available-for-sale investment securities are reported at fair value.

(2)Held-to-maturity investment securities are reported at amortized cost.

(3)Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the ~~new standard. Management also continues to finalize key accounting interpretations,~~Company's community reinvestment initiatives.

The Company invests in U.S. Treasury and residential mortgage-backed securities issued by government agencies, which have long histories with no credit losses and are explicitly or implicitly guaranteed by the ~~reversion method~~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 ~~periods beyond the reasonable and supportable forecast period,~~credit losses on these investments.

The following table provides information about available-for-sale investment securities with aggregate gross unrealized losses and the length of the reasonable and supportable forecast period and reversion period considering economic conditions. Upon adoption, the allowance for loan losses will increase with an offsetting adjustment, net of taxes, to retained earnings. Additionally, there will be an immaterial adjustment to the carrying value of PCD loans. Adoption of the standard will materially impact stockholders' equity, regulatory capital and the Company's consolidated financial condition. In addition, the Company's results of operations may be subject to more volatility. The extent of the impact upon adoption will depend on the characteristics of the Company's loan portfolio and economic conditions attime that ~~date, as well as forecasted conditions thereafter.~~individual investment securities have been in a continuous unrealized loss position (dollars in millions):


	Number of Securities in a Loss Position	Less than 12 months									More than 12 months
				Fair Value			Unrealized Losses			Fair Value			Unrealized Losses





At December 31, 2019
Available-for-Sale Investment Securities
U.S. Treasury securities	11	$	1,402		$	(8)		$	0		$	0


2.	~~Investments~~

The Company's other short-term investments and investment securities consist of the following (dollars in millions):
September 30,
2019 December 31,
2018
Certificates of deposit⁽¹⁾
$ 1,000
$ —
Total other short-term investments $ 1,000
$ —

U.S. Treasury securities⁽²⁾
$ 9,930
$ 2,586
Residential mortgage-backed securities - Agency⁽³⁾
719
784
Total investment securities $ 10,649
$ 3,370


~~(1)~~	~~Includes certificates of deposit with maturity dates greater than 90 days but less than one year at the time of acquisition.~~


~~(2)~~	~~Includes $86 million and $42 million of U.S. Treasury securities pledged as swap collateral as of September 30, 2019 and December 31, 2018, respectively.~~


~~(3)~~	~~Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.~~

The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in millions):

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses
Fair Value
At September 30, 2019
Available-for-Sale Investment Securities⁽¹⁾

U.S. Treasury securities $ 9,758
$ 177
$ (5 ) $ 9,930
Residential mortgage-backed securities - Agency 449
2
(1 ) 450
Total available-for-sale investment securities $ 10,207
$ 179
$ (6 ) $ 10,380
Held-to-Maturity Investment Securities⁽²⁾

Residential mortgage-backed securities - Agency⁽³⁾
$ 269
$ 4
$ —
$ 273
Total held-to-maturity investment securities $ 269
$ 4
$ —
$ 273

At December 31, 2018
Available-for-Sale Investment Securities⁽¹⁾

U.S. Treasury securities $ 2,559
$ 27
$ —
$ 2,586
Residential mortgage-backed securities - Agency 559
—
(12 ) 547
Total available-for-sale investment securities $ 3,118
$ 27
$ (12 ) $ 3,133
Held-to-Maturity Investment Securities⁽²⁾

Residential mortgage-backed securities - Agency⁽³⁾
$ 237
$ —
$ (4 ) $ 233
Total held-to-maturity investment securities $ 237
$ —
$ (4 ) $ 233


~~(1)~~	~~Available-for-sale investment securities are reported at fair value.~~


~~(2)~~	~~Held-to-maturity investment securities are reported at amortized cost.~~


~~(3)~~	~~Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.~~

The following table provides information about investment securities with aggregate gross unrealized losses and the length of time that individual investment securities have been in a continuous unrealized loss position (dollars in millions):
Number of Securities in a Loss Position Less than 12 months More than 12 months

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
At September 30, 2019
Available-for-Sale Investment Securities
U.S. Treasury securities 13
$ 1,660
$ (5 ) $ —
$ —
Residential mortgage-backed securities - Agency 11
$ 70
$ —
$ 78
$ (1 )
Held-to-Maturity Investment Securities
Residential mortgage-backed securities - Agency 22
$ 8
$ —
$ 20
$ —

At December 31, 2018
Available-for-Sale Investment Securities
Residential mortgage-backed securities - Agency 31
$ 110
$ (1 ) $ 437
$ (11 )
Held-to-Maturity Investment Securities
Residential mortgage-backed securities - Agency 90
$ 101
$ (1 ) $ 83
$ (3 )

There were ~~0 losses related to other-than-temporary impairments and~~ 0 proceeds from sales or recognized gains and losses on available-for-sale securities during the three or nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019. See Note 7:9: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three and nine months ended September 30, ~~2019~~2020 and ~~2018.~~

2019.

Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the following table (dollars in millions):
At September 30, 2019
One Year
or
Less

After One
Year
Through
Five Years

After Five
Years
Through
Ten Years

After Ten
Years
Total
Available-for-Sale Investment Securities—Amortized Cost
U.S. Treasury securities $ 621
$ 7,980
$ 1,157
$ —
$ 9,758
Residential mortgage-backed securities - Agency⁽¹⁾
—
97
352
—
449
Total available-for-sale investment securities $ 621
$ 8,077
$ 1,509
$ —
$ 10,207
Held-to-Maturity Investment Securities—Amortized Cost
Residential mortgage-backed securities - Agency⁽¹⁾
$ —
$ —
$ —
$ 269
$ 269
Total held-to-maturity investment securities $ —
$ —
$ —
$ 269
$ 269
Available-for-Sale Investment Securities—Fair Values
U.S. Treasury securities $ 624
$ 8,137
$ 1,169
$ —
$ 9,930
Residential mortgage-backed securities - Agency⁽¹⁾
—
97
353
—
450
Total available-for-sale investment securities $ 624
$ 8,234
$ 1,522
$ —
$ 10,380
Held-to-Maturity Investment Securities—Fair Values
Residential mortgage-backed securities - Agency⁽¹⁾
$ —
$ —
$ —
$ 273
$ 273
Total held-to-maturity investment securities $ —
$ —
$ —
$ 273
$ 273

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

Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the following table (dollars in millions):


At September 30, 2020	One Year or Less		After One Year Through Five Years		After Five Years Through Ten Years		After Ten Years		Total
Available-for-Sale Investment Securities—Amortized Cost
U.S. Treasury securities	$	1,880	$	7,254	$	0	$	0	$	9,134
Residential mortgage-backed securities - Agency⁽¹⁾	0		54		291		10,669		11,014
Total available-for-sale investment securities	$	1,880	$	7,308	$	291	$	10,669	$	20,148
Held-to-Maturity Investment Securities—Amortized Cost
Residential mortgage-backed securities - Agency⁽¹⁾	$	0	$	0	$	0	$	281	$	281
Total held-to-maturity investment securities	$	0	$	0	$	0	$	281	$	281
Available-for-Sale Investment Securities—Fair Values
U.S. Treasury securities	$	1,900	$	7,648	$	0	$	0	$	9,548
Residential mortgage-backed securities - Agency⁽¹⁾	0		56		300		10,669		11,025
Total available-for-sale investment securities	$	1,900	$	7,704	$	300	$	10,669	$	20,573
Held-to-Maturity Investment Securities—Fair Values
Residential mortgage-backed securities - Agency⁽¹⁾	$	0	$	0	$	0	$	290	$	290
Total held-to-maturity investment securities	$	0	$	0	$	0	$	290	$	290

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

Other Investments

As a part of the Company's community reinvestment initiatives, the Company has made equity investments in certain limited partnerships and limited liability companies that finance the construction and rehabilitation of affordable rental housing, as well as stimulate economic development in low to moderate income communities. These investments are accounted for using the equity method of accounting and are recorded within other assets. The related commitment for future investments is recorded in accrued expenses and other liabilities within the condensed consolidated statements of financial condition. The portion of each investment's operating results allocable to the Company reduces the carrying value of the investments and is recorded in other expense within the condensed consolidated statements of income. The Company further reduces the carrying value of the investments by recognizing any amounts that are in excess of future net tax benefits in other expense. The Company earns a return primarily through the receipt of tax credits allocated to the affordable housing projects and the community revitalization projects. These investments are not consolidated as the Company does not have a controlling financial interest in the investee entities. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had outstanding investments in these entities of ~~$321~~$323 million and ~~$295~~$336 million, respectively, and related contingent liabilities of ~~$57~~$61 million and ~~$49~~$74 million, respectively. Of the above outstanding equity investments, the Company had ~~$299~~$292 million and ~~$271~~$298 million of investments related to affordable housing projects as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, which had ~~$57~~$45 million and ~~$30~~$59 million related contingent liabilities, 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 September 30, 2020 and December 31, 2019, the carrying value of these investments, which is recorded within other assets, was $35 million and $42 million, respectively.


3.	~~Loan Receivables~~

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3. Loan Receivables

The Company has 32 loan portfolio segments: credit card loans and other loans.

The Company's classes of receivables within the 2 portfolio segments are depicted in the following table (dollars in millions):


	September 30, 2020		December 31, 2019
Credit card loans⁽¹⁾⁽²⁾	$	69,656	$	77,181
Other loans⁽³⁾
Private student loans⁽⁴⁾	10,016		9,653
Personal loans	7,211		7,687
Other	1,777		1,373
Total other loans	19,004		18,713
Total loan receivables	88,660		95,894
Allowance for credit losses⁽⁵⁾	(8,226)		(3,383)
Net loan receivables	$	80,434	$	92,511

(1)Amounts include carrying values of $15.4 billion and $18.9 billion underlying investors' interest in trust debt at September 30, 2020 and December 31, 2019, respectively, and $11.6 billion and $12.7 billion in seller's interest at September 30, 2020 and December 31, 2019, respectively. See Note 4: Credit Card and 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 condensed consolidated statements of financial condition, was $380 million and $471 million at September 30, 2020 and December 31, 2019, respectively.

(3)Accrued interest receivable on private student, personal and other loans, which is presented as part of other assets in the Company's condensed consolidated statements of financial condition, was $527 million, $47 million and ~~PCI loans.~~$6 million, respectively, at September 30, 2020 and $461 million, $53 million and $4 million, respectively, at December 31, 2019.

(4)Amounts include carrying values of $261 million and $292 million in loans pledged as collateral against the note issued from a student loan securitization trust at September 30, 2020 and December 31, 2019, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.

(5)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.

The Company's classes of receivables within the three portfolio segments are depicted in the following table (dollars in millions):
September 30,
2019 December 31,
2018
Credit card loans⁽¹⁾
$ 73,968
$ 72,876
Other loans
Personal loans 7,596
7,454
Private student loans 8,395
7,728
Other 1,193
817
Total other loans 17,184
15,999
PCI loans⁽²⁾
1,341
1,637
Total loan receivables 92,493
90,512
Allowance for loan losses (3,299 ) (3,041 )
Net loan receivables $ 89,194
$ 87,471

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~~(1)~~

~~Amounts include carrying values of $17.3 billion and $22.0 billion underlying investors' interest in trust debt at~~ ~~September 30, 2019~~ ~~and December 31, 2018, respectively, and $13.6 billion and $11.1 billion in seller's interest at~~ ~~September 30, 2019~~ ~~and December 31, 2018, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.~~


~~(2)~~	~~Amounts include carrying values of~~ ~~$310 million~~ ~~and $363 million in loans pledged as collateral against the note issued from The Student Loan Corporation ("SLC") securitization trust at~~ ~~September 30, 2019~~ ~~and December 31, 2018, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.~~

Credit Quality Indicators

~~The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for loan losses.~~

Information related to the delinquent and non-accruing loans in the Company's loan portfolio is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions):

30-89 Days
Delinquent

90 or
More Days
Delinquent

Total Past
Due

90 or
More Days
Delinquent
and
Accruing

Total
Non-accruing⁽¹⁾
At September 30, 2019
Credit card loans⁽²⁾
$ 950
$ 897
$ 1,847
$ 809
$ 269
Other loans

Personal loans⁽³⁾
79
34
113
32
12
Private student loans (excluding PCI)⁽⁴⁾
114
36
150
35
9
Other 3
1
4
—
14
Total other loans (excluding PCI) 196
71
267
67
35
Total loan receivables (excluding PCI) $ 1,146
$ 968
$ 2,114
$ 876
$ 304

At December 31, 2018
Credit card loans⁽²⁾
$ 885
$ 887
$ 1,772
$ 781
$ 266
Other loans

Personal loans⁽³⁾
84
35
119
33
11
Private student loans (excluding PCI)⁽⁴⁾
117
38
155
37
8
Other 2
1
3
—
17
Total other loans (excluding PCI) 203
74
277
70
36
Total loan receivables (excluding PCI) $ 1,088
$ 961
$ 2,049
$ 851
$ 302

~~(1)~~

The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of non-accruing credit card loans was $12 million and $9 million for the three months ended September 30, 2019 and 2018, respectively, and $34 million and $28 million for the nine months ended September 30, 2019 and 2018, respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. This amount was estimated based on customers' current balances and most recent interest rates.


~~(2)~~	~~Credit card loans that are 90 or more days delinquent and accruing interest include~~ ~~$148 million~~ ~~and $116 million of loans accounted for as TDRs at~~ ~~September 30, 2019~~ ~~and December 31, 2018, respectively.~~


~~(3)~~	~~Personal loans that are 90 or more days delinquent and accruing interest include~~ ~~$8 million~~ ~~and $5 million of loans accounted for as TDRs at~~ ~~September 30, 2019~~ ~~and December 31, 2018, respectively.~~


~~(4)~~	~~Private student loans that are 90 or more days delinquent and accruing interest include~~ ~~$9 million~~ ~~and $7 million of loans accounted for as TDRs at~~ ~~September 30, 2019~~ ~~and December 31, 2018, respectively.~~

Information related to the net charge-offs in the Company's loan portfolio is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions):
For the Three Months Ended September 30,
2019 2018
Net
Charge-offs
Net
Charge-off
Rate⁽¹⁾
Net
Charge-offs
Net
Charge-off
Rate⁽¹⁾
Credit card loans $ 611
3.32 % $ 543
3.14 %
Other loans
Personal loans 76
3.99 % 77
4.09 %
Private student loans (excluding PCI) 14
0.69 % 22
1.19 %
Other 1
— % —
— %
Total other loans 91
2.13 % 99
2.54 %
Net charge-offs (excluding PCI) $ 702
3.09 % $ 642
3.03 %
Net charge-offs (including PCI) $ 702
3.05 % $ 642
2.97 %

For the Nine Months Ended September 30,
2019 2018
Net
Charge-offs
Net
Charge-off
Rate⁽¹⁾
Net
Charge-offs
Net
Charge-off
Rate⁽¹⁾
Credit card loans $ 1,850
3.43 % $ 1,638
3.27 %
Other loans
Personal loans 240
4.28 % 222
4.03 %
Private student loans (excluding PCI) 44
0.73 % 65
1.17 %
Other 1
— % 1
0.13 %
Total other loans 285
2.30 % 288
2.52 %
Net charge-offs (excluding PCI) $ 2,135
3.22 % $ 1,926
3.13 %
Net charge-offs (including PCI) $ 2,135
3.17 % $ 1,926
3.06 %


~~(1)~~	~~Net charge-off rate represents net charge-off dollars (annualized) divided by average loans for the reporting period.~~

As part of credit risk management activities, on an ongoing basis, the Company reviews information related to the performance of a customer's account with the Company as well as information from credit bureaus, such as FICO or other credit scores, relating to the customer's broader credit performance. Key credit quality indicators that are actively monitored for credit card, private student and personal loans include FICO scores and delinquency status. 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 origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that ~~a significant portion of delinquent~~ accounts ~~have~~with FICO scores below ~~660.~~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
	September 30, 2020														December 31, 2019
	660 and Above						Less than 660 or No Score						660 and Above				Less than 660 or No Score
	$		%		$		%		$		%		$		%
Credit card loans⁽¹⁾	$	57,148	82	%	$	12,508	18	%	$	61,997	80	%	$	15,184	20	%
Private student loans by origination year⁽²⁾⁽³⁾
2020	$	983	97	%	$	29	3	%
2019	1,690		97	%	57		3	%	$	1,176	93	%	$	92	7	%
2018	1,399		96	%	60		4	%	1,518		95	%	79		5	%
2017	1,076		95	%	57		5	%	1,198		95	%	69		5	%
2016	817		94	%	48		6	%	934		94	%	58		6	%
Prior	3,586		94	%	214		6	%	4,229		93	%	300		7	%
Total private student loans	$	9,551	95	%	$	465	5	%	$	9,055	94	%	$	598	6	%
Personal loans by origination year
2020	$	2,175	99	%	$	15	1	%
2019	2,506		97	%	89		3	%	$	3,529	98	%	$	62	2	%
2018	1,221		92	%	101		8	%	1,941		93	%	140		7	%
2017	680		89	%	81		11	%	1,167		90	%	136		10	%
2016	242		88	%	34		12	%	475		88	%	65		12	%
Prior	55		82	%	12		18	%	145		84	%	27		16	%
Total personal loans	$	6,879	95	%	$	332	5	%	$	7,257	94	%	$	430	6	%

(1)Amounts include $1.0 billion and $956 million of revolving line-of-credit arrangements that were converted to term loans as a result of a TDR program as of September 30, 2020 and December 31, 2019, respectively.

(2)A majority of student loans 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.

The following table provides the most recent FICO scores available for the Company’s customers as a percentage of each class of loan receivables:
Credit Risk Profile
by FICO Score

660 and
Above

Less than 660
or No Score
At September 30, 2019
Credit card loans 81 % 19 %
Personal loans 94 % 6 %
Private student loans (excluding PCI)⁽¹⁾
95 % 5 %

At December 31, 2018
Credit card loans 81 % 19 %
Personal loans 94 % 6 %
Private student loans (excluding PCI)⁽¹⁾
94 % 6 %

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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.


~~(1)~~	~~PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."~~

~~For~~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):


	September 30, 2020										December 31, 2019
	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	$	678	$	650	$	1,328	$	999	$	1,020	$	2,019
Private student loans by origination year⁽¹⁾⁽²⁾
2020	$	0	$	0	$	0
2019	3		0		3		$	1	$	0	$	1
2018	11		3		14		4		1		5
2017	13		4		17		11		2		13
2016	14		4		18		14		5		19
Prior	76		21		97		106		37		143
Total private student loans	$	117	$	32	$	149	$	136	$	45	$	181
Personal loans by origination year
2020	$	4	$	1	$	5
2019	19		7		26		$	11	$	3	$	14
2018	17		7		24		27		11		38
2017	11		5		16		22		10		32
2016	4		2		6		10		5		15
Prior	1		1		2		4		2		6
Total personal loans	$	56	$	23	$	79	$	74	$	31	$	105

(1)Student loans ~~additional~~may include a deferment period, during which customers 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.

(2)Includes PCD loans for all periods presented.

In response to the pandemic, the Company expanded borrower relief offerings to include Skip-a-Pay (payment deferral) programs in addition to other modification programs already available. While the Company continues to support and provide assistance to all customers impacted by COVID-19, the Company is no longer offering new enrollments in the Skip-a-Pay (payment deferral) programs as of August 31, 2020.

The Skip-a-Pay program allowed customers on a monthly or other periodic basis to request approval to skip their payment(s) for that month or period. The current accounts that used these modifications did not advance to delinquency and delinquent accounts enrolled in these programs did not advance to the next delinquency cycle or to charge-off. These accounts were generally excluded from TDR status either because the concessions were insignificant or they qualified for exemption pursuant to the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").

In addition to the Skip-a-Pay (payment deferral) programs, the Company has other modification programs that customers have utilized during the period. Due to provisions in the CARES Act, some accounts in these programs do not constitute TDRs.

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Allowance for Credit Losses

A detailed description of the Company's allowance for credit ~~risk management activities include monitoring~~losses policy can be found under the sub-heading "— Significant Loan Receivables Accounting Policies — Allowance for Credit Losses" below.

The following tables provide changes in the Company's allowance for credit losses (dollars in millions):


	For the Three Months Ended September 30, 2020
	Credit Card Loans		Student Loans		Personal Loans		Other Loans		Total
Balance at June 30, 2020	$	6,491	$	799	$	857	$	37	$	8,184
Additions
Provision for credit losses⁽¹⁾	604		55		49		2		710
Deductions
Charge-offs	(759)		(20)		(62)		(1)		(842)
Recoveries	155		6		13		0		174
Net charge-offs	(604)		(14)		(49)		(1)		(668)

Balance at September 30, 2020	$	6,491	$	840	$	857	$	38	$	8,226

	For the Three Months Ended September 30, 2019
	Credit Card Loans		Student Loans		Personal Loans		Other Loans		Total
Balance at June 30, 2019⁽²⁾	$	2,691	$	167	$	338	$	6	$	3,202
Additions
Provision for credit losses⁽²⁾	719		(6)		86		0		799
Deductions
Charge-offs	(784)		(17)		(89)		(1)		(891)
Recoveries	173		3		13		0		189
Net charge-offs⁽³⁾	(611)		(14)		(76)		(1)		(702)

Balance at September 30, 2019⁽²⁾	$	2,799	$	147	$	348	$	5	$	3,299

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	For the Nine Months Ended September 30, 2020
	Credit Card Loans		Student Loans		Personal Loans		Other Loans		Total
Balance at December 31, 2019⁽²⁾	$	2,883	$	148	$	348	$	4	$	3,383
Cumulative effect of ASU No. 2016-13 adoption⁽⁴⁾	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⁾	3,916		233		426		11		4,586
Deductions
Charge-offs	(2,480)		(62)		(224)		(1)		(2,767)
Recoveries	505		16		42		0		563
Net charge-offs	(1,975)		(46)		(182)		(1)		(2,204)

Balance at September 30, 2020	$	6,491	$	840	$	857	$	38	$	8,226

	For the Nine Months Ended September 30, 2019
	Credit Card Loans		Student Loans		Personal Loans		Other Loans		Total
Balance at December 31, 2018⁽²⁾	$	2,528	$	169	$	338	$	6	$	3,041
Additions
Provision for credit losses⁽²⁾	2,121		24		250		0		2,395
Deductions
Charge-offs	(2,347)		(54)		(274)		(1)		(2,676)
Recoveries	497		10		34		0		541
Net charge-offs⁽³⁾	(1,850)		(44)		(240)		(1)		(2,135)
Other⁽⁵⁾	0		(2)		0		0		(2)
Balance at September 30, 2019⁽²⁾	$	2,799	$	147	$	348	$	5	$	3,299

(1)Excludes a $40 million build and $17 million build of the liability for expected credit losses on unfunded commitments for the three months and nine months ended September 30, 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition.

(2)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.

(3)Prior to adoption of ASU No. 2016-13 on January 1, 2020, net charge-offs on PCD loans generally did not result in a charge to earnings.

(4)Represents the adjustment to allowance for credit losses as a result of adoption of ASU No. 2016-13 on January 1, 2020.

(5)Net change in reserves on PCD pools having no remaining non-accretable difference (prior to adoption of ASU No. 2016-13 on January 1, 2020).

The allowance for credit losses was $8.2 billion at September 30, 2020, which is essentially flat compared to the amount of the allowance for credit losses at June 30, 2020. In estimating the allowance at September 30, 2020, the Company used a macroeconomic forecast that projected slight improvement from the prior quarter, including a peak unemployment rate of 11%, which remained flat through the end of 2020 and recovers slowly over the next few years. The Company also considered the uncertainties associated with some of the assumptions used in that macroeconomic forecast, including the amount and timing of additional government stimulus. Furthermore, the estimate contemplated the impact of previous government stimulus programs and other company-initiated loan modification programs on borrower payment trends. The impact of COVID-19 on the economy has continued to cause uncertainty in assumptions surrounding factors such as length and depth of economic stresses and longer term impacts on borrower behavior, which has required significant management judgment in estimating the allowance for credit losses.

Company-initiated loan modification programs include those offered specifically in response to COVID-19 as well as existing programs also offered to customers experiencing difficulty making their payments. In addition to Skip-a-Pay (payment deferral) programs, which ended on August 31, 2020, the Company has other modification programs that customers have utilized during the period related to the pandemic. The accounts using these modifications are generally excluded from TDR status either because the concessions are insignificant or they qualify for exemption under the CARES Act. All modifications are considered as part of the process for determining the allowance for credit losses.

The allowance for credit losses was $8.2 billion at September 30, 2020, which reflects a $4.8 billion build over the amount of the allowance for credit losses at December 31, 2019. The allowance build across all loan products was due to (I) a

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$2.5 billion cumulative-effect adjustment for the adoption of CECL on January 1, 2020, and (II) a $2.3 billion build that primarily reflects an economic outlook that included the COVID-19 pandemic and resulting economic stress.

The forecast period management deemed to be reasonable and supportable was 18 months for all periods since the adoption of CECL except for the estimate as of March 31, 2020. The decrease to 12 months as of March 31, 2020, was due to the uncertainty caused by the rapidly changing economic environment resulting from the COVID-19 pandemic. The return to an 18-month reasonable and supportable forecast period was based on the view that the present macroeconomic conditions will last for a longer period than previously expected. The reversion period was 12 months for all quarters since the adoption of CECL. During the first quarter of 2020, a straight-line method was used to revert to appropriate historical information. In the second quarter of 2020, the high degree of economic stress led the Company to apply a weighted reversion method for credit card loans that puts more emphasis on the loss forecast model rather than lower historical losses. For similar reasons, the Company determined it was appropriate to apply a weighted reversion method for all loans in ~~forbearance. Forbearance allows borrowers experiencing temporary financial difficulties and willing to make payments,~~ the ~~ability to temporarily suspend payments. Eligible borrowers have a lifetime cap~~third quarter.

The net charge-offs on ~~forbearance of 12 months. At~~credit card loans for the three months ended September 30, 2020, was relatively flat when compared to same period in 2019. The increase in net charge-offs on credit card loans for the nine months ended September 30, 2020, when compared to the same period in 2019 ~~and December 31, 2018, there were $41 million and $37 million, respectively,~~was due to the seasoning of ~~private student loans, including those classified as PCI, in forbearance, representing 0.8% and 0.7%, respectively, of total student loans in repayment and forbearance.~~recent years' loan growth.

~~Allowance~~Net charge-offs of principal are recorded against the allowance for ~~Loan Losses~~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 Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)	$	114	$	127	$	393	$	382
Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)	$	27	$	29	$	95	$	90

The following tables provide changes in the Company's allowance for loan losses (dollars in millions):
For the Three Months Ended September 30, 2019
Credit Card Personal Loans
Student Loans⁽¹⁾
Other Total
Balance at beginning of period $ 2,691
$ 338
$ 167
$ 6
$ 3,202
Additions
Provision for loan losses 719
86
(6 ) —
799
Deductions
Charge-offs (784 ) (89 ) (17 ) (1 ) (891 )
Recoveries 173
13
3
—
189
Net charge-offs (611 ) (76 ) (14 ) (1 ) (702 )
Balance at end of period $ 2,799
$ 348
$ 147
$ 5
$ 3,299

For the Three Months Ended September 30, 2018
Credit Card Personal Loans
Student Loans⁽¹⁾
Other Total
Balance at beginning of period $ 2,334
$ 313
$ 170
$ 11
$ 2,828
Additions
Provision for loan losses 633
87
22
—
742
Deductions
Charge-offs (674 ) (86 ) (25 ) —
(785 )
Recoveries 131
9
3
—
143
Net charge-offs (543 ) (77 ) (22 ) —
(642 )
Other⁽²⁾
—
—
(1 ) —
(1 )
Balance at end of period $ 2,424
$ 323
$ 169
$ 11
$ 2,927

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

The following tables provide changes in the Company's allowance for loan losses (dollars in millions):
For the Nine Months Ended September 30, 2019
Credit Card Personal Loans
Student Loans⁽¹⁾
Other Total
Balance at beginning of period $ 2,528
$ 338
$ 169
$ 6
$ 3,041
Additions
Provision for loan losses 2,121
250
24
—
2,395
Deductions
Charge-offs (2,347 ) (274 ) (54 ) (1 ) (2,676 )
Recoveries 497
34
10
—
541
Net charge-offs (1,850 ) (240 ) (44 ) (1 ) (2,135 )
Other⁽²⁾
—
—
(2 ) —
(2 )
Balance at end of period $ 2,799
$ 348
$ 147
$ 5
$ 3,299

For the Nine Months Ended September 30, 2018
Credit Card Personal Loans
Student Loans⁽¹⁾
Other Total
Balance at beginning of period $ 2,147
$ 301
$ 162
$ 11
$ 2,621
Additions
Provision for loan losses 1,915
244
75
1
2,235
Deductions
Charge-offs (2,021 ) (247 ) (74 ) (1 ) (2,343 )
Recoveries 383
25
9
—
417
Net charge-offs (1,638 ) (222 ) (65 ) (1 ) (1,926 )
Other⁽²⁾
—
—
(3 ) —
(3 )
Balance at end of period $ 2,424
$ 323
$ 169
$ 11
$ 2,927


~~(1)~~	~~Includes both PCI and non-PCI private student loans.~~


~~(2)~~	~~Net change in reserves on PCI pools having no remaining non-accretable difference.~~

Net charge-offs of principal are recorded against the allowance for loan losses, as shown in the preceding table. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions):
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income) $ 127
$ 109
$ 382
$ 328
Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income) $ 29
$ 26
$ 90
$ 81

The following tables provide additional detail of the Company's allowance for loan losses and recorded investment in its loan portfolio by impairment methodology (dollars in millions):
Credit Card
Personal
Loans

Student
Loans⁽¹⁾

Other
Loans
Total
At September 30, 2019
Allowance for loans evaluated for impairment as
Collectively evaluated for impairment in accordance with
ASC 450-20
$ 2,297
$ 287
$ 95
$ 4
$ 2,683
Evaluated for impairment in accordance with
ASC 310-10-35⁽²⁾⁽³⁾
502
61
29
1
593
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 —
—
23
—
23
Total allowance for loan losses $ 2,799
$ 348
$ 147
$ 5
$ 3,299
Recorded investment in loans evaluated for impairment as
Collectively evaluated for impairment in accordance with
ASC 450-20
$ 70,860
$ 7,401
$ 8,146
$ 1,141
$ 87,548
Evaluated for impairment in accordance with
ASC 310-10-35⁽²⁾⁽³⁾
3,108
195
249
52
3,604
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 —
—
1,341
—
1,341
Total recorded investment $ 73,968
$ 7,596
$ 9,736
$ 1,193
$ 92,493

At December 31, 2018
Allowance for loans evaluated for impairment as
Collectively evaluated for impairment in accordance with
ASC 450-20
$ 2,229
$ 292
$ 121
$ 4
$ 2,646
Evaluated for impairment in accordance with
ASC 310-10-35⁽²⁾⁽³⁾
299
46
23
2
370
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 —
—
25
—
25
Total allowance for loan losses $ 2,528
$ 338
$ 169
$ 6
$ 3,041
Recorded investment in loans evaluated for impairment as
Collectively evaluated for impairment in accordance with
ASC 450-20
$ 70,628
$ 7,302
$ 7,546
$ 761
$ 86,237
Evaluated for impairment in accordance with
ASC 310-10-35⁽²⁾⁽³⁾
2,248
152
182
56
2,638
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 —
—
1,637
—
1,637
Total recorded investment $ 72,876
$ 7,454
$ 9,365
$ 817
$ 90,512


~~(1)~~	~~Includes both PCI and non-PCI private student loans.~~

~~(2)~~

Loan receivables evaluated for impairment in accordance with Accounting Standards Codification ("ASC") 310-10-35 include credit card loans, personal loans and student loans collectively evaluated for impairment in accordance with ASC Subtopic 310-40, ~~Receivables,~~ ~~which consists of modified loans accounted for as TDRs. Other loans are individually evaluated for impairment and generally do not represent TDRs.~~

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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 by 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⁾
At September 30, 2020
Credit card loans	$	678	$	650	$	1,328	$	604	$	196
Other loans
Private student loans⁽²⁾	117		32		149		31		12
Personal loans	56		23		79		22		9
Other	8		3		11		0		11
Total other loans	181		58		239		53		32
Total loan receivables	$	859	$	708	$	1,567	$	657	$	228

At December 31, 2019
Credit card loans	$	999	$	1,020	$	2,019	$	940	$	237
Other loans
Private student loans⁽²⁾	136		45		181		45		11
Personal loans	74		31		105		29		12
Other	5		2		7		0		6
Total other loans	215		78		293		74		29
Total loan receivables	$	1,214	$	1,098	$	2,312	$	1,014	$	266

(1)The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of non-accruing credit card loans was $7 million and $12 million for the three months ended September 30, 2020 and 2019, respectively, and $25 million and $34 million for the nine months ended September 30, 2020 and 2019, respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. This amount was estimated based on customers' current balances and most recent interest rates.

(2)Includes PCD loans for all periods presented.

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~~(3)~~	~~The unpaid principal balance of credit card loans was~~ ~~$2.8 billion~~ ~~and $2.0 billion at~~ ~~September 30, 2019~~ ~~and December 31, 2018, respectively. All loans accounted for as TDRs have a related allowance for loan losses.~~

Troubled Debt Restructurings

The Company has internal loan modification programs that provide relief to credit card, ~~personal loan~~student and ~~student~~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. New programs are continually ~~evaluates new programs~~evaluated to determine which of them meet the definition of a ~~TDR.~~TDR, including programs provided to customers for temporary relief due to the economic impacts of the COVID-19 outbreak that may be subject to regulatory exclusion from TDR status. 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. ~~Temporary~~For all temporary modification programs, including those created specifically in response to COVID-19, the accounts are reviewed for exclusion from being reported as a TDR in accordance with the CARES Act. To the extent the accounts do not meet the requirements for exclusion, temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on student loans and certain grants of student loan forbearance, result in the loans being ~~considered individually impaired.~~classified as TDRs. In addition, loans that defaulted (see table on loans that defaulted from a TDR program that follows) or graduated from modification programs or forbearance ~~are considered~~continue to be ~~individually impaired.~~classified as TDRs, except as noted below.

For credit card customers, the Company offers both temporary and permanent hardship programs. The temporary hardship programs ~~consisting~~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 loans are generally suspended while in the program and if certain criteria are met, may be reinstated following completion of the program. Beginning in 2020, credit card accounts of borrowers that 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 60 months and reducing the interest rate on the loan. The permanent modification program does not normally 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 but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. ~~Modified credit card~~These loans remain in the population of TDRs until they are paid off or charged off.

At September 30, 2020 and December 31, 2019, there were $5.3 billion and $5.6 billion, respectively, of private student loans in repayment and $64 million and $46 million, respectively, in forbearance. To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance or programs that ~~are deemed to meet~~include payment deferral, temporary payment reduction, temporary interest rate reduction or extended terms. A modified loan typically meets the definition of ~~TDRs include loans in both temporary~~a TDR based on the cumulative length of the concession period and ~~permanent programs.~~a determination of financial distress based on an evaluation of the credit quality of the borrower using FICO scores.

For personal loan customers, in certain situations the Company offers various payment programs, including temporary and permanent programs. The temporary programs normally consist of a reduction of the minimum payment for a period of no longer than 12 months with the option of a final balloon payment required at the end of the loan term or an extension of the maturity date with the total term not exceeding nine years. Further, in certain circumstances the interest rate on the loan is reduced. The permanent programs involve changing the terms of the loan in order to pay off the outstanding balance over a longer term and ~~also~~ in certain circumstances reducing the interest rate on the loan. Similar to the temporary programs, the total term 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 ~~accounted for~~classified as TDRs.

At September 30, 2019, there was $5.2 billion of private student loans in repayment, which includes both PCI and non-PCI loans. To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance or programs that include payment deferral, temporary payment reduction, temporary interest rate reduction or extended terms. A non-PCI modified loan typically meets the definition of a TDR based on the cumulative length of the concession period and an evaluation of the credit quality of the borrower based on FICO scores.

Borrower performance after using payment programs or forbearance is monitored and the Company believes the programs ~~help to prevent defaults and~~ are useful in assisting customers experiencing financial ~~difficulties.~~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 as a means to provide relief to customers experiencing temporary financial difficulties and, as a result, expects to have additional loans classified as TDRs in the future.

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Additional information about modified loans classified as TDRs is shown below (dollars in millions):
Average recorded investment in loans
Interest income recognized during period loans were impaired⁽¹⁾

Gross interest income that would have been recorded with original terms⁽²⁾
For the Three Months Ended September 30, 2019
Credit card loans⁽³⁾
$ 2,960
$ 93
$ 53
Personal loans $ 188
$ 5
$ 3
Private student loans $ 239
$ 5
$ 1

For the Three Months Ended September 30, 2018
Credit card loans⁽³⁾
$ 1,815
$ 48
$ 37
Personal loans $ 134
$ 4
$ 1
Private student loans $ 166
$ 3
$ —

For the Nine Months Ended September 30, 2019
Credit card loans⁽³⁾
$ 2,682
$ 245
$ 148
Personal loans $ 174
$ 13
$ 7
Private student loans $ 215
$ 13
$ 1

For the Nine Months Ended September 30, 2018
Credit card loans⁽³⁾
$ 1,612
$ 123
$ 95
Personal loans $ 125
$ 10
$ 4
Private student loans $ 152
$ 9
$ —


~~(1)~~	The Company does not separately track interest income on loans in modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs.

~~(2)~~

The Company does not separately track the amount of additional gross interest income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on non-impaired loans and the average interest rate earned on loans in the modification programs to the average loans in the modification programs.

~~(3)~~

Includes credit card loans that were modified in TDRs, but are no longer enrolled in a TDR program due to noncompliance with the terms of the modification or due to successful completion of a program after which charging privileges may be reinstated based on customer-level evaluation. The average balance of credit card loans that were no longer enrolled in a TDR program was $985 million and $427 million for the three months ended September 30, 2019 and 2018, respectively, and $833 million and $404 million for the nine months ended September 30, 2019 and 2018, respectively.

In order to evaluate the primary financial effects that resulted from credit card loans entering into a ~~loan modification~~TDR program during the three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company quantified the amount by which interest and fees were reduced during the periods. During the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company forgave approximately ~~$19~~$13 million and ~~$12~~$19 million, respectively, of interest and fees as a result of accounts entering into a credit card loan ~~modification~~TDR program. During the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company forgave approximately ~~$53~~$52 million and ~~$35~~$53 million, respectively, of interest and fees as a result of accounts entering into a credit card loan ~~modification~~TDR program. For all loan products, interest income on modified loans is recognized based on the modified contractual terms.

TDR program balances and number of accounts have been favorably impacted by customer usage of modifications that were subject to TDR exclusion in accordance with the CARES Act and are lower than comparative periods as a result.

The following table provides information on loans that entered a TDR program during the period (dollars in millions):


	For the Three Months Ended September 30,
	2020				2019
	Number of Accounts	Balances		Number of Accounts	Balances
Accounts that entered a TDR program during the period
Credit card loans⁽¹⁾	20,779	$	150	97,046	$	623
Private student loans	118	$	2	1,692	$	31
Personal loans	2,505	$	33	2,859	$	39

	For the Nine Months Ended September 30,
	2020				2019
	Number of Accounts	Balances		Number of Accounts	Balances
Accounts that entered a TDR program during the period
Credit card loans⁽¹⁾	130,869	$	875	273,970	$	1,766
Private student loans	1,767	$	32	4,978	$	92
Personal loans	6,315	$	83	8,129	$	110

(1)

The following table provides information on loans that entered a loan modification program during the period (dollars in millions):
For the Three Months Ended September 30,
2019 2018
Number of Accounts Balances Number of Accounts Balances
Accounts that entered a loan modification program during the period
Credit card loans 97,046
$ 623
69,127
$ 444
Personal loans 2,859
$ 39
1,903
$ 27
Private student loans 1,692
$ 31
935
$ 17

For the Nine Months Ended September 30,
2019 2018
Number of Accounts Balances Number of Accounts Balances
Accounts that entered a loan modification program during the period
Credit card loans 273,970
$ 1,766
185,185
$ 1,187
Personal loans 8,129
$ 110
5,867
$ 79
Private student loans 4,978
$ 92
2,887
$ 54

Accounts that entered a credit card TDR program include $143 million and $173 million that were converted from revolving line-of-credit arrangements to term loans during the three months ended September 30, 2020 and 2019, respectively, and $529 million and $336 million for the nine months ended September 30, 2020 and 2019, respectively.

The following table presents the carrying value of loans that experienced a payment 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 Three Months Ended September 30,
2019 2018
Number of Accounts Aggregated Outstanding Balances Upon Default Number of Accounts Aggregated Outstanding Balances Upon Default
Troubled debt restructurings that subsequently defaulted
Credit card loans⁽¹⁾⁽²⁾
19,108
$ 109
10,535
$ 60
Personal loans⁽²⁾
1,131
$ 15
847
$ 11
Private student loans⁽³⁾
396
$ 8
278
$ 5

For the Nine Months Ended September 30,
2019 2018
Number of Accounts Aggregated Outstanding Balances Upon Default Number of Accounts Aggregated Outstanding Balances Upon Default
Troubled debt restructurings that subsequently defaulted
Credit card loans⁽¹⁾⁽²⁾
50,980
$ 294
28,319
$ 156
Personal loans⁽²⁾
2,925
$ 42
2,059
$ 27
Private student loans⁽³⁾
966
$ 19
753
$ 13

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	For the Three Months Ended September 30,
	2020				2019
	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⁾	8,983	$	52	19,108	$	109
Private student loans⁽³⁾	272	$	6	396	$	8
Personal loans⁽²⁾	624	$	9	1,131	$	15

	For the Nine Months Ended September 30,
	2020				2019
	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⁾	41,285	$	235	50,980	$	294
Private student loans⁽³⁾	876	$	18	966	$	19
Personal loans⁽²⁾	2,446	$	36	2,925	$	42

(1)

~~Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain revoked in most cases.~~


~~(2)~~	For credit card loans and personal loans, a customer defaults from a modification program after 2 consecutive missed payments. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.

~~(3)~~

~~For student loans, defaults have been defined as loans that are~~ 60Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain suspended in most cases.

(2)For credit card loans and personal loans, a customer defaults from a TDR program after 2 consecutive missed payments. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.

(3)For student loans, defaults have been defined as loans that 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 three months ended September 30, 2020 and 2019, approximately 65% and ~~2018,~~37%, respectively, and for the nine months ended September 30, 2020 and 2019, approximately ~~37%~~52% and ~~34%~~38%, respectively, of the total balances were charged off at the end of the month in which they defaulted from a ~~loan modification~~TDR program. Of

Significant Loan Receivables Accounting Policies

With the ~~account balances that defaulted as shown above~~adoption of ASU No. 2016-13 on January 1, 2020, certain significant accounting policies have changed since disclosed in Note 2: Summary of Significant Accounting Policies to the consolidated financial statements of the Company's annual report on Form 10-K for the ~~nine months~~year ended ~~September 30, 2019~~December 31, 2019. Refer to Note 1: Background and ~~2018, approximately 38% and 35%, respectively,~~Basis of Presentation for details on adoption of the ~~total balances were charged off at~~standard. Impacts on all significant loan receivables accounting policies are summarized as follows:

•The loan receivables policy was updated to reflect the ~~end~~removal of PCI loans as a separate loan portfolio segment.

•The relevance of the ~~month in which they defaulted from~~PCI loan policy was eliminated by CECL and therefore it was removed as a ~~loan modification program. For accounts that have defaulted from a loan~~significant accounting policy.

•The delinquent loans and charge-offs policy did not change.

~~modification program and have not been subsequently charged off, the balances are included in the~~•The allowance for ~~loan loss analysis discussed above under "— Allowance~~credit losses policy was updated to reflect the CECL approach for ~~Loan Losses."~~

~~Purchased Credit-Impaired Loans~~estimating credit losses.

~~Purchased loans~~•The loan interest and fee income policy, which includes certain accounting policy elections related to accrued interest, did not materially change.

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The policies below represent those with ~~evidence~~significant updates resulting from adoption of ASU 2016-13 and are reflective of those updates. Policies that did not materially change can be found at Note 2: Summary of Significant Accounting Policies to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, 2019.

Loan Receivables

Loan receivables consist of credit ~~deterioration since~~card receivables and other loan receivables. Loan receivables also include unamortized net deferred loan origination fees and costs. Credit card loan receivables are reported at their principal amounts outstanding and include uncollected billed interest and fees and are reduced for ~~which it is probable that not all contractually required payments will be collected are considered impaired at acquisition~~unearned revenue related to balance transfer fees. Other loan receivables consist of student loans, personal loans and other loans and are reported ~~as PCI loans. The private~~at their principal amounts outstanding. For 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.

Allowance for Credit Losses

The Company maintains an allowance for credit losses at a level that is appropriate to absorb credit losses anticipated over the ~~SLC transaction,~~remaining expected life of loan receivables as ~~well as~~of the ~~additional acquired private student loan portfolio comprise~~balance sheet date. The estimate of expected credit losses considers uncollectible principal, interest and fees associated with the Company's ~~only PCI loans at~~ ~~September 30, 2019~~ ~~and December 31, 2018. Total PCI student loans had an outstanding balance of~~ ~~$1.4 billion~~ ~~and $1.7 billion, including accrued interest, and a related carrying amount of $1.3 billion and $1.6 billion~~loan receivables existing as of ~~September 30, 2019~~ ~~and December 31, 2018, respectively.~~

The following table provides changes in accretable yield for the acquired loans during each period (dollars in millions):
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Balance at beginning of period $ 508
$ 608
$ 548
$ 669
Accretion into interest income (29 ) (34 ) (92 ) (106 )
Other changes in expected cash flows —
1
23
12
Balance at end of period $ 479
$ 575
$ 479
$ 575

~~Periodically,~~ the ~~Company updates~~balance sheet date. Additionally, the estimate includes expected recoveries of ~~cash flows~~amounts that were either previously charged off or are expected to be ~~collected based on management's latest expectations~~charged off. The allowance is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for credit losses. Charge-offs of ~~future net~~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 ~~borrower prepayments and certain other assumptions that affect cash flows. NaN provision expense was recorded during~~by estimating expected credit losses separately for classes of the ~~three or nine months ended September 30, 2019 and 2018.~~loan portfolio with similar risk characteristics, which results in segmenting the portfolio by loan product type. The allowance for ~~PCI~~credit losses for each loan ~~losses at September 30, 2019~~product type is based on: 1) a reasonable and ~~December 31, 2018 was $23 million~~supportable forecast period, 2) a reversion period and ~~$25 million, respectively. For the nine months ended September 30, 2019 and three and nine months ended September 30, 2018, the increase in accretable yield was primarily driven by changes in rates~~3) a post-reversion period based on variable-rate loans. There were no changes in the cash flow assumption for the three months ended September 30, 2019. Changes to accretable yield are recognized prospectively as an adjustment to yield overhistorical information covering the remaining life of the ~~pools.~~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. Generally, a straight-line method is used 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.

~~At September 30, 2019,~~Several analyses are used to help estimate credit losses anticipated over the ~~30 or more days delinquency~~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 ~~90 or more days delinquency rates~~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 model estimates the probability of charge-off at different points in time over the life of each loan.

•Exposure at default: this model 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 ~~PCI~~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 model 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.

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For student loans ~~(which~~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 models described above for credit card, student and personal loans are developed utilizing historical data and applicable macroeconomic variable inputs based on statistical analysis and 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 student and personal loans, the Company 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 ~~not yet~~modified in ~~repayment) were 2.90% and 0.72%, respectively. At December 31, 2018,~~a TDR. For the ~~30 or more days delinquency and 90 or more days delinquency rates~~credit card loan portfolio, the Company estimates its credit losses on ~~PCI student loans (which include loans not yet in repayment) were 2.93% and 0.78%, respectively. These rates include private student~~a loan-level basis, which includes loans that are ~~greater than 120 days~~ delinquent and/or no longer accruing interest and/or loans that ~~are covered by an indemnification agreement or insurance arrangements through which~~have been modified under a TDR. For the remainder of its portfolio, including student, personal and other loans, the Company ~~expects~~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.

Interest on credit card loans is included in the estimate of expected credit losses once billed to ~~recover a substantial portion~~the customer (i.e., once the interest becomes part of the ~~loan.~~ loan balance). An allowance for credit losses is measured for accrued interest on all other loans and is presented as part of allowance for credit losses in the consolidated statements of financial condition.

The ~~net charge-off rate~~Company records a liability for expected credit losses for unfunded commitments on ~~PCI student~~all other loans, ~~was 0.32%~~which is presented as part of accrued expenses and ~~0.64%~~other liabilities in the consolidated statements of financial condition. This liability is evaluated quarterly for appropriateness and is maintained through an adjustment to the ~~three months ended September 30, 2019~~provision for 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.

4. Credit Card and ~~2018, respectively, and 0.33% and 0.71% for the nine months ended September 30, 2019 and 2018, respectively.~~Student Loan Securitization Activities


4.	~~Credit Card and 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 to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Credit Card Securitization Activities

The Company accesses the term asset securitization market through the Discover Card Master Trust I ("DCMT") and the Discover Card Execution Note Trust ("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 in long-term borrowings.

The DCENT debt structure consists of 4 classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. In order 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. The subordinated classes are held by wholly-owned subsidiaries of Discover Bank. The

Company is exposed to credit-related risk of loss associated with trust assets as of the balance sheet date through the retention of these subordinated interests. The estimated ~~probable incurred~~ loss is included in the allowance for ~~loan~~credit losses estimate.

The Company's retained interests in the assets of the trusts, consisting of investments in DCENT notes held by subsidiaries of Discover Bank, constitute intercompany positions, which are eliminated in the preparation of the Company's condensed consolidated statements of financial condition.

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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 trusts' creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to third-party creditors of the Company. The trusts have ownership of cash balances, the amounts of which are reported in restricted cash. With the exception of the seller's interest in trust receivables, the Company's interests in trust assets are generally subordinate to the interests of third-party investors and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts' debt. 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.


	September 30, 2020		December 31, 2019
Restricted cash	$	567	$	28

Investors' interests held by third-party investors	11,150		14,100
Investors' interests held by wholly-owned subsidiaries of Discover Bank	4,249		4,796
Seller's interest	11,627		12,652
Loan receivables⁽¹⁾	27,026		31,548
Allowance for credit losses allocated to securitized loan receivables⁽¹⁾⁽²⁾	(1,964)		(1,179)
Net loan receivables	25,062		30,369
Other	4		5
Carrying value of assets of consolidated variable interest entities	$	25,633	$	30,402

The carrying values of these restricted assets, which are presented on the Company's condensed consolidated statements of financial condition as relating to securitization activities, are shown in the following table (dollars in millions):
September 30,
2019 December 31,
2018
Restricted cash $ 26
$ 1,834

Investors' interests held by third-party investors 12,600
16,800
Investors' interests held by wholly-owned subsidiaries of Discover Bank 4,657
5,211
Seller's interest 13,578
11,050
Loan receivables⁽¹⁾
30,835
33,061
Allowance for loan losses allocated to securitized loan receivables⁽¹⁾
(1,167 ) (1,150 )
Net loan receivables 29,668
31,911
Other 6
7
Carrying value of assets of consolidated variable interest entities $ 29,700
$ 33,752

(1)The Company maintains its allowance for credit losses at an amount sufficient to absorb expected losses inherent in all loan receivables, which includes all loan receivables in the trusts. Therefore, credit risk associated with the transferred receivables is fully reflected on the Company's balance sheet in accordance with GAAP.


~~(1)~~	The Company maintains its allowance for loan losses at an amount sufficient to absorb probable losses inherent in all loan receivables, which includes all loan receivables in the trusts. Therefore, credit risk associated with the transferred receivables is fully reflected on the Company's balance sheet in accordance with GAAP.

(2)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.

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 could 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 September 30, ~~2019,~~2020, 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.

Student Loan Securitization Activities

Student loan trust receivables ~~underlying third-party investors' interests~~ are ~~recorded~~reported in ~~PCI loans~~loan receivables and the related debt issued by the trusts is reported in long-term borrowings. The assets of the trusts are restricted from being sold or pledged as collateral for other borrowings and the cash flows from these restricted assets may be used only to pay obligations of the trusts. With the exception of the trusts' restricted assets, the trusts and investors have no recourse to the Company's other assets or the Company's general credit for a shortage in cash flows.

~~Currently there is~~Securities issued to investors are outstanding from only 1 ~~trust from which issued securities remain outstanding to investors.~~of the 2 remaining student loan securitization trusts. Principal payments on the long-term secured borrowings are made as cash is collected on the underlying loans that are used as collateral on the secured borrowings. The Company does not have access to cash collected by the securitization trust until cash is released in accordance with the trust indenture agreement. Similar to the credit card securitizations, the Company continues to own and

service the accounts that generate the student loan receivables held by the trust and receives servicing fees from the trust based on a percentage of the principal balance outstanding. Although the servicing fee income offsets the fee expense related to the trust 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.

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Under terms of the trust arrangement, the Company has the option, but not the obligation, to provide financial support to the trust, but has never provided such support. A substantial portion of the credit risk associated with the securitized loans has been transferred to a third party under an indemnification arrangement.


	September 30, 2020		December 31, 2019
Restricted cash	$	9	$	12
Student loan receivables	261		292
Carrying value of assets of consolidated variable interest entities	$	270	$	304


5.	~~Deposits~~

5. Intangible Assets

In connection with the preparation of the financial statements for the second quarter report on Form 10-Q, the Company identified a triggering event due to changes in the international travel and entertainment businesses and a declining revenue outlook for the foreseeable future resulting from COVID-19. As a result, during the second quarter the Company conducted an interim impairment test on its Diners Club trade names and international transaction processing rights non-amortizable intangible assets.

The valuation of the trade names and international transaction processing rights was based on a discounted cash flow method, consistent with the methodology used for annual impairment testing. As a result of this analysis, the Company made the determination that the trade names and international transaction processing rights were impaired and recognized a charge, during the second quarter, in its Payment Services segment of $36 million and $23 million, respectively. The impairment was recorded in other expense. As of September 30, 2020, 0 additional material impairments have been recorded and annual impairment testing will resume on October 1, 2020.

As of September 30, 2020, the trade names have a remaining net book value of $92 million and the international transaction processing rights have 0 remaining net book value.

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6. Deposits

The Company offers its deposit products to customers through 2 channels: (i) through direct marketing, internet origination and affinity relationships ("direct-to-consumer deposits"); and (ii) indirectly through contractual arrangements with securities brokerage firms ("brokered deposits"). Direct-to-consumer deposits include online savings accounts, certificates of deposit, money market accounts, IRA certificates of deposit and checking accounts, while brokered deposits include certificates of deposit and sweep accounts.

The following table provides a summary of interest-bearing deposit accounts (dollars in millions):


	September 30, 2020		December 31, 2019
Certificates of deposit in amounts less than $100,000	$	21,071	$	25,113
Certificates of deposit in amounts $100,000 or greater⁽¹⁾	9,771		9,268
Savings deposits, including money market deposit accounts	46,096		37,574
Total interest-bearing deposits	$	76,938	$	71,955

(1)Includes $2.8 billion and $2.6 billion in certificates of deposit equal to or greater than $250,000, the Federal Deposit Insurance Corporation ("FDIC") insurance limit, as of September 30, 2020 and December 31, 2019, respectively.

The following table provides a summary of interest-bearing deposit accounts (dollars in millions):
September 30,
2019 December 31,
2018
Certificates of deposit in amounts less than $100,000 $ 25,248
$ 27,947
Certificates of deposit in amounts $100,000 or greater⁽¹⁾
8,736
6,841
Savings deposits, including money market deposit accounts 36,343
32,296
Total interest-bearing deposits $ 70,327
$ 67,084

The following table summarizes certificates of deposit in amounts of $100,000 or greater by contractual maturity (dollars in millions):


~~(1)~~			~~Includes $2.4 billion and $1.7 billion in certificates of deposit equal to or greater than $250,000, the Federal Deposit Insurance Corporation ("FDIC") insurance limit, as of~~ September 30, ~~2019 and December 31, 2018, respectively.~~ 2020

The following table summarizes certificates of deposit in amounts of $100,000 or greater by contractual maturity (dollars in millions):
September 30, 2019
Three months or less $ 1,370
Over three months through six months 1,502
Over six months through twelve months 3,311
Over twelve months 2,553
Total $ 8,736

The following table summarizes certificates of deposit maturing over the remainder of this year, over each of the next four years, and thereafter (dollars in millions):
September 30, 2019
2019 $ 4,122
2020 15,328
2021 6,382
2022 3,178
2023 1,896
Thereafter 3,078
Total $ 33,984

Three months or less		$	1,734
Over three months through six months		2,375
Over six months through twelve months		3,166
Over twelve months		2,496
Total		$	9,771

6.	~~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):
September 30, 2019 December 31, 2018
Maturity Interest
Rate Weighted-Average Interest Rate Outstanding Amount Outstanding Amount
Securitized Debt
Fixed-rate asset-backed securities⁽¹⁾
2020-2024 1.39%-3.32% 2.58% $ 7,637
$ 10,657
Floating-rate asset-backed securities⁽²⁾⁽³⁾
2020-2024 2.26%-2.63% 2.41% 5,014
6,063
Total Discover Card Master Trust I and Discover Card Execution Note Trust 12,651
16,720

Floating-rate asset-backed security⁽⁴⁾⁽⁵⁾
2031 6.00% 6.00% 169
197
Total SLC Private Student Loan Trust 169
197
Total long-term borrowings - owed to securitization investors 12,820
16,917

Discover Financial Services (Parent Company)
Fixed-rate senior notes 2022-2027 3.75%-5.20% 4.16% 3,287
2,743
Fixed-rate retail notes 2019-2031 2.85%-4.60% 3.73% 339
346

Discover Bank
Fixed-rate senior bank notes⁽¹⁾
2020-2028 2.45%-4.65% 3.55% 6,811
6,027
Fixed-rate subordinated bank notes 2019-2028 4.68%-8.70% 6.32% 1,197
1,195
Total long-term borrowings $ 24,454
$ 27,228


~~(1)~~	The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in London Interbank Offered Rate ("LIBOR") or Overnight Index Swap ("OIS") Rate. Use of these interest rate swaps impacts carrying value of the debt. See Note 14: Derivatives and Hedging Activities.


~~(2)~~	~~Discover Card Execution Note Trust floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 23 to 60 basis points as of September 30, 2019.~~


~~(3)~~	The Company uses interest rate swaps to manage its exposure to changes in interest rates related to future cash flows resulting from interest payments on a portion of these long-term borrowings. There is no impact on debt carrying value from use of these interest rate swaps. See Note 14: Derivatives and Hedging Activities.


~~(4)~~	~~SLC Private Student Loan Trust floating-rate asset-backed security includes an issuance with the following interest rate term: Prime rate + 100 basis points as of September 30, 2019.~~


~~(5)~~	~~Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying student loans. The date shown represents final maturity date.~~

The following table summarizes long-term borrowings maturing over the remainder of this year, over each of the next four years, and thereafter (dollars in millions):
September 30, 2019
2019 $ 200
2020 4,745
2021 4,218
2022 4,124
2023 3,329
Thereafter 7,838
Total $ 24,454

The following table summarizes certificates of deposit maturing over the remainder of this year, over each of the next four years and thereafter (dollars in millions):


	September 30, 2020
2020	$	4,861
2021	15,825
2022	4,353
2023	2,214
2024	1,357
Thereafter	2,232
Total	$	30,842

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7. Long-Term Borrowings


	September 30, 2020							December 31, 2019
	Maturity	Interest Rate	Weighted-Average Interest Rate	Outstanding Amount		Outstanding Amount
Securitized Debt
Fixed-rate asset-backed securities⁽¹⁾	2020-2024	1.85%-3.32%	2.70%	$	6,621	$	8,609
Floating-rate asset-backed securities⁽²⁾	2021-2024	0.38%-0.75%	0.55%	4,668		5,515
Total Discover Card Master Trust I and Discover Card Execution Note Trust				11,289		14,124

Floating-rate asset-backed security⁽³⁾⁽⁴⁾	2031	4.25%	4.25%	136		160
Total student loan securitization trust				136		160
Total long-term borrowings - owed to securitization investors				11,425		14,284

Discover Financial Services (Parent Company)
Fixed-rate senior notes	2022-2027	3.75%-5.20%	4.16%	3,327		3,296
Fixed-rate retail notes	2021-2031	2.85%-4.60%	3.73%	336		340

Discover Bank
Fixed-rate senior bank notes⁽¹⁾	2021-2030	2.45%-4.65%	3.89%	6,236		6,785
Fixed-rate subordinated bank notes	2028-2028	4.68%-4.68%	4.68%	517		996
Total long-term borrowings				$	21,841	$	25,701

(1)The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in LIBOR or Overnight Index Swap ("OIS") Rate. Use of these interest rate swaps impacts carrying value of the debt. See Note 16: Derivatives and Hedging Activities.

(2)Discover Card Execution Note Trust floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 23 to 60 basis points as of September 30, 2020.

(3)The 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 September 30, 2020.

(4)Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying student loans. The date shown represents final maturity date.

The following table summarizes long-term borrowings maturing over the remainder of this year, over each of the next four years and thereafter (dollars in millions):


	September 30, 2020
2020	$	550
2021	4,232
2022	5,204
2023	3,411
2024	2,630
Thereafter	5,814
Total	$	21,841

The Company has access to committed borrowing capacity through private securitizations to support the funding of its credit card loan receivables. As of September 30, ~~2019~~,2020, the total commitment of secured credit facilities through private providers was ~~$6.0~~$6.0 billion,, NaN of which was drawn as of September 30, ~~2019.~~2020. Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers, which have various expirations in calendar ~~years 2021 through~~year 2022. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each individual conduit 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.


7.	~~Accumulated Other Comprehensive Income~~

Changes in each component of accumulated other comprehensive income (loss) ("AOCI") were as follows (dollars in millions):
Unrealized Gains (Losses) on Available-for-Sale Investment Securities, Net of Tax (Losses) Gains on Cash Flow Hedges, Net of Tax Losses on Pension Plan, Net of Tax AOCI
For the Three Months Ended September 30, 2019
Balance at June 30, 2019 $ 112
$ (8 ) $ (187 ) $ (83 )
Net change 17
(8 ) —
9
Balance at September 30, 2019 $ 129

$ (16 )
$ (187 )
$ (74 )

For the Three Months Ended September 30, 2018
Balance at June 30, 2018 $ (14 ) $ 39
$ (187 ) $ (162 )
Net change (2 ) 4
—
2
Balance at September 30, 2018 $ (16 ) $ 43
$ (187 ) $ (160 )

For the Nine Months Ended September 30, 2019
Balance at December 31, 2018 $ 10
$ 22
$ (188 ) $ (156 )
Net change 119
(38 ) 1
82
Balance at September 30, 2019 $ 129
$ (16 ) $ (187 ) $ (74 )

For the Nine Months Ended September 30, 2018
Balance at December 31, 2017 $ (5 ) $ 10
$ (157 ) $ (152 )
Cumulative effect of ASU No. 2018-02 adoption⁽¹⁾
(1 ) 3
(31 ) (29 )
Net change (10 ) 30
1
21
Balance at September 30, 2018 $ (16 ) $ 43
$ (187 ) $ (160 )


~~(1)~~	~~Represents the adjustment to AOCI as a result of adoption of ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the second quarter of 2018.~~

The following table presents each component of other comprehensive income (loss) ("OCI") before reclassifications and amounts reclassified from AOCI for each component of OCI before- and after-tax (dollars in millions):
Before Tax Tax (Expense) Benefit Net of Tax
For the Three Months Ended September 30, 2019
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period $ 24
$ (7 ) $ 17
Net change $ 24
$ (7 ) $ 17
Cash Flow Hedges
Net unrealized losses arising during the period $ (9 ) $ 2
$ (7 )
Amounts reclassified from AOCI (2 ) 1
(1 )
Net change $ (11 ) $ 3
$ (8 )

For the Three Months Ended September 30, 2018
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period $ (4 ) $ 2
$ (2 )
Net change $ (4 ) $ 2
$ (2 )
Cash Flow Hedges
Net unrealized gains arising during the period $ 8
$ (2 ) $ 6
Amounts reclassified from AOCI (2 ) —
(2 )
Net change $ 6
$ (2 ) $ 4

For the Nine Months Ended September 30, 2019
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period $ 158
$ (39 ) $ 119
Net change $ 158
$ (39 ) $ 119
Cash Flow Hedges
Net unrealized losses arising during the period $ (44 ) $ 11
$ (33 )
Amounts reclassified from AOCI (7 ) 2
(5 )
Net change $ (51 ) $ 13
$ (38 )
Pension Plan
Unrealized gains arising during the period $ 1
$ —
$ 1
Net change $ 1
$ —
$ 1

For the Nine Months Ended September 30, 2018
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period $ (14 ) $ 4
$ (10 )
Net change $ (14 ) $ 4
$ (10 )
Cash Flow Hedges
Net unrealized gains arising during the period $ 42
$ (10 ) $ 32
Amounts reclassified from AOCI (2 ) —
(2 )
Net change $ 40
$ (10 ) $ 30
Pension Plan
Unrealized gains arising during the period $ 1
$ —
$ 1
Net change $ 1
$ —
$ 1

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8. Preferred Stock

On June 22, 2020, the Company issued and sold 5,000 shares of 6.125% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (the “preferred stock”), with a par value of $0.01 per share. Each share of preferred stock has a liquidation preference of $1,000 and is represented by 100 depositary shares. Proceeds received from the preferred stock issuance, net of underwriting discount and expenses, totaled approximately $493 million. The preferred stock is redeemable at the Company’s option, subject to regulatory approval, either (1) 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 preferred stock) or (2) in whole but not in part, at any time within 90 days following a regulatory capital event (as defined in the certificate of designations for the preferred stock), in each case at a redemption price equal to $1,000 per share of preferred stock plus declared and unpaid dividends. Any dividends declared on the preferred stock will be 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 five years to a fixed annual rate equal to the 5-year Treasury rate plus 5.783%. For more information on the other outstanding preferred stock issued by the Company, see Note 12: Common and Preferred Stock to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, 2019.

9. Accumulated Other Comprehensive Income

Changes in each component of accumulated other comprehensive income (loss) ("AOCI") were as follows (dollars in millions):


	Unrealized Gains on Available-for-Sale Investment Securities, Net of Tax		(Losses) Gains on Cash Flow Hedges, Net of Tax		Losses on Pension Plan, Net of Tax		AOCI
For the Three Months Ended September 30, 2020
Balance at June 30, 2020	$	352	$	(16)	$	(214)	$	122
Net change	(32)		3		0		(29)
Balance at September 30, 2020	$	320	$	(13)	$	(214)	$	93

For the Three Months Ended September 30, 2019
Balance at June 30, 2019	$	112	$	(8)	$	(187)	$	(83)
Net change	17		(8)		0		9
Balance at September 30, 2019	$	129	$	(16)	$	(187)	$	(74)

For the Nine Months Ended September 30, 2020
Balance at December 31, 2019	$	112	$	(17)	$	(214)	$	(119)
Net change	208		4		0		212
Balance at September 30, 2020	$	320	$	(13)	$	(214)	$	93

For the Nine Months Ended September 30, 2019
Balance at December 31, 2018	$	10	$	22	$	(188)	$	(156)
Net change	119		(38)		1		82
Balance at September 30, 2019	$	129	$	(16)	$	(187)	$	(74)


8.	~~Income Taxes~~

The following table presents the calculation of the Company's effective income tax rate (dollars in millions, except effective income tax rate):
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Income before income tax expense $ 994
$ 967
$ 2,911
$ 2,700
Income tax expense $ 224
$ 247
$ 662
$ 645
Effective income tax rate 22.5 % 25.5 % 22.7 % 23.9 %

27


	Before Tax		Tax Benefit (Expense)		Net of Tax
For the Three Months Ended September 30, 2020
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period	$	(42)	$	10	$	(32)

Net change	$	(42)	$	10	$	(32)
Cash Flow Hedges
Net unrealized gains arising during the period	$	0	$	0	$	0
Amounts reclassified from AOCI	4		(1)		3
Net change	$	4	$	(1)	$	3




For the Three Months Ended September 30, 2019
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period	$	24	$	(7)	$	17

Net change	$	24	$	(7)	$	17
Cash Flow Hedges
Net unrealized losses arising during the period	$	(9)	$	2	$	(7)
Amounts reclassified from AOCI	(2)		1		(1)
Net change	$	(11)	$	3	$	(8)




For the Nine Months Ended September 30, 2020
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period	$	275	$	(67)	$	208

Net change	$	275	$	(67)	$	208
Cash Flow Hedges
Net unrealized losses arising during the period	$	(7)	$	3	$	(4)
Amounts reclassified from AOCI	11		(3)		8
Net change	$	4	$	0	$	4




For the Nine Months Ended September 30, 2019
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period	$	158	$	(39)	$	119

Net change	$	158	$	(39)	$	119
Cash Flow Hedges
Net unrealized losses arising during the period	$	(44)	$	11	$	(33)
Amounts reclassified from AOCI	(7)		2		(5)
Net change	$	(51)	$	13	$	(38)
Pension Plan
Unrealized gains arising during the period	$	1	$	0	$	1
Net change	$	1	$	0	$	1

The following table presents the calculation of the Company's effective income tax ~~rates~~rate (dollars in millions, except effective income tax rate):


	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	2020			2019			2020			2019
Income before income taxes	$	959		$	994		$	420		$	2,911
Income tax expense	$	188		$	224		$	78		$	662
Effective income tax rate	19.6		%	22.5		%	18.6		%	22.7		%

Income tax expense decreased ~~3.0 percentage points~~$36 million and ~~1.2 percentage points, respectively,~~$584 million for the three and nine months ended September 30, ~~2019~~2020, respectively, as compared to the same periods in ~~2018. For~~2019. Income tax expense and the effective tax rate for the three and nine months ended September 30, ~~2019,~~2020 are lower due to lower projected pretax income for the full year. The Company calculates its provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year to pretax income or loss excluding unusual or infrequently occurring discrete items. As the Company is projecting lower pretax income for the full year, the impact of certain favorable items, such as tax credits, on the effective tax rate ~~was~~is amplified, thereby resulting in a full-year effective tax rate that is lower ~~because~~than the ~~same period in 2018 included an increase in reserves for certain~~historical annual effective tax ~~matters.~~rate. For the three and nine months ended September 30, 2020 and 2019, respectively, the effective tax rate was favorably impacted by the resolution of certain tax matters.

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 regularly assesses the likelihood of additional assessments or settlements in each of the taxing ~~jurisdictions resulting from these and subsequent years' examinations.~~jurisdictions. The years 2011-2015 are currently under review by the IRS ~~is currently examining the years 2011-2015.~~Office of Appeals. 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.

11. Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS") (in millions, except per share amounts):
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Numerator
Net income $ 770
$ 720
$ 2,249
$ 2,055
Preferred stock dividends (15 ) (15 ) (31 ) (31 )
Net income available to common stockholders 755
705
2,218
2,024
Income allocated to participating securities (6 ) (6 ) (15 ) (16 )
Net income allocated to common stockholders $ 749
$ 699
$ 2,203
$ 2,008
Denominator
Weighted-average shares of common stock outstanding 317
341
323
348
Effect of dilutive common stock equivalents —
1
—
—
Weighted-average shares of common stock outstanding and common stock equivalents 317
342
323
348

Basic earnings per common share $ 2.36
$ 2.05
$ 6.83
$ 5.77
Diluted earnings per common share $ 2.36
$ 2.05
$ 6.82
$ 5.77

Anti-dilutive securities were not material and had no impact on the computation of diluted EPS for the three or nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.


~~10.~~	~~Capital Adequacy~~

12. Capital Adequacy

The Company is subject to the capital adequacy guidelines of the Federal Reserve and Discover Bank, the Company's ~~main~~ 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 have a direct material effect on the financial position and operating results of the Company and Discover Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Discover Bank must meet specific capital guidelines 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.

The Company 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"). The Basel III rules, which became effective for the Company January 2015, were subject to phase-in periods through the end of 2018, based on the Company being classified as a "Standardized Approach" entity. As of January 1, 2019, the Basel III rules subject to transition have all been fully phased in with the exception of certain transition provisions that were frozen pursuant to regulation issued in November 2017. Pursuant to a final rule issued in July 2019, the transition provisions that were previously frozen ~~will be~~have been replaced with new permanent rules effective in April 2020. Additionally, on March 27, 2020, ~~with~~federal bank regulatory agencies announced an interim final rule, which has since been adopted as a final rule, that allows banks that have implemented CECL the option to ~~early adopt~~delay for two years the estimated impact of CECL on regulatory capital, 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 federal bank regulatory agencies final rule published on September 30, 2020. Pursuant to the final rule, the estimated impact of CECL on regulatory capital will be phased in over a three-year period beginning ~~on January 1, 2020.~~in 2022.

As of September 30, ~~2019,~~2020, the Company and Discover Bank met all Basel III minimum capital ratio requirements to which they were subject. The Company and Discover Bank also met the requirements to be considered "well-capitalized" under Regulation Y and prompt corrective action regulations, respectively, and there have been no conditions or events that management believes have changed the Company's or Discover Bank's category. To be categorized as "well-capitalized," the Company and Discover Bank must maintain minimum capital ratios as set forth in the table below.


	Actual						Minimum Capital Requirements				Capital Requirements To Be Classified as Well-Capitalized
	Amount		Ratio⁽¹⁾		Amount		Ratio	Amount⁽²⁾		Ratio⁽²⁾
September 30, 2020
Total capital (to risk-weighted assets)
Discover Financial Services	$	14,046	15.2	%	$	7,389	≥8.0%	$	9,236	≥10.0%
Discover Bank	$	13,838	15.2	%	$	7,304	≥8.0%	$	9,130	≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services	$	12,325	13.3	%	$	5,541	≥6.0%	$	5,541	≥6.0%
Discover Bank	$	11,729	12.8	%	$	5,478	≥6.0%	$	7,304	≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services	$	12,325	10.6	%	$	4,662	≥4.0%	N/A		N/A
Discover Bank	$	11,729	10.2	%	$	4,614	≥4.0%	$	5,767	≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services	$	11,269	12.2	%	$	4,156	≥4.5%	N/A		N/A
Discover Bank	$	11,729	12.8	%	$	4,109	≥4.5%	$	5,935	≥6.5%

December 31, 2019
Total capital (to risk-weighted assets)
Discover Financial Services	$	13,250	13.5	%	$	7,860	≥8.0%	$	9,825	≥10.0%
Discover Bank	$	13,441	13.8	%	$	7,776	≥8.0%	$	9,720	≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services	$	11,595	11.8	%	$	5,895	≥6.0%	$	5,895	≥6.0%
Discover Bank	$	11,203	11.5	%	$	5,832	≥6.0%	$	7,776	≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services	$	11,595	10.3	%	$	4,482	≥4.0%	N/A		N/A
Discover Bank	$	11,203	10.1	%	$	4,435	≥4.0%	$	5,544	≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services	$	11,032	11.2	%	$	4,421	≥4.5%	N/A		N/A
Discover Bank	$	11,203	11.5	%	$	4,374	≥4.5%	$	6,318	≥6.5%

The following table shows the actual capital amounts and ratios of the Company 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⁾
September 30, 2019
Total capital (to risk-weighted assets)
Discover Financial Services $ 13,009
13.7 % $ 7,598
≥8.0% $ 9,498
≥10.0%
Discover Bank $ 13,354
14.2 % $ 7,515
≥8.0% $ 9,394
≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services $ 11,403
12.0 % $ 5,699
≥6.0% $ 5,699
≥6.0%
Discover Bank $ 11,157
11.9 % $ 5,637
≥6.0% $ 7,515
≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services $ 11,403
10.3 % $ 4,409
≥4.0% N/A
N/A
Discover Bank $ 11,157
10.2 % $ 4,362
≥4.0% $ 5,452
≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services $ 10,840
11.4 % $ 4,274
≥4.5% N/A
N/A
Discover Bank $ 11,157
11.9 % $ 4,227
≥4.5% $ 6,106
≥6.5%

December 31, 2018
Total capital (to risk-weighted assets)
Discover Financial Services $ 12,532
13.5 % $ 7,450
≥8.0% $ 9,312
≥10.0%
Discover Bank $ 13,106
14.2 % $ 7,372
≥8.0% $ 9,215
≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services $ 10,895
11.7 % $ 5,587
≥6.0% $ 5,587
≥6.0%
Discover Bank $ 10,834
11.8 % $ 5,529
≥6.0% $ 7,372
≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services $ 10,895
10.1 % $ 4,308
≥4.0% N/A
N/A
Discover Bank $ 10,834
10.2 % $ 4,265
≥4.0% $ 5,332
≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services $ 10,332
11.1 % $ 4,191
≥4.5% N/A
N/A
Discover Bank $ 10,834
11.8 % $ 4,147
≥4.5% $ 5,990
≥6.5%

(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.

13. 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.

Unused Credit Arrangements

At September 30, ~~2019~~,2020, the Company had unused credit arrangements for loans of approximately ~~$206.8 billion~~.$215.0 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.

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Contingencies

See Note ~~12:~~14: 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 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 condensed 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.~~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.

•. 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.~~


•	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 that all licensees and/or issuers were to become

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unable to settle their transactions, the Company estimates its maximum potential counterparty exposures to these settlement guarantees would be approximately ~~$200~~$50 million as of September 30, ~~2019.~~2020.

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 September 30, ~~2019,~~2020, the Company had not recorded any material contingent liability in the condensed 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.~~(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 three orand nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.

The maximum potential amount of obligations of the Discover Network arising as a result of 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 Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Aggregate sales transaction volume⁽¹⁾	$	46,128	$	44,332	$	125,214	$	125,922

The following table summarizes certain information regarding merchant chargeback guarantees (in millions):
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Aggregate sales transaction volume⁽¹⁾
$ 44,332
$ 40,806
$ 125,922
$ 116,800

(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 material contingent liability in the condensed consolidated financial statements for merchant chargeback guarantees as of September 30, ~~2019~~2020 or December 31, ~~2018.~~2019. 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 higher risk due to various factors such as time delays in the delivery of products or services. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had escrow deposits and settlement withholdings of $8$19 million and ~~$10~~$8 million, respectively, which are recorded in interest-bearing deposit accounts and accrued expenses and other liabilities on the Company's condensed consolidated statements of financial condition.

14. 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, some of which may result in significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief, which could materially impact the Company's condensed consolidated financial statements, increase its cost of operations, or limit its ability to execute its business strategies and engage in certain business activities. ~~For example, the Company is currently the subject of an action by the Federal Reserve with respect to anti-money laundering and related compliance programs as referred to below. In addition, certain~~Certain subsidiaries of the Company are subject to a consent order with the Consumer Financial Protection Bureau ~~(the "CFPB"~~("CFPB") regarding certain 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. The existing supervisory action related to anti-money laundering and related laws and regulations will limit for a period of time the Company's ability to enter into certain types of acquisitions and make certain types of investments.

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 not material for the three and nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.

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 those losses the likelihood of which 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 ~~$125~~$220 million. This estimated range of reasonably possible losses is based upon currently available information for those proceedings in which the Company is involved and takes into account the Company's best estimate of such losses for those matters for which an estimate can be ~~made, and~~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 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 condensed 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, and could adversely affect the Company's reputation.~~

On May 26, 2015, the Company entered into a written agreement with the Federal Reserve Bank of Chicago where the Company agreed to enhance the Company's enterprise-wide anti-money laundering and related compliance programs. The agreement does not include civil money penalties.period.

On July 22, 2015, the Company announced that its subsidiaries, Discover Bank, ~~SLC~~The Student Loan Corporation and Discover Products Inc. (the "Discover Subsidiaries"), agreed to a consent order with the CFPB resolving the agency's investigation with respect to certain student loan servicing practices. ~~The CFPB's investigation into these practices has been previously disclosed by the Company, initially in February 2014.~~ The order required the Discover Subsidiaries to provide redress of approximately $16 million to consumers who may have been affected by the activities described in the order related to certain collection calls, overstatements of minimum payment due amounts in billing statements and provision of interest paid information to consumers and provide regulatory disclosures with respect to loans acquired in default. In addition, the Discover Subsidiaries were required to pay a $2.5 million civil money penalty to the CFPB. As required by the consent order, on October 19, 2015, the Discover Subsidiaries submitted to the CFPB a redress plan and a compliance plan designed to ensure that the Discover Subsidiaries provide redress and otherwise comply with the terms of the order. The CFPB is currently investigating Discover Bank's compliance with the order and certain student loan servicing practices. Discover Bank is cooperating with the CFPB in connection with the investigation. Discover Bank is enhancing the

compliance plan submitted to the CFPB in 2015. The investigation could lead to a supervisory action, which may result in legal fees, penalties, fines and remediation expenses, and could require Discover Bank to change certain business practices.

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 ~~violations of the Sherman Antitrust Act, California's Cartwright Act, and unjust enrichment. Plaintiffs allege~~ a conspiracy by defendants to shift fraud liability to merchants with the migration to the EMV security standard and chip technology. Plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys' fees, costs and injunctive relief. On July 15, 2016, plaintiffs filed an amended complaint that includes additional named plaintiffs, reasserts the original claims, and includes additional state law causes of action. On September 30, 2016, the court granted the motions to dismiss for certain issuing banks and EMVCo but denied the motions to dismiss filed by the networks, including the Company. 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. On ~~March 11, 2018,~~August 28, 2020, the Court ~~entered an order denying~~granted Plaintiff's Motion to Certify a Class. Defendants appealed the ~~plaintiffs' motion for class certification without prejudice to filing a renewed motion. Plaintiffs~~ruling on September 11, 2020. Discover filed a ~~renewed motion for class certification~~Letter Motion to Compel Arbitration on July 16, 2018 and opening merits expert reports on October 5, 2018. Defendants filed their Opposition to Class Certification on March 15, 2019. Briefing and expert discovery related to class certification has ended; and a hearing date on class certification is yet to be scheduled.September 29, 2020. 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, but will seek to vigorously defend against all claims asserted by the plaintiffs.

On September 20, 2019, a putative class action was filed against the Company in the Northern District of Illinois alleging violations of the Telephone Consumer Protection Act. The plaintiff alleges the Company placed telephone calls to wrong or reassigned cellular telephone numbers without consent. The plaintiff seeks an injunction, statutory damages, treble damages, reasonable attorney fees, costs and expenses. 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, but will seek to vigorously defend against all claims asserted by the plaintiff.

15. 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~~Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement, provides a three-level hierarchy for classifying financial instruments, which is based on whether the inputs to the valuation techniques used to measure the fair value of each financial instrument 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.

•: 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 in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.

The determination of classification of its financial instruments within the fair value hierarchy is performed at least quarterly by the Company. For transfers in and out of the levels of the fair value hierarchy, the Company discloses the fair value measurement based on the value immediately preceding the transfer.

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 September 30, 2019
Assets
Fair value - OCI
U.S. Treasury securities $ 9,930
$ —
$ —
$ 9,930
Residential mortgage-backed securities - Agency —
450
—
450
Available-for-sale investment securities $ 9,930
$ 450
$ —
$ 10,380

Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges⁽¹⁾
$ —
$ 3
$ —
$ 3

Fair value - Net income
Derivative financial instruments - fair value hedges⁽¹⁾
$ —
$ 1
$ —
$ 1

Balance at December 31, 2018
Assets
Fair value - OCI
U.S. Treasury securities $ 2,586
$ —
$ —
$ 2,586
Residential mortgage-backed securities - Agency —
547
—
547
Available-for-sale investment securities $ 2,586
$ 547
$ —
$ 3,133

Derivative financial instruments - cash flow hedges⁽¹⁾
$ —
$ 8
$ —
$ 8

Fair value - Net income
Derivative financial instruments - fair value hedges⁽¹⁾
$ —
$ 5
$ —
$ 5

Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges⁽¹⁾
$ —
$ 2
$ —
$ 2

~~There were 0 transfers between Levels 1~~Assets and ~~2 within the~~liabilities measured at fair value ~~hierarchy for~~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 September 30, 2020
Assets
Fair value - OCI
U.S. Treasury securities	$	9,548	$	0	$	0	$	9,548
Residential mortgage-backed securities - Agency	0		11,025		0		11,025
Available-for-sale investment securities	$	9,548	$	11,025	$	0	$	20,573







Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges⁽¹⁾	$	0	$	1	$	0	$	1

Fair value - Net income
Derivative financial instruments - fair value hedges⁽¹⁾	$	0	$	1	$	0	$	1


Balance at December 31, 2019
Assets
Fair value - OCI
U.S. Treasury securities	$	9,906	$	0	$	0	$	9,906
Residential mortgage-backed securities - Agency	0		417		0		417
Available-for-sale investment securities	$	9,906	$	417	$	0	$	10,323







Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges⁽¹⁾	$	0	$	2	$	0	$	2

Fair value - Net income
Derivative financial instruments - fair value hedges⁽¹⁾	$	0	$	4	$	0	$	4
Derivative financial instruments - foreign exchange forward contracts⁽¹⁾	$	0	$	1	$	0	$	1

(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 ~~three or nine months ended September 30, 2019 and 2018.~~Company's condensed consolidated statements of financial condition.

Available-for-Sale Investment Securities

Investment securities classified as available-for-sale consist of U.S. Treasury securities and residential mortgage-backed securities. 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 Company classifies residential mortgage-backed securities as Level 2, the fair value estimates of which are based on the best information available. This data may consist of observed market prices, broker quotes or discounted cash flow models that incorporate assumptions such as benchmark yields, issuer spreads, prepayment speeds, credit ratings and losses, the priority of which may vary based on availability of information.

The Company validates the fair value estimates provided by pricing services primarily by comparison to valuations obtained through other pricing sources. The Company evaluates pricing variances ~~amongst~~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 September 30, ~~2019~~,2020, amounts reported in residential mortgage-backed securities reflect ~~government-rated~~ obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae with a par value of ~~$442~~$309 million,, a weighted-average coupon of 2.81% and a weighted-average remaining maturity of ~~two~~three years,. as well as the $10.7 billion of RMBS recorded as part of the securities lending transaction disclosed in Note 2: Investments.

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 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 ~~amongst~~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 to any changes to the valuation techniques performed by proprietary pricing models prior to implementation, working closely with the third-party valuation service and reviews the control objectives of the service at least annually. The Company corroborates the fair value of foreign exchange forward contracts through independent calculation of the fair value estimates.

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 and other intangible assets. For these assets, measurement at fair value in periods subsequent to the initial recognition of the assets is applicable if one or more of the assets is determined to be impaired. The Company had 0$59 million of impairments related to ~~these~~intangible assets during the ~~three or~~ nine months ended September 30, ~~2019~~2020. See Note 5: Intangible Assets for more information on the impact of COVID-19 on intangible assets. NaN impairments of goodwill were recognized during the three and ~~2018.~~nine months ended September 30, 2020.

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):

Quoted Prices in Active Markets

Carrying value approximates fair value⁽¹⁾

Accrued interest receivables⁽²⁾

Time deposits⁽³⁾

Carrying value approximates fair value⁽¹⁾

Accrued interest payables⁽²⁾

(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 or accrued expenses and other liabilities, respectively, in the Company's

(3)Excludes deposits without contractually defined maturities for all periods presented.


Balance at December 31, 2019	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	$	0	$	274	$	0	$	274	$	272
Held-to-maturity investment securities	$	0	$	274	$	0	$	274	$	272

Net loan receivables	$	0	$	0	$	96,094	$	96,094	$	92,511

Carrying value approximates fair value⁽¹⁾
Cash and cash equivalents	$	6,924	$	0	$	0	$	6,924	$	6,924
Restricted cash	$	40	$	0	$	0	$	40	$	40
Accrued interest receivables⁽²⁾	$	0	$	1,044	$	0	$	1,044	$	1,044

Liabilities
Amortized cost
Time deposits⁽³⁾	$	0	$	34,910	$	0	$	34,910	$	34,381


Long-term borrowings - owed to securitization investors	$	0	$	14,211	$	172	$	14,383	$	14,284
Other long-term borrowings	0		12,189		0		12,189		11,417
Long-term borrowings	$	0	$	26,400	$	172	$	26,572	$	25,701

Carrying value approximates fair value⁽¹⁾
Accrued interest payables⁽²⁾	$	0	$	283	$	0	$	283	$	283

(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 or accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.

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, 2018
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 $ —
$ 233
$ —
$ 233
$ 237
Held-to-maturity investment securities $ —
$ 233
$ —
$ 233
$ 237

Net loan receivables $ —
$ —
$ 90,787
$ 90,787
$ 87,471

Carrying value approximates fair value⁽¹⁾

Cash and cash equivalents $ 13,299
$ —
$ —
$ 13,299
$ 13,299
Restricted cash $ 1,846
$ —
$ —
$ 1,846
$ 1,846
Accrued interest receivables⁽²⁾
$ —
$ 951
$ —
$ 951
$ 951

Liabilities
Amortized cost
Time deposits⁽³⁾
$ —
$ 34,635
$ —
$ 34,635
$ 34,788

Long-term borrowings - owed to securitization investors $ —
$ 16,701
$ 217
$ 16,918
$ 16,917
Other long-term borrowings —
10,325
—
10,325
10,311
Long-term borrowings $ —
$ 27,026
$ 217
$ 27,243
$ 27,228

Carrying value approximates fair value⁽¹⁾

Accrued interest payables⁽²⁾
$ —
$ 292
$ —
$ 292
$ 292

(3)Excludes deposits without contractually defined maturities for all periods presented.

16. 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 addressed 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 prior to engaging in any transaction with the Company. Counterparties are monitored on a regular basis by the Company 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, 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 ~~13:~~15: Fair Value Measurements for a description of the valuation methodologies of 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 condensed consolidated statements of

financial condition. Collateral amounts recorded in the condensed 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.

The Company uses interest rate swaps to manage its exposure to changes in interest rates related to future cash flows resulting from interest payments on credit card securitized debt and deposits. The Company's outstanding cash flow ~~hedges are~~hedge is for an initial maximum period of seven years for ~~securitized debt and~~ deposits. The derivatives are designated as hedges of the risk of changes in cash flows on the Company's ~~LIBOR or~~ Federal Funds rate-based interest payments and qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815").

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 September 30, ~~2019~~2020, will be reclassified to interest expense as interest payments are accrued on certain of the Company's floating-rate securitized debt and deposits. During the next 12 months, the Company estimates it will reclassify $5$4 million of pretax expense to interest expense related to its derivatives designated as cash flow hedges.

The Company is exposed to changes in 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 ~~or other senior~~ notes, ~~and deposits~~ attributable to changes in LIBOR or OIS rate, benchmark interest rates as defined by ASC 815. These interest rate swaps qualify as fair value hedges in accordance with ASC 815. Changes in both (i) the fair values of the derivatives and (ii) the hedged long-term borrowings ~~and deposits~~ relating to the risk being hedged are recorded in interest expense. The changes generally provide substantial offset to one ~~another, with any difference in interest expense.~~another.

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.

Derivatives Cleared Through an Exchange

~~The legal characterization of cash~~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):


	September 30, 2020													December 31, 2019
	Notional Amount		Number of Outstanding Derivative Contracts	Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedges
Interest rate swaps—cash flow hedge	$	300	1	$	0	$	1	$	900	$	0	$	2
Interest rate swaps—fair value hedge	$	12,175	16	0		1		$	14,275	0		4
Derivatives not designated as hedges
Foreign exchange forward contracts⁽¹⁾	$	23	6	0		0		$	38	0		1
Total gross derivative assets/liabilities⁽²⁾				0		2				0		7

Less: collateral held/posted⁽³⁾				0		(2)				0		(7)
Total net derivative assets/liabilities				$	0	$	0			$	0	$	0

The following table summarizes the fair value (including accrued interest) and outstanding notional amounts of derivative instruments and related collateral balances (dollars in millions):
September 30, 2019 December 31, 2018

Notional
Amount
Number of Outstanding Derivative Contracts Derivative Assets Derivative Liabilities
Notional
Amount
Derivative Assets Derivative Liabilities
Derivatives designated as hedges
Interest rate swaps—cash flow hedge $ 1,650
4
$ —
$ 3
$ 2,450
$ 8
$ 2
Interest rate swaps—fair value hedge $ 9,000
12
—
1
$ 8,000
5
—
Derivatives not designated as hedges
Foreign exchange forward contracts⁽¹⁾
$ 34
7
—
—
$ 33
—
—
Total gross derivative assets/liabilities⁽²⁾
—
4
13
2

Less: collateral held/posted⁽³⁾
—
(4 ) (8 ) (2 )
Total net derivative assets/liabilities $ —
$ —
$ 5
$ —

(1)The foreign exchange forward contracts have notional amounts of EUR 6 million, GBP 6 million, SGD 1 million and INR 596 million as of September 30, 2020, and notional amounts of EUR 9 million, GBP 14 million, SGD 1 million and INR 596 million as of December 31, 2019.

(2)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 September 30, 2020, the Company had 0 outstanding contracts. At December 31, 2019, the Company had 2 outstanding contracts with a total notional amount of $42 million and immaterial fair value.

(3)Collateral amounts, which consist of both 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):


	September 30, 2020						December 31, 2019
	Carrying Amount of Hedged Assets/Liabilities		Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities		Carrying Amount of Hedged Assets/Liabilities		Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities
Long-term borrowings	$	12,481	$	339	$	14,244	$	13

~~The foreign exchange forward contracts have notional amounts of EUR~~ ~~9 million, GBP~~ ~~12 million, SGD~~ ~~1 million~~ ~~and INR 596 million as of~~ ~~September 30, 2019~~ ~~and notional amounts of EUR 9 million, GBP 12 million, SGD 1 million and INR 464 million as of December 31, 2018.~~

The following amounts were recorded on the statements of financial condition related to cumulative basis adjustment for fair value hedges (dollars in millions):
September 30, 2019 December 31, 2018
Carrying Amount of Hedged Assets/Liabilities Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities Carrying Amount of Hedged Assets/Liabilities Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities
Long-term borrowings $ 9,046
$ 69
$ 7,893
$ (91 )


	Location and Amount of (Losses) Gains Recognized in Income
	Interest Expense
	Deposits		Long-Term Borrowings		Other Income
For the Three Months Ended September 30, 2020
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded	$	(287)	$	(126)	$	17

The effects of cash flow and fair value hedging
(Losses) gains on cash flow hedging relationship
Amounts reclassified from OCI into earnings	$	(4)	$	0	$	0

Gains (losses) on fair value hedging relationships
Gains on hedged items	$	0	$	59	$	0
Gains (losses) on interest rate swaps	0		(9)		0
Total gains (losses) on fair value hedging relationships	$	0	$	50	$	0




For the Three Months Ended September 30, 2019
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded	$	(407)	$	(231)	$	23

The effects of cash flow and fair value hedging
Gains on cash flow hedging relationship
Amounts reclassified from OCI into earnings	$	1	$	1	$	0

Gains (losses) on fair value hedging relationships
Gains (losses) on hedged items	$	0	$	(20)	$	0
Gains on interest rate swaps	0		12		0
Total gains (losses) on fair value hedging relationships	$	0	$	(8)	$	0

The following table summarizes the impact of the derivative instruments on income and indicates where within the condensed consolidated financial statements such impact is reported (dollars in millions):
Location and Amount of (Losses) Gains Recognized in Income
Interest (Expense)
Deposits Long-Term Borrowings Other Income
For the Nine Months Ended September 30, 2019
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded $ (1,194 ) $ (721 ) $ 73

The effects of cash flow and fair value hedging
Gains on cash flow hedging relationship
Amounts reclassified from OCI into earnings $ 3
$ 4
$ —

Gains (losses) on fair value hedging relationship
Gains (losses) on hedged items $ —
$ (160 ) $ —
Gains on interest rate swaps —
128
—
Total gains (losses) on fair value hedges $ —
$ (32 ) $ —

The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges $ —
$ —
$ 1

For the Nine Months Ended September 30, 2018
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded $ (878 ) $ (656 ) $ 73

The effects of cash flow and fair value hedging
(Losses) gains on cash flow hedging relationship
Amounts reclassified from OCI into earnings $ (1 ) $ 3
$ —

Gains (losses) on fair value hedging relationship
Gains on hedged items $ —
$ 61
$ —
Gains (losses) on interest rate swaps —
(88 ) —
Total gains (losses) on fair value hedges $ —
$ (27 ) $ —

The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges $ —
$ —
$ 2

For the impact of the derivative instruments on OCI, see Note 7:9: 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 these derivatives held with that counterparty. The Company may also be required to post collateral with a counterparty for its fair value and cash flow hedge interest rate swaps depending on the credit rating it or Discover Bank receives from specified major credit rating agencies. 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.

At September 30, ~~2019~~,2020, Discover Bank's credit rating met specified thresholds set by its counterparties. However, if its credit rating is reduced below investment grade, Discover Bank would be required to post additional collateral. The amount of additional collateral as of September 30, ~~2019~~2020, would have been ~~$20 million~~.$9 million. DFS (Parent Company) had no outstanding derivatives as of September 30, ~~2019,~~2020, and therefore, no collateral was required.

The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.


~~15.~~	~~Segment Disclosures~~

17. Segment Disclosures

The Company's business activities are managed in 2 segments: Direct Banking and Payment Services.

•Direct Banking: The Direct 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 equity loans and other consumer lending and deposit products. The majority of Direct Banking revenues relate to interest income earned on the segment's loan products. Additionally, the Company's credit card products generate substantially all revenues related to discount and interchange, protection products and loan fee income.

~~Direct Banking:~~ The Direct 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 equity loans, and other consumer lending and deposit products. The majority of Direct Banking revenues relate to interest income earned on the segment's loan products. Additionally, the Company's credit card products generate substantially all revenues related to discount and interchange, protection products and loan fee income.

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 Direct Banking segment.

•Through its operation of the Discover Network, the Direct Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments, with the exception of an allocation of direct and incremental costs driven by the Company's Payment Services segment.

•The assets of the Company 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):

Direct
Banking

Payment
Services
Total
For the Three Months Ended September 30, 2019
Interest income
Credit card loans $ 2,465
$ —
$ 2,465
Private student loans 175
—
175
PCI student loans 29
—
29
Personal loans 249
—
249
Other 122
—
122
Total interest income 3,040
—
3,040
Interest expense 638
—
638
Net interest income 2,402
—
2,402
Provision for loan losses 799
—
799
Other income 409
89
498
Other expense 1,069
38
1,107
Income before income tax expense $ 943
$ 51
$ 994

For the Three Months Ended September 30, 2018
Interest income
Credit card loans $ 2,258
$ —
$ 2,258
Private student loans 154
—
154
PCI student loans 34
—
34
Personal loans 238
—
238
Other 97
—
97
Total interest income 2,781
—
2,781
Interest expense 558
—
558
Net interest income 2,223
—
2,223
Provision for loan losses 742
—
742
Other income 421
80
501
Other expense 979
36
1,015
Income before income tax expense $ 923
$ 44
$ 967

Provision for credit losses⁽¹⁾

(1)Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.

The following table presents segment data (dollars in millions):

Direct
Banking

Payment
Services
Total
For the Nine Months Ended September 30, 2019
Interest income
Credit card loans $ 7,223
$ —
$ 7,223
Private student loans 520
—
520
PCI student loans 92
—
92
Personal loans 727
—
727
Other 391
1
392
Total interest income 8,953
1
8,954
Interest expense 1,915
—
1,915
Net interest income 7,038
1
7,039
Provision for loan losses 2,395
—
2,395
Other income 1,217
259
1,476
Other expense 3,097
112
3,209
Income before income tax expense $ 2,763
$ 148
$ 2,911

For the Nine Months Ended September 30, 2018
Interest income
Credit card loans $ 6,487
$ —
$ 6,487
Private student loans 451
—
451
PCI student loans 106
—
106
Personal loans 693
—
693
Other 249
—
249
Total interest income 7,986
—
7,986
Interest expense 1,534
—
1,534
Net interest income 6,452
—
6,452
Provision for loan losses 2,235
—
2,235
Other income 1,213
237
1,450
Other expense 2,859
108
2,967
Income before income tax expense $ 2,571
$ 129
$ 2,700

18. 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 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):


	Direct Banking		Payment Services		Total
For the Three Months Ended September 30, 2020
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾	$	225	$	13	$	238
Protection products revenue	44		0		44
Transaction processing revenue	0		50		50
Other income	2		15		17
Total other income subject to ASC 606⁽²⁾	271		78		349
Other income not subject to ASC 606
Loan fee income	100		0		100

Total other income not subject to ASC 606	100		0		100
Total other income by operating segment	$	371	$	78	$	449

For the Three Months Ended September 30, 2019
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾	$	238	$	17	$	255
Protection products revenue	48		0		48
Transaction processing revenue	0		52		52
Other income	3		20		23
Total other income subject to ASC 606⁽²⁾	289		89		378
Other income not subject to ASC 606
Loan fee income	120		0		120

Total other income not subject to ASC 606	120		0		120
Total other income by operating segment	$	409	$	89	$	498

(1)Net of rewards, including Cashback Bonus rewards, of $514 million and $520 million for the three months ended September 30, 2020 and 2019, respectively.

(2)Excludes $1 million of deposit product fees that are reported within net interest income for the three months ended September 30, 2020. Deposit product fees were immaterial for the three months ended September 30, 2019.

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):
Direct Banking Payment Services Total
For the Three Months Ended September 30, 2019
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾
$ 238
$ 17
$ 255
Protection products revenue 48
—
48
Transaction processing revenue —
52
52
Other income 3
20
23
Total other income subject to ASC 606⁽²⁾
289
89
378
Other income not subject to ASC 606
Loan fee income 120
—
120
Total other income not subject to ASC 606 120
—
120
Total other income by operating segment $ 409
$ 89
$ 498

For the Three Months Ended September 30, 2018
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾
$ 266
$ 14
$ 280
Protection products revenue 51
—
51
Transaction processing revenue —
47
47
Other income 1
19
20
Total other income subject to ASC 606⁽²⁾
318
80
398
Other income not subject to ASC 606
Loan fee income 103
—
103
Total other income not subject to ASC 606 103
—
103
Total other income by operating segment $ 421
$ 80
$ 501

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):



	Direct Banking		Payment Services		Total
For the Nine Months Ended September 30, 2020
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾	$	644	$	47	$	691
Protection products revenue	135		0		135
Transaction processing revenue	0		143		143
Other income	8		51		59
Total other income subject to ASC 606⁽²⁾	787		241		1,028
Other income not subject to ASC 606
Loan fee income	304		0		304
Gains on equity investments	0		79		79
Total other income not subject to ASC 606	304		79		383
Total other income by operating segment	$	1,091	$	320	$	1,411

For the Nine Months Ended September 30, 2019
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾	$	738	$	47	$	785
Protection products revenue	146		0		146
Transaction processing revenue	0		146		146
Other income	7		66		73
Total other income subject to ASC 606⁽²⁾	891		259		1,150
Other income not subject to ASC 606
Loan fee income	326		0		326

Total other income not subject to ASC 606	326		0		326
Total other income by operating segment	$	1,217	$	259	$	1,476

(1)Net of rewards, including Cashback Bonus rewards, of $1.4 billion for the nine months ended September 30, 2020 and 2019.

(2)Excludes $2 million of deposit product fees that are reported within net interest income for the nine months ended September 30, 2020 and 2019.

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):
Direct Banking Payment Services Total
For the Nine Months Ended September 30, 2019
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾
$ 738
$ 47
$ 785
Protection products revenue 146
—
146
Transaction processing revenue —
146
146
Other income 7
66
73
Total other income subject to ASC 606⁽²⁾
891
259
1,150
Other income not subject to ASC 606
Loan fee income 326
—
326
Total other income not subject to ASC 606 326
—
326
Total other income by operating segment $ 1,217
$ 259
$ 1,476

For the Nine Months Ended September 30, 2018
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾
$ 758
$ 39
$ 797
Protection products revenue 154
—
154
Transaction processing revenue —
132
132
Other income 7
66
73
Total other income subject to ASC 606⁽²⁾
919
237
1,156
Other income not subject to ASC 606
Loan fee income 294
—
294
Total other income not subject to ASC 606 294
—
294
Total other income by operating segment $ 1,213
$ 237
$ 1,450

For a detailed description of the Company's significant revenue recognition accounting policies, see Note 2: Summary of Significant Accounting Policies to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, ~~2018.~~2019.

19. Subsequent Events

The Company has evaluated events and transactions that have occurred subsequent to September 30, ~~2019~~2020 and determined that there were no subsequent events that would require recognition or disclosure in the condensed consolidated financial statements.


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2. 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 condensed consolidated financial statements and related notes included elsewhere in this quarterly report. This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expected business and financial performance, among other matters, contain words such as "believe," "expect," "anticipate," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely," "forecast," and similar expressions. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report and there is no undertaking to update or revise them as more information becomes available.

The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: the effect of the coronavirus disease 2019 ("COVID-19") pandemic and measures taken to mitigate the pandemic, including their impact on our credit quality and business operations as well as their impact on general economic and financial markets, 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 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; our ability to sustain and grow our private student loan, personal loan and home equity loan products; difficulty obtaining regulatory approval for, financing, 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, legal and compliance 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 key systems; our ability to remain organizationally effective; our ability to increase or sustain Discover card usage or attract new customers; our ability to maintain relationships with merchants; the effect of political, economic and market conditions, geopolitical events and unforeseen or catastrophic events; our ability to introduce new products and services; our ability to manage our relationships with third-party vendors; our ability to maintain current technology and integrate new and acquired systems; 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; 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.

Additional factors that could cause our results to differ materially from those described below can be found in this section and in "Item 1A. Risk Factors" in Part II of this quarterly report and in "Risk Factors," "Business — Competition," "Business — Supervision and Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, ~~2018,~~2019, which is filed with the SEC and available at the SEC's internet site (https://www.sec.gov).

Introduction and Overview

Discover Financial Services ("DFS") is a direct banking and payment services company. We provide direct banking products and services and payment services through our subsidiaries. We offer our customers credit card loans, private student loans, personal loans, home equity loans and deposit products. We also operate the Discover Network, the PULSE network ("PULSE") and Diners Club International ("Diners Club"). The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as merchant acceptance throughout the U.S. for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded charge cards and/or provide card acceptance services.

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), ~~loan~~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.

~~Quarter Highlights~~Change in Accounting Principle

~~The highlights below compare results as of and for the three months ended~~ ~~September 30, 2019~~ ~~against results for the same period in the prior year.~~

We continue to focus on disciplined capital deployment through profitable organic loan growth and execution of our capital plan. Our marketing strategy remains focused on expanding market share with existing customers and adding new accounts to achieve continued loan growth.

Total expenses are expected to increase as we continue to invest in business growth and technology, including investments in advanced analytics and infrastructure. We continue to expect a modest increase in the full-year rewards rate year over year.

The total net charge-off rate is expected to increase in comparison to the prior year. We expect to add to the loan loss reserve due to the seasoning of continued loan growth and supply-driven credit normalization. While net interest margin is expected to compress during the remainder of the year, we anticipate a moderate increase for the full year compared to the prior year.

~~In our payments segment, we will continue to pursue new ways to drive volume growth in a competitive environment. We continue to leverage our network to support our card-issuing business.~~

~~Regulatory Environment and Developments~~

Policymakers continue to develop, implement and execute on regulatory, supervisory and enforcement priorities. The impact of the evolving regulatory environment on our business and operations depends upon a number of factors, including the actions of policymakers at the federal and state levels, our competitors, and consumers. For more information on how the regulatory and supervisory environment, enforcement actions and findings, and changes to laws and regulations could impact our strategies, the value of our assets, or otherwise adversely affect our business see "Risk Factors — Current Economic and Regulatory Environment" in our annual report on Form 10-K year ended December 31, 2018. For more information on recent matters affecting us, see Note 12: Litigation and Regulatory Matters to our condensed consolidated financial statements.

Federal banking regulators continue to propose and implement new regulations and supervisory guidance, and modify their examination and enforcement priorities. In May 2018, the President signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, which is intended to promote economic growth, provide tailored regulatory relief for smaller and less complex financial institutions, and enhance consumer protections. Among other provisions, the new law raised the asset threshold for automatically designating a bank holding company as "systemically important" from $50 billion to $250 billion, so that bank holding companies with assets below $250 billion are no longer automatically subject to enhanced prudential standards pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which created a framework for regulation of large financial firms, including Discover. However, the extent of relief afforded to Discover under the law will depend on how it is implemented.

In October 2019, the federal banking regulators issued approved final rules that will tailor the existing regulatory requirements related to capital, liquidity and enhanced prudential standards to an institution's risk and complexity profile for banking institutions with total consolidated assets of $100 billion or more. Under the final rules, Discover will be categorized as a Category IV institution and therefore subject to the least stringent requirements for bank holding companies with at least $100 billion in assets. Among other things, Discover will be required to submit supervisory stress tests every other year rather than annually, will no longer be subject to regulations requiring company-run capital stress tests and will no longer be subject to the liquidity coverage ratio. Discover will however still be required to submit annual capital plans to the Federal Reserve and will remain subject to other core components of the enhanced prudential standards rules, such as risk management and risk committee requirements and liquidity risk management regulations. The final rules will be effective sixty days after publication in the Federal Register. The final rules did not address other aspects of the Federal Reserve’s capital plan rule or the Comprehensive Capital Analysis and Review ("CCAR") framework. These requirements, including the previously proposed "stress capital buffer" framework, are expected to be addressed in a forthcoming proposal from the Federal Reserve.

In February 2019, the Federal Reserve issued a temporary order granting Discover relief from the regulatory requirements related to supervisory stress testing and company-run stress testing for the 2019 stress test cycle and provided Discover a one-year extension of the requirement to submit a capital plan to the Federal Reserve until April 5, 2020. As a result, and pending any forthcoming regulatory changes, Discover expects to be subject to the CCAR quantitative process in 2020.

Policymakers at the federal and state levels are increasingly focused on measures to enhance data security and data breach incident response requirements as a result of growing cybersecurity threats and the number of incidents involving unauthorized access to consumer information. Furthermore, regulations and legislation at various levels of government have been proposed and enacted to augment data privacy standards. For example, 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 goes into effect on January 1, 2020 and regulations have only recently been proposed and still need to be finalized. A 2020 California ballot initiative has been commenced by the original proponent of the CCPA with the goal of repealing many of the amendments made to the CCPA and expanding the rights and remedies created by the CCPA. While it is too early to determine the full impact of these developments, they may result in the imposition of requirements on Discover and other providers of consumer financial services or networks that could increase costs or otherwise adversely affect our businesses.

~~Current Expected Credit Loss~~

~~In June 2016, the~~ Financial Accounting Standards Board ~~issued~~("FASB") Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ~~which is~~ became effective for us on January 1, 2020. The standard ~~alters~~significantly amended accounting principles generally accepted in the United States by replacing the incurred loss model with the current expected credit loss ("CECL") approach. The CECL approach requires our allowance for ~~loan~~credit losses to be based on an estimate of all ~~expected~~anticipated credit losses over the remaining ~~contractual term~~expected life of all of the loans, as opposed to an estimate of incurred losses as of the balance sheet date. ~~We have substantially finalized loss forecasting models and technological solutions, and are refining processes and controls in support of the new standard.~~

To enhance investors' understanding of the potential impact of CECL, we are providing our current preliminary estimate of the impact on the allowance for loan losses assuming the standard had become effective for us on September 30, 2019. That estimate, which remains subject to further refinement, would have resulted in an increase in the allowance for loan losses of approximately 55% to 65%. Additionally, our results of operations may be subject to more volatility under CECL. The ultimate extent of the impact upon adoption will depend on the characteristics of our loan portfolio and economic conditions at that date, as well as forecasted conditions thereafter.

In December 2018, federal banking agencies adopted a joint final rule that will, among other things, give bank holding companies and banks, including Discover and its bank subsidiaries, the option to phase in the regulatory capital impacts of implementing CECL over a three-year transition period. Additionally, notwithstanding the January 1, 2020 effective date, the Federal Reserve announced that it will not incorporate CECL into its supervisory stress tests until at least 2022 to reduce uncertainty, allow for better capital planning at affected firms and allow the Federal Reserve to gatherFor additional information on the impact of CECL; however, banking institutions subject to Dodd-Frank Act company-run stress test requirements are required to incorporate CECL into their internal stress testing processes beginning in 2020. We anticipate that DFS and

~~Discover Bank will continue to meet requirements to be "well-capitalized" upon adoption of the standard. For more~~ information on CECL, see Note 1: Background and Basis of Presentation to our condensed consolidated financial statements.

The ASU required modified-retrospective application, meaning a cumulative-effect adjustment was recorded on January 1, 2020, without adjusting comparative prior periods. This cumulative-effect adjustment did not reflect the economic disruption resulting from COVID-19 since the global disruption occurred subsequent to January 1, 2020. As a result of adoption, we recorded:

•A $0.6 billion increase to other assets related to deferred tax assets on the larger allowance for credit losses;

•An offsetting $1.9 billion decrease, net of tax, to the opening balance of retained earnings; and

•Immaterial adjustments to the following:

◦The carrying value of PCD loans and related accrued interest reflected in other assets; and

◦Accrued expenses and other liabilities to record reserves for unfunded commitments.

Additional Information for Comparability

In order to help investors understand our year-over-year performance, we are providing adjusted prior year allowance for credit losses and related allowance build figures using the CECL approach for comparative purposes. These adjusted prior year figures are non-GAAP financial measures and should be viewed in addition to, not as a substitute for, our reported results. We believe that these adjusted figures are useful to investors since credit losses were estimated using the incurred loss approach prior to adoption of ASU No. 2016-13 on January 1, 2020. The adjusted allowance and related build figures provide investors with comparable amounts to understand our results.

The following table provides a reconciliation of prior year allowance for credit losses figures as reported (using the incurred loss approach) to adjusted allowance for credit losses using the CECL approach, as well as related allowance build figures (dollars in millions):


	As of and for the Quarter Ended,										As of
	Dec 31, 2019		Sep 30, 2019		Jun 30, 2019		Mar 31, 2019		Dec 31, 2018
Allowance for credit losses - as reported (incurred)	$	3,383	$	3,299	$	3,202	$	3,134	$	3,041
CECL adjustment⁽¹⁾	2,461		2,440		2,400		2,408		2,376
Allowance for credit losses - as adjusted (CECL)	$	5,844	$	5,739	$	5,602	$	5,542	$	5,417

Allowance build - as reported (incurred)⁽²⁾	$	84	$	97	$	68	$	93
Allowance build - as adjusted (CECL)⁽³⁾	$	105	$	137	$	60	$	125

(1)Represents adjustment for recording reserves for expected losses, not simply those deemed to be already incurred, and extending the loss estimate period over the entire life of the loan.

(2)Calculated as the change in the allowance for credit losses as reported using the incurred loss approach.

(3)Calculated as the change in the allowance for credit losses as adjusted using the CECL approach.

Refer to "— Critical Accounting Estimates — Allowance for Credit Losses on Loan Receivables" for more details on our estimation process and key assumptions requiring significant judgment and to "— Loan Quality — Provision and Allowance for Credit Losses" for discussion of drivers of current period changes in the allowance for credit losses.

COVID-19 Pandemic Response and Impact

The COVID-19 pandemic has continued to have a widespread and unprecedented impact on a global scale. The health crisis continues to have a severe effect on the economy and unemployment. The impact of COVID-19 continues to evolve rapidly. Its future effects are uncertain and it may be difficult to assess or predict the extent of the impacts of the pandemic on us as many factors are beyond our control and knowledge. For a discussion of the risks we face with respect to the COVID-19 pandemic, the associated economic uncertainty, the steps taken to mitigate the pandemic and the resulting economic contraction, see "Item 1A — Risk Factors" in Part II of this quarterly report on Form 10-Q, which should be read in conjunction with the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019. This section includes a discussion of significant areas of potential impact on us of the COVID-19 pandemic and certain actions we are taking or expect to take in this time of uncertainty caused by the COVID-19 pandemic.

Outlook and Financial Results

During the first three quarters of the year, the pandemic has adversely impacted our financial results, specifically in the decrease in sales volume and credit card loan growth as well as the increase in our estimate of life of loan expected credit losses. As previously disclosed in the first quarter Form 10-Q, we continue to execute on our strategy to implement approximately $400 million of cost reductions off of previously provided guidance from the fourth quarter 2019 earnings release, targeting areas such as account acquisition costs and marketing expenses, due to the economic environment and the resulting pressure on earnings for the remainder of the year. Outbreaks of COVID-19 have resulted in state and local governments implementing, and in some cases re-implementing, measures to try to contain the virus such as travel bans and restrictions, shutdowns and quarantines. We anticipate these measures as well as the related economic uncertainty will continue to negatively impact consumer and business spending habits and the consumer credit environment, including the ability of consumers to repay their loans. While certain parts of the U.S. have lifted these measures, the re-emergence of COVID-19 has and may continue to result in governments re-imposing restrictions that may remain in place for a significant period of time. The economic uncertainty associated with COVID-19 and the measures taken to limit its spread have and will likely continue to adversely affect our business, results of operations and financial condition.

Regulatory and Legislative

Federal, state and local governments, including the U.S. Congress, the Executive Branch and banking agencies have taken extraordinary measures to support the U.S. economy and mitigate the effects of the COVID-19 pandemic and the impact of measures taken to slow its spread. These policies have included efforts to provide regulatory relief and flexibility to financial institutions, liquidity to capital markets and mandates to support businesses and consumers, including stimulus checks, payment forbearance and other forms of assistance. Lawmakers continue to offer additional proposals as the situation evolves in an attempt to mitigate harm to the economy and consumers. It is too early to determine the overall effectiveness of

actions that have been taken and their ultimate impact on our business, results of operations and financial condition. For more information, see “— Regulatory Environment and Developments” below.

In our loan portfolio, we continue to lend to customers, but have tightened standards for new accounts and for growing existing accounts. Currently, we are providing support to our customers impacted by COVID-19 across all of our loan products to help our customers during this period of economic difficulty. We have materially increased our allowance for credit losses in anticipation of higher credit losses caused by further deterioration in the macroeconomic outlook. The reserve for the quarter ended September 30, 2020, took into account our best estimate for the impact of programs put in place by federal and state governments and agencies to mitigate the economic impact of the pandemic. It is unclear whether the measures employed to date are complete or whether federal and state governments and agencies may take additional action that could impact our business. Refer to "— Loan Quality — Impact of COVID-19 on Loan Quality" for more details on the current period allowance for credit losses.

Capital and Liquidity

~~Discover Financial Services~~We entered the COVID-19 pandemic with strong capital and ~~Discover Bank are subject~~liquidity positions, which we believe allows us to maintain normal operations during periods of financial market stress and disruptions to wholesale and retail funding sources. We believe we have a sufficient reserve of high-quality liquid assets and have been able to maintain access to diverse funding channels. We continued to see strong demand for our direct-to-consumer and sweep deposit balances as consumer savings rates have increased and investors sought safer assets. We remain well-capitalized with capital ratios in excess of regulatory minimums and have taken actions to preserve capital such as suspending our share repurchase program. For purposes of calculating regulatory capital, ~~requirements~~we have elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the interim final rule announced by Federal banking regulators on March 27, 2020. Pursuant to the interim final rule, the estimated impact of CECL on regulatory capital will be phased in over a three-year period beginning in 2022.

For more information on the impact of COVID-19 on liquidity and capital, see "— Liquidity and Capital Resources — Impact of COVID-19 on Liquidity and Capital."

As governments across the U.S. and the world have taken steps to minimize the transmission of COVID-19, the number of transactions processed on the Discover Global Network has declined overall despite increases in certain categories. Certain negatively impacted categories such as travel make up a small portion of the transactions processed but may have an outsized impact on some of our Diners Club franchisees. The current crisis may result in lasting changes in consumer payment behaviors, such as a shift from credit to debit, a decline in the use of cash, increasing online sales and rapid adoption of contactless payment. These shifts may result in changes to the Payment Services segment’s results of operations.

Fair Value and Impairments



Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4549
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6678
Item 4.	Controls and Procedures	6779
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	6981
Item 1A.	Risk Factors	6981
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6982
Item 3.	Defaults Upon Senior Securities	6983
Item 4.	Mine Safety Disclosures	6983
Item 5.	Other Information	6983
Item 6.	Exhibits	6983



	September 30, 2019			December 31, 2018
	(unaudited) (dollars in millions, except share amounts)
Assets
Cash and cash equivalents	$	6,075		$	13,299
Restricted cash	37			1,846
Other short-term investments	1,000			—
Investment securities (includes $10,380 and $3,133 at fair value at September 30, 2019 and December 31, 2018, respectively)	10,649			3,370
Loan receivables
Loan receivables	92,493			90,512
Allowance for loan losses	(3,299		)	(3,041		)
Net loan receivables	89,194			87,471
Premises and equipment, net	1,028			936
Goodwill	255			255
Intangible assets, net	159			161
Other assets	2,389			2,215
Total assets	$	110,786		$	109,553
Liabilities and Stockholders' Equity
Liabilities
Deposits
Interest-bearing deposit accounts	$	70,327		$	67,084
Non-interest bearing deposit accounts	694			675
Total deposits	71,021			67,759
Long-term borrowings	24,454			27,228
Accrued expenses and other liabilities	3,594			3,436
Total liabilities	99,069			98,423
Commitments, contingencies and guarantees (Notes 8, 11 and 12)
Stockholders' Equity
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 566,604,226 and 564,851,848 shares issued at September 30, 2019 and December 31, 2018, respectively	6			6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 5,700 shares issued and outstanding and aggregate liquidation preference of $570 at September 30, 2019 and December 31, 2018	563			563
Additional paid-in capital	4,188			4,130
Retained earnings	20,720			18,906
Accumulated other comprehensive loss	(74		)	(156		)
Treasury stock, at cost; 251,623,001 and 233,406,005 shares at September 30, 2019 and December 31, 2018, respectively	(13,686		)	(12,319		)
Total stockholders' equity	11,717			11,130
Total liabilities and stockholders' equity	$	110,786		$	109,553

Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the following table (dollars in millions):

At September 30, 2019	One Year or Less		After One Year Through Five Years		After Five Years Through Ten Years		After Ten Years		Total
Available-for-Sale Investment Securities—Amortized Cost
U.S. Treasury securities	$	621	$	7,980	$	1,157	$	—	$	9,758
Residential mortgage-backed securities - Agency⁽¹⁾	—		97		352		—		449
Total available-for-sale investment securities	$	621	$	8,077	$	1,509	$	—	$	10,207
Held-to-Maturity Investment Securities—Amortized Cost
Residential mortgage-backed securities - Agency⁽¹⁾	$	—	$	—	$	—	$	269	$	269
Total held-to-maturity investment securities	$	—	$	—	$	—	$	269	$	269
Available-for-Sale Investment Securities—Fair Values
U.S. Treasury securities	$	624	$	8,137	$	1,169	$	—	$	9,930
Residential mortgage-backed securities - Agency⁽¹⁾	—		97		353		—		450
Total available-for-sale investment securities	$	624	$	8,234	$	1,522	$	—	$	10,380
Held-to-Maturity Investment Securities—Fair Values
Residential mortgage-backed securities - Agency⁽¹⁾	$	—	$	—	$	—	$	273	$	273
Total held-to-maturity investment securities	$	—	$	—	$	—	$	273	$	273

The following table provides the most recent FICO scores available for the Company’s customers as a percentage of each class of loan receivables:

	Credit Risk Profile by FICO Score
	660 and Above		Less than 660 or No Score
At September 30, 2019
Credit card loans	81	%	19	%
Personal loans	94	%	6	%
Private student loans (excluding PCI)⁽¹⁾	95	%	5	%

At December 31, 2018
Credit card loans	81	%	19	%
Personal loans	94	%	6	%
Private student loans (excluding PCI)⁽¹⁾	94	%	6	%

The following tables provide changes in the Company's allowance for loan losses (dollars in millions):

	For the Three Months Ended September 30, 2019
	Credit Card			Personal Loans			Student Loans⁽¹⁾			Other			Total
Balance at beginning of period	$	2,691		$	338		$	167		$	6		$	3,202
Additions
Provision for loan losses	719			86			(6		)	—			799
Deductions
Charge-offs	(784		)	(89		)	(17		)	(1		)	(891		)
Recoveries	173			13			3			—			189
Net charge-offs	(611		)	(76		)	(14		)	(1		)	(702		)
Balance at end of period	$	2,799		$	348		$	147		$	5		$	3,299

	For the Three Months Ended September 30, 2018
	Credit Card			Personal Loans			Student Loans⁽¹⁾			Other			Total
Balance at beginning of period	$	2,334		$	313		$	170		$	11		$	2,828
Additions
Provision for loan losses	633			87			22			—			742
Deductions
Charge-offs	(674		)	(86		)	(25		)	—			(785		)
Recoveries	131			9			3			—			143
Net charge-offs	(543		)	(77		)	(22		)	—			(642		)
Other⁽²⁾	—			—			(1		)	—			(1		)
Balance at end of period	$	2,424		$	323		$	169		$	11		$	2,927

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

The following tables provide additional detail of the Company's allowance for loan losses and recorded investment in its loan portfolio by impairment methodology (dollars in millions):

	Credit Card		Personal Loans		Student Loans⁽¹⁾		Other Loans		Total
At September 30, 2019
Allowance for loans evaluated for impairment as
Collectively evaluated for impairment in accordance with ASC 450-20	$	2,297	$	287	$	95	$	4	$	2,683
Evaluated for impairment in accordance with ASC 310-10-35⁽²⁾⁽³⁾	502		61		29		1		593
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30	—		—		23		—		23
Total allowance for loan losses	$	2,799	$	348	$	147	$	5	$	3,299
Recorded investment in loans evaluated for impairment as
Collectively evaluated for impairment in accordance with ASC 450-20	$	70,860	$	7,401	$	8,146	$	1,141	$	87,548
Evaluated for impairment in accordance with ASC 310-10-35⁽²⁾⁽³⁾	3,108		195		249		52		3,604
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30	—		—		1,341		—		1,341
Total recorded investment	$	73,968	$	7,596	$	9,736	$	1,193	$	92,493

At December 31, 2018
Allowance for loans evaluated for impairment as
Collectively evaluated for impairment in accordance with ASC 450-20	$	2,229	$	292	$	121	$	4	$	2,646
Evaluated for impairment in accordance with ASC 310-10-35⁽²⁾⁽³⁾	299		46		23		2		370
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30	—		—		25		—		25
Total allowance for loan losses	$	2,528	$	338	$	169	$	6	$	3,041
Recorded investment in loans evaluated for impairment as
Collectively evaluated for impairment in accordance with ASC 450-20	$	70,628	$	7,302	$	7,546	$	761	$	86,237
Evaluated for impairment in accordance with ASC 310-10-35⁽²⁾⁽³⁾	2,248		152		182		56		2,638
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30	—		—		1,637		—		1,637
Total recorded investment	$	72,876	$	7,454	$	9,365	$	817	$	90,512

Additional information about modified loans classified as TDRs is shown below (dollars in millions):

	Average recorded investment in loans		Interest income recognized during period loans were impaired⁽¹⁾		Gross interest income that would have been recorded with original terms⁽²⁾
For the Three Months Ended September 30, 2019
Credit card loans⁽³⁾	$	2,960	$	93	$	53
Personal loans	$	188	$	5	$	3
Private student loans	$	239	$	5	$	1

For the Three Months Ended September 30, 2018
Credit card loans⁽³⁾	$	1,815	$	48	$	37
Personal loans	$	134	$	4	$	1
Private student loans	$	166	$	3	$	—

For the Nine Months Ended September 30, 2019
Credit card loans⁽³⁾	$	2,682	$	245	$	148
Personal loans	$	174	$	13	$	7
Private student loans	$	215	$	13	$	1

For the Nine Months Ended September 30, 2018
Credit card loans⁽³⁾	$	1,612	$	123	$	95
Personal loans	$	125	$	10	$	4
Private student loans	$	152	$	9	$	—

The following table summarizes certificates of deposit in amounts of $100,000 or greater by contractual maturity (dollars in millions):

	September 30, 2019
Three months or less	$	1,370
Over three months through six months	1,502
Over six months through twelve months	3,311
Over twelve months	2,553
Total	$	8,736

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):

	September 30, 2019					December 31, 2018
	Maturity	Interest Rate	Weighted-Average Interest Rate	Outstanding Amount		Outstanding Amount
Securitized Debt
Fixed-rate asset-backed securities⁽¹⁾	2020-2024	1.39%-3.32%	2.58%	$	7,637	$	10,657
Floating-rate asset-backed securities⁽²⁾⁽³⁾	2020-2024	2.26%-2.63%	2.41%	5,014		6,063
Total Discover Card Master Trust I and Discover Card Execution Note Trust				12,651		16,720

Floating-rate asset-backed security⁽⁴⁾⁽⁵⁾	2031	6.00%	6.00%	169		197
Total SLC Private Student Loan Trust				169		197
Total long-term borrowings - owed to securitization investors				12,820		16,917

Discover Financial Services (Parent Company)
Fixed-rate senior notes	2022-2027	3.75%-5.20%	4.16%	3,287		2,743
Fixed-rate retail notes	2019-2031	2.85%-4.60%	3.73%	339		346

Discover Bank
Fixed-rate senior bank notes⁽¹⁾	2020-2028	2.45%-4.65%	3.55%	6,811		6,027
Fixed-rate subordinated bank notes	2019-2028	4.68%-8.70%	6.32%	1,197		1,195
Total long-term borrowings				$	24,454	$	27,228

Changes in each component of accumulated other comprehensive income (loss) ("AOCI") were as follows (dollars in millions):

	Unrealized Gains (Losses) on Available-for-Sale Investment Securities, Net of Tax			(Losses) Gains on Cash Flow Hedges, Net of Tax			Losses on Pension Plan, Net of Tax			AOCI
For the Three Months Ended September 30, 2019
Balance at June 30, 2019	$	112		$	(8	)	$	(187	)	$	(83	)
Net change	17			(8		)	—			9
Balance at September 30, 2019	$	129		$	(16	)	$	(187	)	$	(74	)

For the Three Months Ended September 30, 2018
Balance at June 30, 2018	$	(14	)	$	39		$	(187	)	$	(162	)
Net change	(2		)	4			—			2
Balance at September 30, 2018	$	(16	)	$	43		$	(187	)	$	(160	)

For the Nine Months Ended September 30, 2019
Balance at December 31, 2018	$	10		$	22		$	(188	)	$	(156	)
Net change	119			(38		)	1			82
Balance at September 30, 2019	$	129		$	(16	)	$	(187	)	$	(74	)

For the Nine Months Ended September 30, 2018
Balance at December 31, 2017	$	(5	)	$	10		$	(157	)	$	(152	)
Cumulative effect of ASU No. 2018-02 adoption⁽¹⁾	(1		)	3			(31		)	(29		)
Net change	(10		)	30			1			21
Balance at September 30, 2018	$	(16	)	$	43		$	(187	)	$	(160	)

The following table presents each component of other comprehensive income (loss) ("OCI") before reclassifications and amounts reclassified from AOCI for each component of OCI before- and after-tax (dollars in millions):

	Before Tax			Tax (Expense) Benefit			Net of Tax
For the Three Months Ended September 30, 2019
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period	$	24		$	(7	)	$	17
Net change	$	24		$	(7	)	$	17
Cash Flow Hedges
Net unrealized losses arising during the period	$	(9	)	$	2		$	(7	)
Amounts reclassified from AOCI	(2		)	1			(1		)
Net change	$	(11	)	$	3		$	(8	)

For the Three Months Ended September 30, 2018
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period	$	(4	)	$	2		$	(2	)
Net change	$	(4	)	$	2		$	(2	)
Cash Flow Hedges
Net unrealized gains arising during the period	$	8		$	(2	)	$	6
Amounts reclassified from AOCI	(2		)	—			(2		)
Net change	$	6		$	(2	)	$	4

For the Nine Months Ended September 30, 2019
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period	$	158		$	(39	)	$	119
Net change	$	158		$	(39	)	$	119
Cash Flow Hedges
Net unrealized losses arising during the period	$	(44	)	$	11		$	(33	)
Amounts reclassified from AOCI	(7		)	2			(5		)
Net change	$	(51	)	$	13		$	(38	)
Pension Plan
Unrealized gains arising during the period	$	1		$	—		$	1
Net change	$	1		$	—		$	1

For the Nine Months Ended September 30, 2018
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period	$	(14	)	$	4		$	(10	)
Net change	$	(14	)	$	4		$	(10	)
Cash Flow Hedges
Net unrealized gains arising during the period	$	42		$	(10	)	$	32
Amounts reclassified from AOCI	(2		)	—			(2		)
Net change	$	40		$	(10	)	$	30
Pension Plan
Unrealized gains arising during the period	$	1		$	—		$	1
Net change	$	1		$	—		$	1


~~(1)~~	~~Capital ratios are calculated based on the Basel III Standardized Approach rules, subject to applicable 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.


~~(1)~~	~~Represents period transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume.~~


~~(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 condensed consolidated statements of financial condition.


~~(1)~~	~~The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year).~~


~~(2)~~	Accrued interest receivable and payable carrying values are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.


~~(3)~~	~~Excludes deposits without contractually defined maturities for all periods presented.~~


~~(3)~~	~~Collateral amounts, which consist of both cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged.~~

The following table summarizes the impact of the derivative instruments on income and indicates where within the condensed consolidated financial statements such impact is reported (dollars in millions):

	Location and Amount of (Losses) Gains Recognized in Income
	Interest (Expense)
	Deposits			Long-Term Borrowings			Other Income
For the Nine Months Ended September 30, 2019
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded	$	(1,194	)	$	(721	)	$	73

The effects of cash flow and fair value hedging
Gains on cash flow hedging relationship
Amounts reclassified from OCI into earnings	$	3		$	4		$	—

Gains (losses) on fair value hedging relationship
Gains (losses) on hedged items	$	—		$	(160	)	$	—
Gains on interest rate swaps	—			128			—
Total gains (losses) on fair value hedges	$	—		$	(32	)	$	—

The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges	$	—		$	—		$	1

For the Nine Months Ended September 30, 2018
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded	$	(878	)	$	(656	)	$	73

The effects of cash flow and fair value hedging
(Losses) gains on cash flow hedging relationship
Amounts reclassified from OCI into earnings	$	(1	)	$	3		$	—

Gains (losses) on fair value hedging relationship
Gains on hedged items	$	—		$	61		$	—
Gains (losses) on interest rate swaps	—			(88		)	—
Total gains (losses) on fair value hedges	$	—		$	(27	)	$	—

The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges	$	—		$	—		$	2

The following table presents segment data (dollars in millions):

	Direct Banking		Payment Services		Total
For the Three Months Ended September 30, 2019
Interest income
Credit card loans	$	2,465	$	—	$	2,465
Private student loans	175		—		175
PCI student loans	29		—		29
Personal loans	249		—		249
Other	122		—		122
Total interest income	3,040		—		3,040
Interest expense	638		—		638
Net interest income	2,402		—		2,402
Provision for loan losses	799		—		799
Other income	409		89		498
Other expense	1,069		38		1,107
Income before income tax expense	$	943	$	51	$	994

For the Three Months Ended September 30, 2018
Interest income
Credit card loans	$	2,258	$	—	$	2,258
Private student loans	154		—		154
PCI student loans	34		—		34
Personal loans	238		—		238
Other	97		—		97
Total interest income	2,781		—		2,781
Interest expense	558		—		558
Net interest income	2,223		—		2,223
Provision for loan losses	742		—		742
Other income	421		80		501
Other expense	979		36		1,015
Income before income tax expense	$	923	$	44	$	967


~~(1)~~	Net of rewards, including Cashback Bonus rewards, of $520 million and $473 million for the three months ended September 30, 2019 and 2018, respectively, and $1.4 billion and $1.3 billion for the nine months ended September 30, 2019 and 2018, respectively.


~~(2)~~	Excludes $2 million of deposit product fees that are reported within net interest income for the nine months ended September 30, 2019 and 2018 and $1 million for the three months ended September 30, 2018. Deposit product fees were immaterial for the three months ended September 30, 2019.

The following table presents information on transaction volume (in millions):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Network Transaction Volume
PULSE Network	$	47,535	$	45,244	$	142,030	$	132,710
Network Partners	6,656		5,113		18,269		14,268
Diners Club⁽¹⁾	8,386		8,370		25,136		25,177
Total Payment Services	62,577		58,727		185,435		172,155
Discover Network—Proprietary⁽²⁾	38,722		36,642		110,664		105,363
Total Volume	$	101,299	$	95,369	$	296,099	$	277,518
Transactions Processed on Networks
Discover Network	710		642		1,986		1,806
PULSE Network	1,220		1,151		3,535		3,195
Total	1,930		1,793		5,521		5,001
Credit Card Volume
Discover Card Volume⁽³⁾	$	41,168	$	39,414	$	117,489	$	112,171
Discover Card Sales Volume⁽⁴⁾	$	37,432	$	35,896	$	106,995	$	101,823


~~(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.~~


	For the Three Months Ended September 30,						2020 vs. 2019 (Decrease) Increase						For the Nine Months Ended September 30,				2020 vs. 2019 (Decrease) Increase
	2020		2019		$		%		2020		2019		$		%
Interest income	$	2,681	$	3,040	$	(359)	(12)	%	$	8,335	$	8,954	$	(619)	(7)	%
Interest expense	416		638		(222)		(35)	%	1,482		1,915		(433)		(23)	%
Net interest income	2,265		2,402		(137)		(6)	%	6,853		7,039		(186)		(3)	%
Provision for credit losses⁽¹⁾	750		799		(49)		(6)	%	4,603		2,395		2,208		92	%
Net interest income after provision for credit losses	1,515		1,603		(88)		(5)	%	2,250		4,644		(2,394)		(52)	%
Other income	449		498		(49)		(10)	%	1,411		1,476		(65)		(4)	%
Other expense	1,005		1,107		(102)		(9)	%	3,241		3,209		32		1	%
Income before income taxes	959		994		(35)		(4)	%	420		2,911		(2,491)		(86)	%
Income tax expense	188		224		(36)		(16)	%	78		662		(584)		(88)	%
Net income	$	771	$	770	$	1	—	%	$	342	$	2,249	$	(1,907)	(85)	%

The following table outlines changes in our condensed consolidated statements of income (dollars in millions):

	For the Three Months Ended September 30,				2019 vs. 2018 Increase (Decrease)					For the Nine Months Ended September 30,				2019 vs. 2018 Increase
	2019		2018		$			%		2019		2018		$		%
Interest income	$	3,040	$	2,781	$	259		9	%	$	8,954	$	7,986	$	968	12	%
Interest expense	638		558		80			14	%	1,915		1,534		381		25	%
Net interest income	2,402		2,223		179			8	%	7,039		6,452		587		9	%
Provision for loan losses	799		742		57			8	%	2,395		2,235		160		7	%
Net interest income after provision for loan losses	1,603		1,481		122			8	%	4,644		4,217		427		10	%
Other income	498		501		(3		)	(1	)%	1,476		1,450		26		2	%
Other expense	1,107		1,015		92			9	%	3,209		2,967		242		8	%
Income before income tax expense	994		967		27			3	%	2,911		2,700		211		8	%
Income tax expense	224		247		(23		)	(9	)%	662		645		17		3	%
Net income	$	770	$	720	$	50		7	%	$	2,249	$	2,055	$	194	9	%

Average Balance Sheet Analysis (dollars in millions)

	For the Three Months Ended September 30,
	2019							2018
	Average Balance			Yield/Rate		Interest		Average Balance			Yield/Rate		Interest
Assets
Interest-earning assets
Cash and cash equivalents	$	7,029		2.20	%	$	39	$	14,522		2.00	%	$	73
Restricted cash	737			2.11	%	4		638			1.92	%	3
Other short-term investments	1,000			2.66	%	7		—			—	%	—
Investment securities	9,186			2.26	%	53		1,952			1.97	%	10
Loan receivables⁽¹⁾
Credit card⁽²⁾	73,248			13.35	%	2,465		68,613			13.06	%	2,258
Personal loans	7,522			13.17	%	249		7,460			12.66	%	238
Private student loans	8,073			8.58	%	175		7,370			8.34	%	154
PCI student loans	1,386			8.29	%	29		1,788			7.58	%	34
Other	1,116			6.72	%	19		624			6.38	%	11
Total loan receivables	91,345			12.76	%	2,937		85,855			12.45	%	2,695
Total interest-earning assets	109,297			11.03	%	3,040		102,967			10.72	%	2,781
Allowance for loan losses	(3,198		)					(2,827		)
Other assets	4,674							4,377
Total assets	$	110,773						$	104,517
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits⁽³⁾	$	33,757		2.61	%	222		$	31,133		2.31	%	181
Money market deposits⁽⁴⁾	7,071			2.10	%	37		6,930			1.89	%	33
Other interest-bearing savings deposits	28,801			2.03	%	148		24,374			1.85	%	115
Total interest-bearing deposits⁽⁵⁾	69,629			2.32	%	407		62,437			2.08	%	329
Borrowings
Short-term borrowings	1			2.18	%	—		3			2.09	%	—
Securitized borrowings⁽³⁾⁽⁴⁾	13,719			2.95	%	102		16,141			2.71	%	110
Other long-term borrowings⁽³⁾	11,047			4.64	%	129		10,351			4.56	%	119
Total borrowings	24,767			3.70	%	231		26,495			3.43	%	229
Total interest-bearing liabilities	94,396			2.68	%	638		88,932			2.49	%	558
Other liabilities and stockholders' equity	16,377							15,585
Total liabilities and stockholders' equity	$	110,773						$	104,517
Net interest income						$	2,402						$	2,223
Net interest margin⁽⁶⁾				10.43	%						10.28	%
Net yield on interest-earning assets⁽⁷⁾				8.72	%						8.57	%
Interest rate spread⁽⁸⁾				8.35	%						8.23	%


~~(1)~~	Average balances of loan receivables include non-accruing loans, which are included in the yield calculations. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.