Discover Financial Services - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

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

For the transition period from to

Commission File Number 001-33378

DISCOVER FINANCIAL SERVICES

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

36-2517428

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

2500 Lake Cook Road, Riverwoods, Illinois 60015

(Address of principal executive offices, including zip code)

(224) 405-0900

(Registrant's telephone number, including area code)


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 22, 2021, there were 293,075,754 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, 2021

TABLE OF CONTENTS


Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	75
Item 4.	Controls and Procedures	76
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	78
Item 1A.	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	79
Item 4.	Mine Safety Disclosures	79
Item 5.	Other Information	79
Item 6.	Exhibits	79

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

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

Table of Content s

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Financial Condition


	September 30, 2021		December 31, 2020
	(unaudited) (dollars in millions, except for share amounts)
Assets
Cash and cash equivalents	$	12,716	$	13,564
Restricted cash	32		25
Other short-term investments	—		2,200
Investment securities (includes available-for-sale securities of $7,791 and $9,654 reported at fair value with associated amortized cost of $7,566 and $9,277 at September 30, 2021 and December 31, 2020, respectively)	8,014		9,914
Loan receivables
Loan receivables	89,542		90,449
Allowance for credit losses	(6,861)		(8,226)
Net loan receivables	82,681		82,223
Premises and equipment, net	987		1,027
Goodwill	255		255
Intangible assets, net	1		95
Other assets	3,858		3,586
Total assets	$	108,544	$	112,889
Liabilities and Stockholders' Equity
Liabilities
Deposits
Interest-bearing deposit accounts	$	71,126	$	75,695
Non-interest bearing deposit accounts	1,436		1,209
Total deposits	72,562		76,904

Long-term borrowings	18,516		21,241
Accrued expenses and other liabilities	4,203		3,860
Total liabilities	95,281		102,005
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; 568,761,125 and 567,898,063 shares issued at September 30, 2021 and December 31, 2020, respectively	6		6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	1,056		1,056
Additional paid-in capital	4,345		4,257
Retained earnings	23,846		19,955
Accumulated other comprehensive (loss) income	(68)		45
Treasury stock, at cost; 274,001,084 and 261,300,765 shares at September 30, 2021 and December 31, 2020, respectively	(15,922)		(14,435)
Total stockholders' equity	13,263		10,884
Total liabilities and stockholders' equity	$	108,544	$	112,889

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, 2021		December 31, 2020
	(unaudited) (dollars in millions)
Assets
Restricted cash	$	32	$	25
Loan receivables	$	24,751	$	27,546
Allowance for credit losses allocated to securitized loan receivables	$	(1,436)	$	(1,936)
Other assets	$	4	$	4
Liabilities
Long-term borrowings	$	9,064	$	10,840
Accrued expenses and other liabilities	$	5	$	8

See Notes to the Condensed Consolidated Financial Statements.

Table of Content s

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Income


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
	(unaudited) (dollars in millions, except per share amounts)
Interest income
Credit card loans	$	2,193	$	2,171	$	6,452	$	6,760
Other loans	433		446		1,301		1,369
Investment securities	45		58		142		171
Other interest income	3		6		14		35
Total interest income	2,674		2,681		7,909		8,335
Interest expense
Deposits	156		287		519		1,000
Short-term borrowings	—		3		—		3
Long-term borrowings	113		126		356		479
Total interest expense	269		416		875		1,482
Net interest income	2,405		2,265		7,034		6,853
Provision for credit losses	185		750		(45)		4,603
Net interest income after provision for credit losses	2,220		1,515		7,079		2,250
Other income
Discount and interchange revenue, net	299		238		879		691
Protection products revenue	43		44		129		135
Loan fee income	121		100		333		304
Transaction processing revenue	58		50		167		143
Unrealized (losses) gains on equity investments	(167)		—		562		—
Realized gains on equity investments	—		—		—		79
Other income	18		17		47		59
Total other income	372		449		2,117		1,411
Other expense
Employee compensation and benefits	483		471		1,487		1,390
Marketing and business development	210		140		539		500
Information processing and communications	121		111		375		342
Professional fees	198		151		567		525
Premises and equipment	23		26		69		83
Other expense	155		106		456		401
Total other expense	1,190		1,005		3,493		3,241
Income before income taxes	1,402		959		5,703		420
Income tax expense	311		188		1,321		78
Net income	$	1,091	$	771	$	4,382	$	342
Net income allocated to common stockholders	$	1,055	$	751	$	4,289	$	309
Basic earnings per common share	$	3.54	$	2.45	$	14.17	$	1.00
Diluted earnings per common share	$	3.54	$	2.45	$	14.16	$	1.00

See Notes to the Condensed Consolidated Financial Statements.

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DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Comprehensive Income


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
	(unaudited) (dollars in millions)
Net income	$	1,091	$	771	$	4,382	$	342
Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax	(29)		(32)		(115)		208
Unrealized gains on cash flow hedges, net of tax	—		3		2		4

Other comprehensive (loss) income	(29)		(29)		(113)		212
Comprehensive income	$	1,062	$	742	$	4,269	$	554

See Notes to the Condensed Consolidated Financial Statements.

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DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Changes in Stockholders' Equity


							Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (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, 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	—		3		—		—		—		3
Common stock issued and stock-based compensation expense	—	—		41	—		16		—		—		—		16

Dividends — common stock ($0.44 per share)	—	—		—	—		—		(137)		—		—		(137)
Dividends — Series C 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 Three Months Ended September 30, 2021
Balance at June 30, 2021	11	$	1,056	568,693	$	6	$	4,319	$	22,936	$	(39)	$	(15,107)	$	13,171
Net income	—	—		—	—		—		1,091		—		—		1,091
Other comprehensive loss	—	—		—	—		—		—		(29)		—		(29)
Purchases of treasury stock	—	—		—	—		—		—		—		(815)		(815)
Common stock issued under employee benefit plans	—	—		21	—		2		—		—		—		2
Common stock issued and stock-based compensation expense	—	—		47	—		24		—		—		—		24

Dividends — common stock ($0.50 per share)	—	—		—	—		—		(151)		—		—		(151)
Dividends — Series C preferred stock ($2,750 per share)	—	—		—	—		—		(15)		—		—		(15)
Dividends — Series D preferred stock ($3,063 per share)	—	—		—	—		—		(15)		—		—		(15)
Balance at September 30, 2021	11	$	1,056	568,761	$	6	$	4,345	$	23,846	$	(68)	$	(15,922)	$	13,263

For the 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	—		7		—		—		—		7
Common stock issued and stock-based compensation expense	—	—		927	—		22		—		—		—		22
Preferred stock issued	5	493		—	—		—		—		—		—		493
Dividends — common stock ($1.32 per share)	—	—		—	—		—		(407)		—		—		(407)
Dividends — Series C 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

For the Nine Months Ended September 30, 2021
Balance at December 31, 2020	11	$	1,056	567,898	$	6	$	4,257	$	19,955	$	45	$	(14,435)	$	10,884
Net income	—	—		—	—		—		4,382		—		—		4,382
Other comprehensive loss	—	—		—	—		—		—		(113)		—		(113)
Purchases of treasury stock	—	—		—	—		—		—		—		(1,487)		(1,487)
Common stock issued under employee benefit plans	—	—		67	—		7		—		—		—		7
Common stock issued and stock-based compensation expense	—	—		796	—		81		—		—		—		81

Dividends — common stock ($1.38 per share)	—	—		—	—		—		(422)		—		—		(422)
Dividends — Series C preferred stock ($5,500 per share)	—	—		—	—		—		(31)		—		—		(31)
Dividends — Series D preferred stock ($7,674 per share)	—	—		—	—		—		(38)		—		—		(38)
Balance at September 30, 2021	11	$	1,056	568,761	$	6	$	4,345	$	23,846	$	(68)	$	(15,922)	$	13,263

See Notes to the Condensed Consolidated Financial Statements.

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DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Cash Flows


	For the Nine Months Ended September 30,
	2021		2020
	(unaudited) (dollars in millions)
Cash flows provided by operating activities
Net income	$	4,382	$	342
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	(45)		4,603
Deferred income taxes	388		(600)
Depreciation and amortization	387		362
Amortization of deferred revenues	(217)		(245)
Net unrealized and realized gains on investments and other assets	(531)		(40)
Other, net	227		87
Changes in assets and liabilities:
(Increase) decrease in other assets	(273)		212
Increase (decrease) in accrued expenses and other liabilities	359		(158)
Net cash provided by operating activities	4,677		4,563

Cash flows provided by (used for) investing activities
Maturities of other short-term investments	2,200		—
Purchases of other short-term investments	—		(8,046)
Maturities of available-for-sale investment securities	1,709		724
Purchases of available-for-sale investment securities	(9)		—
Maturities of held-to-maturity investment securities	63		34
Purchases of held-to-maturity investment securities	(28)		(44)
Net principal (disbursed) repaid on loans originated for investment	(255)		5,316
Proceeds from the sale of available-for-sale securities	5		—
Proceeds from the sale of other investments	—		94
Purchases of other investments	(108)		(54)

Purchases of premises and equipment	(146)		(206)
Net cash provided by (used for) investing activities	3,431		(2,182)

Cash flows (used for) provided by financing activities
Proceeds from issuance of securitized debt	1,731		—
Maturities and repayment of securitized debt	(3,445)		(2,974)
Proceeds from issuance of other long-term borrowings	—		494
Maturities and repayment of other long-term borrowings	(922)		(1,754)
Proceeds from issuance of common stock	7		7
Purchases of treasury stock	(1,487)		(343)
Net (decrease) increase in deposits	(4,359)		5,245
Proceeds from issuance of preferred stock, net	—		493
Dividends paid on common and preferred stock	(474)		(424)
Net cash (used for) provided by financing activities	(8,949)		744
Net (decrease) increase in cash, cash equivalents and restricted cash	(841)		3,125
Cash, cash equivalents and restricted cash, at the beginning of the period	13,589		6,964
Cash, cash equivalents and restricted cash, at the end of the period	$	12,748	$	10,089

Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	12,716	$	9,513
Restricted cash	32		576
Cash, cash equivalents and restricted cash, at the end of the period	$	12,748	$	10,089

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

Description of Business

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

The Company manages its business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. See Note 17: Segment Disclosures for a detailed description of each segment's operations and the allocation conventions used in business segment reporting.

Basis of Presentation

The accompanying 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 the 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 2020 audited consolidated financial statements filed with the Company's annual report on Form 10-K for the year ended December 31, 2020.

2. Investments

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


	September 30, 2021		December 31, 2020
United States Treasury bills(1)	$	—	$	2,200

Total other short-term investments	$	—	$	2,200

United States Treasury(2) and U.S. GSE(3) securities	$	7,580	$	9,354
Residential mortgage-backed securities - Agency(3)	434		560
Total investment securities	$	8,014	$	9,914

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

(2)Includes $56 million and $117 million of United States Treasury securities pledged as swap collateral as of September 30, 2021 and December 31, 2020, respectively.

(3)Consists of securities issued by Fannie Mae, Freddie Mac, Ginnie Mae, or the Federal Home Loan Bank.

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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, 2021
Available-for-Sale Investment Securities(1)
United States Treasury and U.S. GSE securities	$	7,362	$	218	$	—	$	7,580
Residential mortgage-backed securities - Agency	204		7		—		211
Total available-for-sale investment securities	$	7,566	$	225	$	—	$	7,791
Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)	$	223	$	5	$	(1)	$	227
Total held-to-maturity investment securities	$	223	$	5	$	(1)	$	227

At December 31, 2020
Available-for-Sale Investment Securities(1)
United States Treasury securities	$	8,987	$	367	$	—	$	9,354
Residential mortgage-backed securities - Agency	290		10		—		300
Total available-for-sale investment securities	$	9,277	$	377	$	—	$	9,654
Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)	$	260	$	9	$	—	$	269
Total held-to-maturity investment securities	$	260	$	9	$	—	$	269

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

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

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

The Company invests in United States Treasury obligations and securities issued by government agencies and government-sponsored enterprises of the United States of America ("U.S. GSEs"), which have long histories with no credit losses and are explicitly or implicitly guaranteed by the United States government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments.

At September 30, 2021, there were three investment securities with an aggregate fair value of $118 million that had an immaterial aggregate gross unrealized loss for less than 12 months and no securities in an unrealized loss position for more than 12 months. As of December 31, 2020, there were no investment securities with aggregate gross unrealized losses.

During the three and nine months ended September 30, 2021, the Company received $5 million of proceeds from the sale of available-for-sale securities. As a result of the sale, the Company recognized an immaterial gain during the three and nine months ended September 30, 2021. There were no proceeds from sales or recognized gains and losses on available-for-sale securities during the three and nine months ended September 30, 2020. See Note 9: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three and nine months ended September 30, 2021 and 2020.

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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, 2021	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
United States Treasury and U.S. GSE securities	$	2,616	$	4,737	$	9	$	—	$	7,362
Residential mortgage-backed securities - Agency(1)	2		21		174		7		204
Total available-for-sale investment securities	$	2,618	$	4,758	$	183	$	7	$	7,566
Held-to-Maturity Investment Securities—Amortized Cost
Residential mortgage-backed securities - Agency(1)	$	—	$	—	$	—	$	223	$	223
Total held-to-maturity investment securities	$	—	$	—	$	—	$	223	$	223
Available-for-Sale Investment Securities—Fair Values
United States Treasury and U.S. GSE securities	$	2,641	$	4,931	$	8	$	—	$	7,580
Residential mortgage-backed securities - Agency(1)	2		21		180		8		211
Total available-for-sale investment securities	$	2,643	$	4,952	$	188	$	8	$	7,791
Held-to-Maturity Investment Securities—Fair Values
Residential mortgage-backed securities - Agency(1)	$	—	$	—	$	—	$	227	$	227
Total held-to-maturity investment securities	$	—	$	—	$	—	$	227	$	227

(1)Maturities of RMBS 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 and stimulate economic development in low- to moderate-income communities. These investments are accounted for using the equity method of accounting and are recorded within other assets. The related commitment for future investments is recorded in accrued expenses and other liabilities within the 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 tax credits allocated to the affordable housing projects and the community revitalization projects. The Company does not consolidate these investments as the Company does not have a controlling financial interest in the investee entities. As of September 30, 2021 and December 31, 2020, the Company had outstanding investments in these entities of $366 million and $353 million, respectively, and related contingent liabilities for unconditional and legally binding delayed equity contributions of $64 million and $93 million, respectively. Of the above outstanding equity investments, the Company had $324 million of investments related to affordable housing projects as of September 30, 2021 and December 31, 2020, which had $52 million and $79 million of related contingent liabilities for unconditional and legally binding delayed equity contributions, respectively.

The Company holds non-controlling equity positions in several payment services entities. Most of these investments are not subject to equity method accounting because the Company does not have significant influence over the investee. The common or preferred equity securities that the Company holds typically do not have readily determinable fair values. As a result, the majority of these investments are carried at cost minus impairment, if any. As of September 30, 2021 and December 31, 2020, the carrying value of these investments, which are recorded within other assets on the Company's condensed consolidated statements of financial condition, was $31 million and $35 million, respectively.

The Company also holds non-controlling equity positions in payment service entities that have actively traded stock and therefore have readily determinable fair values. As a result, these investments are carried at fair value based on the quoted share prices. As of September 30, 2021 and December 31, 2020, the carrying value of these investments, which are recorded within other assets on the Company's condensed consolidated statements of financial condition, was $600 million and $8 million, respectively. During the three and nine months ended September 30, 2021, the Company recognized unrealized losses of approximately $167 million and unrealized gains of approximately $562 million, respectively, on the condensed consolidated statements of income related to these investments. The Company recognized no unrealized losses or gains during the three and nine months ended September 30, 2020.

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3. Loan Receivables

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

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


	September 30, 2021		December 31, 2020
Credit card loans(1)(2)	$	70,320	$	71,472
Other loans(3)
Private student loans(4)	10,184		9,954
Personal loans	6,890		7,177
Other loans	2,148		1,846
Total other loans	19,222		18,977
Total loan receivables	89,542		90,449
Allowance for credit losses	(6,861)		(8,226)
Net loan receivables	$	82,681	$	82,223

(1)Amounts include carrying values of $12.9 billion and $16.7 billion underlying investors' interest in trust debt at September 30, 2021 and December 31, 2020, respectively, and $11.6 billion and $10.6 billion in seller's interest at September 30, 2021 and December 31, 2020, respectively. See Note 4: Credit Card and Private Student Loan Securitization Activities for additional information.

(2)Unbilled accrued interest receivable on credit card loans, which is presented as part of other assets in the Company's condensed consolidated statements of financial condition, was $379 million and $420 million at September 30, 2021 and December 31, 2020, 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 $503 million, $41 million and $6 million, respectively, at September 30, 2021 and $469 million, $49 million and $6 million, respectively, at December 31, 2020.

(4)Amounts include carrying values of $215 million and $250 million in loans pledged as collateral against the notes issued from a private student loan securitization trust at September 30, 2021 and December 31, 2020, respectively. See Note 4: Credit Card and Private Student Loan Securitization Activities for additional information.

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Credit Quality Indicators

As part of credit risk management activities, on an ongoing basis, the Company reviews information related to the performance of a customer's account with the Company and information from credit bureaus, such as FICO or other credit scores, relating to the customer's broader credit performance. The Company actively monitors key credit quality indicators, including FICO scores and delinquency status, for credit card, private student and personal loans. These indicators are important to understand the overall credit performance of the Company's customers and their ability to repay.

FICO scores are generally obtained at the origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that accounts with FICO scores below 660 have larger delinquencies and credit losses than those with higher credit scores.

The following table provides the distribution of the amortized cost basis (excluding accrued interest receivable presented in other assets) by the most recent FICO scores available for the Company's customers for credit card, private student and personal loan receivables (dollars in millions):


	Credit Risk Profile by FICO Score
	September 30, 2021								December 31, 2020
	660 and Above				Less than 660 or No Score				660 and Above				Less than 660 or No Score
	$		%		$		%		$		%		$		%
Credit card loans(1)	$	59,005	84	%	$	11,315	16	%	$	58,950	82	%	$	12,522	18	%
Private student loans by origination year(2)(3)
2021	$	1,011	94	%	$	70	6	%
2020	1,593		97	%	54		3	%	$	1,173	95	%	$	60	5	%
2019	1,485		96	%	56		4	%	1,659		96	%	61		4	%
2018	1,185		95	%	58		5	%	1,365		96	%	61		4	%
2017	898		95	%	52		5	%	1,052		95	%	57		5	%
Prior	3,521		95	%	201		5	%	4,219		94	%	247		6	%
Total private student loans	$	9,693	95	%	$	491	5	%	$	9,468	95	%	$	486	5	%
Personal loans by origination year
2021	$	2,541	99	%	$	18	1	%
2020	1,921		98	%	37		2	%	$	2,880	99	%	$	25	1	%
2019	1,291		95	%	66		5	%	2,183		96	%	90		4	%
2018	550		92	%	51		8	%	1,018		92	%	90		8	%
2017	276		88	%	36		12	%	558		89	%	69		11	%
Prior	87		84	%	16		16	%	227		86	%	37		14	%
Total personal loans	$	6,666	97	%	$	224	3	%	$	6,866	96	%	$	311	4	%

(1)Amounts include $881 million and $1.0 billion of revolving line-of-credit arrangements that were converted to term loans as a result of a troubled debt restructuring ("TDR") program as of September 30, 2021 and December 31, 2020, respectively.

(2)A majority of private student loan originations occur in the third quarter and disbursements can span multiple calendar years.

(3)FICO score represents the higher credit score of the cosigner or borrower.

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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.

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, 2021						December 31, 2020
	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	$	573	$	467	$	1,040	$	739	$	739	$	1,478
Private student loans by origination year(1)
2021	$	—	$	—	$	—
2020	4		1		5		$	—	$	—	$	—
2019	11		2		13		3		1		4
2018	14		4		18		9		3		12
2017	15		5		20		12		4		16
Prior	78		24		102		86		20		106
Total private student loans	$	122	$	36	$	158	$	110	$	28	$	138
Personal loans by origination year
2021	$	2	$	—	$	2
2020	7		2		9		$	5	$	2	$	7
2019	12		5		17		18		9		27
2018	8		3		11		15		7		22
2017	5		2		7		10		5		15
Prior	2		1		3		5		2		7
Total personal loans	$	36	$	13	$	49	$	53	$	25	$	78

(1)Private student loans 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.

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Allowance for Credit Losses

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


	For the Three Months Ended September 30, 2021
	Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at June 30, 2021	$	5,409	$	828	$	745	$	44	$	7,026
Additions
Provision for credit losses(1)	178		46		(64)		—		160
Deductions
Charge-offs	(495)		(23)		(38)		—		(556)
Recoveries	206		6		19		—		231
Net charge-offs	(289)		(17)		(19)		—		(325)

Balance at September 30, 2021	$	5,298	$	857	$	662	$	44	$	6,861

	For the Three Months Ended September 30, 2020
	Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
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		—		174
Net charge-offs	(604)		(14)		(49)		(1)		(668)

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

	For the Nine Months Ended September 30, 2021
	Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at December 31, 2020	$	6,491	$	840	$	857	$	38	$	8,226
Additions
Provision for credit losses(1)	(18)		61		(96)		6		(47)
Deductions
Charge-offs	(1,778)		(63)		(150)		—		(1,991)
Recoveries	603		19		51		—		673
Net charge-offs	(1,175)		(44)		(99)		—		(1,318)

Balance at September 30, 2021	$	5,298	$	857	$	662	$	44	$	6,861

	For the Nine Months Ended September 30, 2020
	Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at December 31, 2019(2)	$	2,883	$	148	$	348	$	4	$	3,383
Cumulative effect of ASU No. 2016-13 adoption(3)	1,667		505		265		24		2,461
Balance at January 1, 2020	4,550		653		613		28		5,844
Additions
Provision for credit losses(1)	3,916		233		426		11		4,586
Deductions
Charge-offs	(2,480)		(62)		(224)		(1)		(2,767)
Recoveries	505		16		42		—		563
Net charge-offs	(1,975)		(46)		(182)		(1)		(2,204)

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

(1)Excludes a $25 million and $40 million reclassification of the liability for expected credit losses on unfunded commitments for the three months ended September 30, 2021 and 2020, respectively, and $2 million and $17 million for the nine months ended September 30, 2021 and 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 the adoption of Accounting Standards Update ("ASU") No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach.

(3)Represents the adjustment to the allowance for credit losses due to the adoption of ASU No. 2016-13 on January 1, 2020.

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The allowance for credit losses was approximately $6.9 billion at September 30, 2021, which reflects a $165 million release from the amount of the allowance for credit losses at June 30, 2021 and a $1.4 billion release from the amount of the allowance for credit losses at December 31, 2020.

The release in the allowance for credit losses between September 30, 2021 and June 30, 2021, was primarily driven by improving macroeconomic forecasts and continued stable credit performance, partially offset by modest loan growth during the period. The modest growth in loan receivables during the three months ended September 30, 2021, was driven by the robust credit card sales trends as coronavirus disease 2019 ("COVID-19") restrictions continue to ease and the United States economy continues to more fully reopen. Additionally, credit card sales from new accounts and seasonality in private student loan originations contributed to an increase in ending outstanding loan receivables. The loan receivables growth was partially offset by elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows.

The release in the allowance for credit losses between September 30, 2021 and December 31, 2020, was primarily driven by improvements in the macroeconomic forecast and continued stable credit performance. The release was also partially driven by a moderate reduction in loan receivables outstanding during the period. The decrease in outstanding loan receivables, particularly credit card and personal loan receivables, and the stable credit performance, were driven by elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows. The decrease in outstanding loan receivables was partially offset by the robust credit card sales trends during the period and seasonality in private student loan originations in the third quarter of 2021.

In estimating the allowance at September 30, 2021, the Company used a macroeconomic forecast that projected (i) a peak unemployment rate of 6.1%, decreasing to 5.5% and 4.0% through the end of 2021 and 2022, respectively; and (ii) a 6.4% and 3.5% annualized growth in the real gross domestic product for 2021 and 2022, respectively. Labor market conditions, which historically have been an important determinant of credit loss trends, continue to improve despite the spread of the COVID-19 delta variant. However, the unemployment rate and initial and continuing jobless claims remain moderately elevated relative to pre-pandemic levels. In estimating expected credit losses, the Company considered the uncertainties associated with borrower behavior, payment trends and credit performance subsequent to the expiration of government stimulus programs, such as the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and the American Rescue Plan Act of 2021 ("ARPA"), and disaster relief programs, such as foreclosure moratoriums and federal student loan and mortgage payment forbearance. During the third quarter of 2021, several disaster relief programs expired or were rescinded entirely. As the government's response to the pandemic wanes, there is uncertainty regarding the sustainability of the recent credit quality trends in the Company's loan receivables portfolio. Accordingly, the estimation of the allowance for credit losses has required significant management judgment.

Company-initiated loan modification programs include those specifically offered in response to the COVID-19 pandemic as well as existing programs offered to customers experiencing difficulty making their payments. In addition to the Skip-a-Pay (payment deferral) ("SaP") 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 Company evaluated the accounts using these modifications as a result of the COVID-19 pandemic for potential exclusion from the TDR designation either due to the insignificance of the concession or because they qualified for an exemption pursuant to the CARES Act. The effects of all modifications, including TDRs, loan modifications exempt from the TDR designation pursuant to the CARES Act and SaP programs, are considered as part of the process for determining the allowance for credit losses.

The forecast period the Company deemed reasonable and supportable was 18 months for all periods presented except March 31, 2020, where the forecast period was 12 months due to the uncertainty caused by the rapidly changing economic environment experienced at the onset of the COVID-19 pandemic. The 18-month reasonable and supportable forecast period was deemed appropriate based on the observed economic phase transition from recovery to expansion and the associated stabilization of macroeconomic forecasts. For all periods presented, the Company determined that a reversion period of 12 months was appropriate for similar reasons. Due to the uncertainties associated with borrower behavior resulting from government stimulus and disaster relief programs, the Company applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented with the following exceptions: at March 31, 2020 and December 31, 2019, the Company applied a straight-line method for all loan products. At June 30, 2020, the Company applied a weighted reversion method for credit card loans and a straight-line method for all other loan products.

The decrease in net charge-offs for credit card and personal loans for the three and nine months ended September 30, 2021, when compared to the same periods in 2020, was primarily due to the impacts of government stimulus and disaster relief programs and to a lesser extent improved collection and recovery strategies. Additionally, the decrease in net charge-

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offs of personal loans for the three and nine months ended September 30, 2021, were favorably impacted by tighter underwriting standards that were implemented in early 2020. Net charge-offs for private student loans remained relatively flat for the three and nine months ended September 30, 2021, when compared to the same period in 2020, due to the impacts of government stimulus and disaster relief programs.

Net charge-offs of principal are recorded against the allowance for credit losses, as shown in the preceding table. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Interest and fees accrued subsequently charged-off, net of recoveries (recorded as a reduction of interest income)	$	57	$	114	$	232	$	393
Fees accrued subsequently charged-off, net of recoveries (recorded as a reduction to other income)	$	15	$	27	$	59	$	95

Delinquent and Non-Accruing Loans

The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent and non-accruing loans in the Company's loan portfolio is shown below for each class of loan receivables (dollars in millions):


	30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due		90 or More Days Delinquent and Accruing		Total Non-accruing(1)
At September 30, 2021
Credit card loans	$	573	$	467	$	1,040	$	430	$	201
Other loans
Private student loans	122		36		158		35		8
Personal loans	36		13		49		12		9
Other loans	5		6		11		2		14
Total other loans	163		55		218		49		31
Total loan receivables	$	736	$	522	$	1,258	$	479	$	232

At December 31, 2020
Credit card loans	$	739	$	739	$	1,478	$	687	$	209
Other loans
Private student loans	110		28		138		27		12
Personal loans	53		25		78		23		12
Other loans	8		3		11		—		10
Total other loans	171		56		227		50		34
Total loan receivables	$	910	$	795	$	1,705	$	737	$	243

(1)The Company estimates that the gross interest income that would have been recorded under the original terms of non-accruing credit card loans was $6 million and $7 million for the three months ended September 30, 2021 and 2020, respectively, and $21 million and $25 million for the nine months ended September 30, 2021 and 2020, respectively. The Company does not separately track the amount of gross interest income that would have been recorded under the original terms of loans. Instead, the Company estimated this amount based on customers' current balances and most recent interest rates.

Troubled Debt Restructurings

The Company has internal loan modification programs that provide relief to credit card, private student and personal loan borrowers who may be experiencing financial hardship. The Company considers a modified loan in which a concession has been granted to the borrower to be a TDR based on the cumulative length of the concession period and credit quality of the borrower. The Company evaluates new programs to determine which of them meet the definition of a TDR, including modification programs provided to customers for temporary relief due to the economic impacts of the COVID-19 pandemic. 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. All loans modified in a temporary modification program, including those specifically created in response to the COVID-19 pandemic, are evaluated for

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exclusion from the TDR designation either due to the insignificance of the concession or because they qualify for exemption pursuant to the CARES Act. To the extent the loan accounts do not meet the requirements for exclusion, temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on private student loans and certain grants of private student loan forbearance, result in the loans being classified as TDRs. In addition, loans that defaulted from, or successfully completed a loan modification program or forbearance, continue to be classified as TDRs, except as noted below. See the table below that presents the carrying value of loans that experienced a payment default during the period for more information.

For credit card customers, the Company offers both temporary and permanent hardship programs. The temporary hardship programs consist of an interest rate reduction and, in some cases, a reduced minimum payment, both lasting for a period no longer than 12 months. Charging privileges on these accounts are generally suspended while in the program. However, if the customer meets certain criteria, charging privileges may be reinstated following completion of the program. Credit card accounts of borrowers who have previously participated in a temporary interest rate reduction program and 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 loan structure to a fixed payment loan with a maturity no longer than 72 months and reducing the interest rate on the loan. The permanent modification program does not typically provide for the forgiveness of unpaid principal but may allow for the reversal of certain unpaid interest or fee assessments. The Company also makes permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans typically receive a reduced interest rate, typically continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. These permanent loan modifications remain in the population of TDRs until they are paid off or charged off.

At September 30, 2021 and December 31, 2020, there were $5.3 billion and $5.7 billion, respectively, of private student loans in repayment and $63 million and $117 million, respectively, in forbearance. To assist private student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance, payment deferral, a temporary payment reduction, a temporary interest rate reduction or extended terms. A modified loan typically meets the definition of a TDR based on the cumulative length of the concession period and a determination of financial distress based on an evaluation of the borrower's credit quality using FICO scores.

For personal loan customers, the Company offers various payment programs, including temporary and permanent programs, in certain situations. The temporary programs normally consist of reducing the minimum payment for no longer than 12 months. Further, the interest rate on the loan is reduced in certain circumstances. The permanent programs involve extending the loan term and, in certain circumstances, reducing the interest rate on the loan. The total term of the loan, including modification, may not exceed nine years. The Company also allows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are classified as TDRs.

The Company monitors borrower performance after using payment programs or forbearance. The Company believes the programs are useful in assisting customers experiencing financial difficulties and allowing them to make timely payments. In addition to helping customers with their credit needs, these programs are designed to maximize collections and ultimately the Company’s profitability. The Company plans to continue to use payment programs and forbearance to provide relief to customers experiencing temporary financial difficulties and expects to have additional loans classified as TDRs in the future as a result.

To evaluate the primary financial effects that resulted from credit card loans entering into a TDR program during the three and nine months ended September 30, 2021 and 2020, the Company quantified the amount by which interest and fees were reduced during the periods. During the three months ended September 30, 2021 and 2020, the Company forgave approximately $7 million and $13 million, respectively, of interest and fees resulting from accounts entering into a credit card loan TDR program. During the nine months ended September 30, 2021 and 2020, the Company forgave approximately $28 million and $52 million, respectively, of interest and fees resulting from accounts entering into a credit card loan TDR program. For all loan products, interest income on modified loans is recognized based on the modified contractual terms.

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the COVID-19 pandemic. Section 541 of the Omnibus and COVID Relief and Response Act extended the loan modification relief provided by the CARES Act through the earlier of January 1, 2022, or the date that is 60 days after the termination of the presidentially-declared national emergency. The Company has elected to apply the option to suspend the application of accounting guidance for TDRs as provided under Section 4013 of the CARES Act and as subsequently extended. As such, TDR program balances and the number of accounts have been favorably impacted by the exclusion of certain modifications from the TDR designation pursuant to these exemptions and are expected to remain lower than they otherwise would have been.

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,
	2021			2020
	Number of Accounts	Balances		Number of Accounts	Balances
Accounts that entered a TDR program during the period
Credit card loans(1)	13,964	$	86	20,779	$	150
Private student loans	102	$	2	118	$	2
Personal loans	888	$	10	2,505	$	33

	For the Nine Months Ended September 30,
	2021			2020
	Number of Accounts	Balances		Number of Accounts	Balances
Accounts that entered a TDR program during the period
Credit card loans(1)	48,887	$	315	130,869	$	875
Private student loans	355	$	7	1,767	$	32
Personal loans	3,102	$	38	6,315	$	83

(1)Accounts that entered a credit card TDR program include $72 million and $143 million that were converted from revolving line-of-credit arrangements to term loans during the three months ended September 30, 2021 and 2020, respectively, and $288 million and $529 million for the nine months ended September 30, 2021 and 2020, respectively.

The number and balance of new credit card and personal loan modifications, including the combined total of those identified as TDRs and those exempt from the TDR designation, decreased during the three and nine months ended September 30, 2021, when compared to the same periods in 2020. The decrease in both periods is primarily due to the impacts of several rounds of government stimulus and disaster relief programs, which reduced the need for customers to enroll in a loan modification program. The number and balance of loan modifications across all products, including the combined total of those identified as TDRs and those exempt from the TDR designation, during the three and nine months ended September 30, 2020, were favorably impacted by the utilization of SaP programs in lieu of traditional loan modification programs. Additionally, enrollments in personal loan modification programs were favorably impacted by tighter underwriting standards that were implemented in early 2020.

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The following table presents the carrying value of loans that experienced a default during the period that had been modified in a TDR during the 15 months preceding the end of each period (dollars in millions):


	For the Three Months Ended September 30,
	2021			2020
	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)	3,679	$	21	8,983	$	52
Private student loans(3)	83	$	2	272	$	6
Personal loans(2)	399	$	6	624	$	9

	For the Nine Months Ended September 30,
	2021			2020
	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)	14,205	$	84	41,285	$	235
Private student loans(3)	214	$	5	876	$	18
Personal loans(2)	1,287	$	18	2,446	$	36

(1)For credit card loans that default from a temporary program, accounts revert to the pre-modification terms and charging privileges remain suspended in most cases.

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

(3)For student loans, a customer defaults from a loan modification after they are 60 or more days delinquent. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.

Of the account balances that defaulted as shown above for the three months ended September 30, 2021 and 2020, approximately 62% and 65%, respectively, and for the nine months ended September 30, 2021 and 2020, approximately 66% and 52%, respectively, of the total balances were charged off at the end of the month in which they defaulted from a TDR program. For accounts that have defaulted from a TDR program and have not been subsequently charged off, the balances are included in the allowance for credit loss analysis discussed above under “— Allowance for Credit Losses.”

4. Credit Card and Private Student Loan Securitization Activities

The Company's securitizations are accounted for as secured borrowings and the related trusts are treated as consolidated subsidiaries of the Company. For a description of the Company's principles of consolidation with respect to VIEs, see Note 1: Background and Basis of Presentation to the consolidated financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2020.

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 four classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. To issue senior, higher-rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower-rated or more highly subordinated classes of notes. Wholly-owned subsidiaries of Discover Bank hold the subordinated classes of notes. The Company is exposed to credit risk associated with trust receivables as of the balance sheet date through the retention of these subordinated interests. The current expected credit loss ("CECL") on trust receivables is included in the allowance for credit losses estimate.

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

Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the trust's creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to the Company's third-party creditors. The trusts have ownership of cash balances, which are reported in restricted cash within the Company's condensed consolidated statements of financial condition. Except for the seller's interest in trust receivables, the Company's interests in trust assets are generally subordinate to the interests of third-party investors in trust debt and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to those investors. Apart from the restricted assets related to securitization activities, the investors and the securitization trusts have no recourse to the Company's other assets or the Company's general credit for a shortage in cash flows.

The carrying values of these restricted assets, which are presented on the Company's condensed consolidated statements of financial condition as relating to securitization activities, are shown in the following table (dollars in millions):


	September 30, 2021		December 31, 2020
Restricted cash	$	23	$	16

Investors' interests held by third-party investors	8,925		10,600
Investors' interests held by wholly-owned subsidiaries of Discover Bank	3,971		6,121
Seller's interest	11,640		10,575
Loan receivables(1)	24,536		27,296
Allowance for credit losses allocated to securitized loan receivables(1)	(1,436)		(1,936)
Net loan receivables	23,100		25,360
Other	3		3
Carrying value of assets of consolidated variable interest entities	$	23,126	$	25,379

(1)The Company maintains its allowance for credit losses at an amount equal to lifetime expected credit losses associated with all loan receivables, which includes all loan receivables in the trusts. Therefore, the credit risk associated with the transferred receivables is fully reflected on the Company's statements of financial condition in accordance with GAAP.

The debt securities issued by the consolidated trusts are subject to credit, payment and interest rate risks on the transferred credit card loan receivables. To protect investors in the securities, certain features or triggering events will cause an early amortization of the debt securities, including triggers related to the impact of the performance of the trust receivables on the availability and adequacy of cash flows to meet contractual requirements. As of September 30, 2021, no economic or other early amortization events have occurred.

The Company continues to own and service the accounts that generate the loan receivables held by the trusts. Discover Bank receives servicing fees from the trusts based on a percentage of the monthly investor principal balance outstanding. Although the fee income to Discover Bank offsets the fee expense to the trusts and thus is eliminated in consolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead to a termination of the servicing rights and the loss of future servicing income, net of related expenses.

Private Student Loan Securitization Activities

Private student loan trust receivables are reported in loan receivables and the related debt issued by the trust is reported in long-term borrowings. The trust assets 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. Except for the trust's restricted assets, the trust and investors have no recourse to the Company's other assets or the Company's general credit for a shortage in cash flows.

Principal payments on the long-term secured borrowings are made as cash is collected on the underlying loans that are 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 service the private 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

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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.

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, 2021		December 31, 2020
Restricted cash	$	9	$	9
Private student loan receivables	215		250
Carrying value of assets of consolidated variable interest entities	$	224	$	259

5. Intangible Assets

In the second quarter of 2020, the Company conducted an interim impairment test on its non-amortizable intangible assets, both the Diners Club trade names and international transaction processing rights, due to changes in the international travel and entertainment businesses and a declining revenue outlook for the foreseeable future resulting from the COVID-19 pandemic. The valuation methodology used to value the trade names and international transaction processing rights was based on a discounted cash flow method, consistent with the methods used for annual impairment testing. As a result of this analysis, the Company determined that the trade names and international transaction processing rights were impaired and recognized charges, in the second quarter of 2020, in its Payment Services segment of $36 million and $23 million, respectively. The impairments were recorded in other expense.

In the second quarter of 2021, global travel and entertainment spending continued to trend lower than pre-pandemic levels. As a result, the Company re-evaluated that impact on the value of the Diners Club trade names by conducting an interim impairment test on the asset in conjunction with the preparation of the financial statements. The valuation methodology used to value the trade names was based on a discounted cash flow method, consistent with the methods used for annual impairment testing. As a result of this analysis, the Company determined that the trade names were fully impaired and recognized a charge, in the second quarter of 2021, in its Payment Services segment of $92 million. The impairment was recorded in other expense.

At September 30, 2021, the trade names and the international transaction processing rights have no remaining net book value.

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6. Deposits

The Company offers its deposit products to customers through two 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 savings accounts, IRA certificates of deposit and checking/debit accounts. 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, 2021		December 31, 2020
Certificates of deposit in amounts less than $100,000	$	14,592	$	19,105
Certificates of deposit in amounts $100,000 or greater(1)	7,239		9,164
Savings deposits, including money market deposit accounts	49,295		47,426
Total interest-bearing deposits	$	71,126	$	75,695

(1)Includes $2.0 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, 2021 and December 31, 2020, respectively.

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


	September 30, 2021
Three months or less	$	1,458
Over three months through six months	1,640
Over six months through twelve months	2,711
Over twelve months	1,430
Total	$	7,239

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, 2021
2021	$	4,171
2022	11,133
2023	2,663
2024	1,451
2025	870
Thereafter	1,543
Total	$	21,831

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7. 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, 2021					December 31, 2020
	Maturity	Interest Rate	Weighted-Average Interest Rate	Outstanding Amount		Outstanding Amount
Securitized Debt
Fixed-rate asset-backed securities(1)	2022-2026	0.58% - 3.04%	2.01%	$	5,607	$	6,041
Floating-rate asset-backed securities(2)	2022-2024	0.41% - 0.68%	0.54%	3,347		4,669
Total Discover Card Master Trust I and Discover Card Execution Note Trust				8,954		10,710

Floating-rate asset-backed security(3)(4)	2031	4.25%	4.25%	110		130
Total private student loan securitization trust				110		130
Total long-term borrowings - owed to securitization investors				9,064		10,840

Discover Financial Services (Parent Company)
Fixed-rate senior notes	2022-2027	3.75% - 5.20%	4.16%	3,370		3,337
Fixed-rate retail notes	2022-2031	2.85% - 4.40%	3.75%	166		336

Discover Bank
Fixed-rate senior bank notes(1)	2023-2030	2.45% - 4.65%	3.63%	5,406		6,213
Fixed-rate subordinated bank notes(1)	2028	4.68%	4.68%	510		515
Total long-term borrowings				$	18,516	$	21,241

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

(2)DCENT floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 33 to 60 basis points as of September 30, 2021.

(3)The private student loan securitization trust floating-rate asset-backed security includes an issuance with the following interest rate term: Prime rate + 100 basis points as of September 30, 2021.

(4)Repayment of this debt depends on the timing of principal and interest payments on the underlying private student loans. The date shown represents the 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, 2021
2021	$	—
2022	5,188
2023	3,324
2024	3,738
2025	529
Thereafter	5,737
Total	$	18,516

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, 2021, the total commitment of secured credit facilities through private providers was $4.0 billion, none of which was drawn as of September 30, 2021. Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers. The secured credit facilities have various expirations in 2023. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each provider. The terms of each agreement provide for a commitment fee to be paid on the unused capacity and include various affirmative and negative covenants, including performance metrics and legal requirements similar to those required to issue any term securitization transaction.

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8. Preferred Stock

The table below presents a summary of the Company's non-cumulative perpetual preferred stock that is outstanding at September 30, 2021 (dollars in millions, except per depositary share amounts):


Series	Description	Initial Issuance Date	Liquidation Preference and Redemption Price per Depositary Share(1)		Per Annum Dividend Rate in effect at September 30, 2021		Total Depositary Shares Authorized, Issued and Outstanding		Carrying Value
							September 30, 2021	December 31, 2020	September 30, 2021		December 31, 2020
C(2)(3)(4)	Fixed-to-Floating Rate	10/31/2017	$	1,000	5.500	%	570,000	570,000	$	563	$	563
D(2)(5)(6)	Fixed-Rate Reset	6/22/2020	$	1,000	6.125	%	500,000	500,000	493		493
Total Preferred Stock							1,070,000	1,070,000	$	1,056	$	1,056

(1)Redeemable at the redemption price plus declared and unpaid dividends.

(2)Issued as depositary shares, each representing 1/100th interest in a share of the corresponding series of preferred stock. Each preferred share has a par value of $0.01.

(3)Redeemable at the Company’s option, subject to regulatory approval, either (i) in whole or in part on any dividend payment date on or after October 30, 2027, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series C preferred stock).

(4)Any dividends declared are payable semi-annually in arrears at a rate of 5.50% per annum until October 30, 2027. Thereafter, dividends declared will be payable quarterly in arrears at a floating rate equal to 3-month LIBOR plus a spread of 3.076% per annum.

(5)Redeemable at the Company’s option, subject to regulatory approval, either (i) in whole or in part during the three-month period prior to, and including, each reset date (as defined in the certificate of designations for the Series D preferred stock) or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series D Preferred Stock).

(6)Any dividends declared are payable semi-annually in arrears at a rate of 6.125% per annum until September 23, 2025, after which the dividend rate will reset every five years to a fixed annual rate equal to the 5-year Treasury plus a spread of 5.783%.

9. Accumulated Other Comprehensive Income

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


	Unrealized Gains on Available-for-Sale Investment Securities, Net of Tax		Losses on Cash Flow Hedges, Net of Tax		Losses on Pension Plan, Net of Tax		AOCI
For the Three Months Ended September 30, 2021
Balance at June 30, 2021	$	198	$	(10)	$	(227)	$	(39)
Net change	(29)		—		—		(29)
Balance at September 30, 2021	$	169	$	(10)	$	(227)	$	(68)

For the Three Months Ended September 30, 2020
Balance at June 30, 2020	$	352	$	(16)	$	(214)	$	122
Net change	(32)		3		—		(29)
Balance at September 30, 2020	$	320	$	(13)	$	(214)	$	93

For the Nine Months Ended September 30, 2021
Balance at December 31, 2020	$	284	$	(12)	$	(227)	$	45
Net change	(115)		2		—		(113)
Balance at September 30, 2021	$	169	$	(10)	$	(227)	$	(68)

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

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


	Before Tax		Tax Benefit (Expense)		Net of Tax
For the Three Months Ended September 30, 2021
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period	$	(38)	$	9	$	(29)

Net change	$	(38)	$	9	$	(29)
Cash Flow Hedges
Net unrealized gains arising during the period	$	—	$	1	$	1
Amounts reclassified from AOCI	—		(1)		(1)
Net change	$	—	$	—	$	—




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

Amounts reclassified from AOCI	$	4	$	(1)	$	3
Net change	$	4	$	(1)	$	3




For the Nine Months Ended September 30, 2021
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period	$	(152)	$	37	$	(115)

Net change	$	(152)	$	37	$	(115)
Cash Flow Hedges
Net unrealized gains arising during the period	$	—	$	1	$	1
Amounts reclassified from AOCI	2		(1)		1
Net change	$	2	$	—	$	2




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	$	—	$	4

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10. Income Taxes

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
Income before income taxes	$	1,402		$	959		$	5,703		$	420
Income tax expense	$	311		$	188		$	1,321		$	78
Effective income tax rate	22.2		%	19.6		%	23.2		%	18.6		%

Income tax expense increased $123 million and $1.2 billion for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The increase in income tax expense was primarily driven by an increase in pretax income. The effective tax rate increased for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020, primarily due to tax credits having a lower rate benefit on higher pretax income.

The Company is subject to examination by the Internal Revenue Service ("IRS") and tax authorities in various state, local and foreign tax jurisdictions. The IRS is examining the Company's 2018 federal income tax filings. The Company regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions. At this time, the potential change in unrecognized tax benefits is expected to be immaterial 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") (dollars and shares in millions, except per share amounts):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Numerator
Net income	$	1,091	$	771	$	4,382	$	342
Preferred stock dividends	(30)		(15)		(69)		(31)
Net income available to common stockholders	1,061		756		4,313		311
Income allocated to participating securities	(6)		(5)		(24)		(2)
Net income allocated to common stockholders	$	1,055	$	751	$	4,289	$	309
Denominator
Weighted-average shares of common stock outstanding	298		306		303		307
Effect of dilutive common stock equivalents	—		—		—		—
Weighted-average shares of common stock outstanding and common stock equivalents	298		306		303		307

Basic earnings per common share	$	3.54	$	2.45	$	14.17	$	1.00
Diluted earnings per common share	$	3.54	$	2.45	$	14.16	$	1.00

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, 2021 and 2020.

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12. Capital Adequacy

DFS is subject to the capital adequacy guidelines of the Federal Reserve. Discover Bank, the Company's banking subsidiary, is subject to various regulatory capital requirements as administered by the FDIC. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit the Company's business activities and have a direct material effect on the financial condition and operating results of DFS and Discover Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, DFS and Discover Bank must meet specific risk-based capital requirements and leverage ratios that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidelines. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

DFS and Discover Bank are subject to regulatory and capital rules issued by the Federal Reserve and FDIC, respectively, under the Basel Committee's December 2010 framework ("Basel III rules"). Under the Basel III rules, DFS and Discover Bank are classified as "standardized approach" entities. Standardized approach entities are defined as United States banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposures less than $10 billion.

On March 27, 2020, federal bank regulatory agencies announced an interim and now final rule that allows banks that have implemented the CECL accounting model to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, the Company has elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, the estimated impact of CECL on regulatory capital will be phased in over three years beginning in 2022. Accordingly, the Company's Common Equity Tier 1 ("CET1") capital ratios in 2020 and 2021 are higher than they otherwise would have been.

As of September 30, 2021 and December 31, 2020, DFS and Discover Bank met all Basel III minimum capital ratio requirements to which they were subject. DFS and Discover Bank also met the requirements to be considered "well-capitalized" under Regulation Y and prompt corrective action rules, respectively. There have been no conditions or events that management believes have changed DFS' or Discover Bank's category. To be categorized as "well-capitalized," DFS and Discover Bank must maintain minimum capital ratios outlined in the table below.

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The following table shows the actual capital amounts and ratios of DFS and Discover Bank and comparisons of each to the regulatory minimum and "well-capitalized" requirements (dollars in millions):


	Actual				Minimum Capital Requirements			Capital Requirements To Be Classified as Well-Capitalized
	Amount		Ratio(1)		Amount		Ratio	Amount(2)		Ratio(2)
September 30, 2021
Total capital (to risk-weighted assets)
Discover Financial Services	$	16,924	18.5	%	$	7,309	≥8.0%	$	9,136	≥10.0%
Discover Bank	$	15,905	17.7	%	$	7,186	≥8.0%	$	8,982	≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services	$	15,235	16.7	%	$	5,482	≥6.0%	$	5,482	≥6.0%
Discover Bank	$	13,935	15.5	%	$	5,389	≥6.0%	$	7,186	≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services	$	15,235	13.8	%	$	4,424	≥4.0%	N/A		N/A
Discover Bank	$	13,935	12.8	%	$	4,353	≥4.0%	$	5,441	≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services	$	14,179	15.5	%	$	4,111	≥4.5%	N/A		N/A
Discover Bank	$	13,935	15.5	%	$	4,042	≥4.5%	$	5,839	≥6.5%

December 31, 2020
Total capital (to risk-weighted assets)
Discover Financial Services	$	14,711	16.1	%	$	7,298	≥8.0%	$	9,123	≥10.0%
Discover Bank	$	14,507	16.1	%	$	7,214	≥8.0%	$	9,018	≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services	$	13,006	14.3	%	$	5,474	≥6.0%	$	5,474	≥6.0%
Discover Bank	$	12,415	13.8	%	$	5,411	≥6.0%	$	7,214	≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services	$	13,006	10.9	%	$	4,757	≥4.0%	N/A		N/A
Discover Bank	$	12,415	10.5	%	$	4,709	≥4.0%	$	5,886	≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services	$	11,950	13.1	%	$	4,105	≥4.5%	N/A		N/A
Discover Bank	$	12,415	13.8	%	$	4,058	≥4.5%	$	5,862	≥6.5%

(1)Capital ratios are calculated based on the Basel III standardized approach rules, subject to applicable transition provisions, including CECL transition provisions.

(2)The Basel III rules do not establish well-capitalized thresholds for these measures for bank holding companies. Existing well-capitalized thresholds established in the Federal Reserve's Regulation Y have been included where available.

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.

Commitments

Unused Credit Arrangements

At September 30, 2021, the Company had unused credit arrangements for loans of approximately $220.1 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. The Company can terminate substantially all of these arrangements at any time and therefore the arrangements do not necessarily represent future cash requirements. The arrangements are periodically reviewed based on account usage, customer creditworthiness and loan qualification. As the Company’s credit card loans are unconditionally cancellable, no liability for expected credit losses is required for unused lines of credit. For all other loans, the Company records a liability for expected credit losses for unfunded

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commitments, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition.

Contingencies

See Note 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. The Company performs due diligence intended to ensure that asset guideline qualifications are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company might be required to replace, repurchase or sell such assets. For example, in its credit card securitization activities, the Company would replace nonconforming receivables by allocating 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 private student loan securitizations, the Company would generally repurchase the loans from the trust at the outstanding principal amount plus interest.

The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of third-party investor interests in credit card asset-backed securities and the principal amount of any private student loan secured borrowings, plus any unpaid interest for the corresponding secured borrowings. The Company has recorded substantially all of the maximum potential amount of future payments in long-term borrowings on the Company's 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:

•Merchant Guarantee. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants.

•ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.

•Global Network Alliance Guarantee. Discover Network, Diners Club and PULSE have entered into contractual relationships with certain international payment networks in which DFS Services LLC retains the counterparty exposure if a network fails to fulfill its settlement obligation.

The maximum potential amount of future payments related to such contingent obligations depends on the transaction volume processed between the time a potential counterparty defaults on its settlement and the time 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.

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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. If all licensees and/or issuers were to become unable to settle their transactions, the Company estimates its maximum potential counterparty exposures to these settlement guarantees would be approximately $80 million as of September 30, 2021.

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, 2021, the Company had not recorded any contingent liability in the condensed consolidated financial statements for these counterparty exposures. 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, which in turn credits its customer's account. The Discover Network will then charge back the disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by the applicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect the amount subject to dispute from the merchant or merchant acquirer (e.g., in the event of merchant default or dissolution or after expiration of the 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 merchants issue credits 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 and nine months ended September 30, 2021 and 2020.

The maximum potential amount of obligations of the Discover Network arising from such contingent obligations is estimated to be the portion of the total Discover Network transaction volume processed to date for which timely and valid disputes may be raised under applicable law and relevant issuer and customer agreements. There is no limitation on the maximum amount the Company may be liable to pay to issuers. However, the Company believes that such amount is not representative of the Company's actual potential loss exposure based on the Company's historical experience. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes may include or result in disputed transactions.

The following table summarizes certain information regarding merchant chargeback guarantees (dollars in millions):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Aggregate sales transaction volume(1)	$	58,107	$	46,128	$	160,717	$	125,214

(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, 2021 or December 31, 2020.The Company mitigates the risk of potential loss exposure by withholding settlement from merchants, obtaining third-party guarantees, or obtaining escrow deposits or letters of credit from certain merchant acquirers or merchants that are considered a higher risk due to various factors such as time delays in the delivery of products or services. As of September 30, 2021 and December 31, 2020, the Company had escrow deposits and settlement withholdings of $15 million and $16 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.

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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. The investigations and proceedings may result in significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief. These outcomes could materially impact the Company's condensed consolidated financial statements, increase its cost of operations, or limit the Company's ability to execute its business strategies and engage in certain business activities. Certain subsidiaries of the Company are subject to a consent order with the Consumer Financial Protection Bureau ("CFPB") regarding certain private student loan servicing practices, as described below. Pursuant to powers granted under federal banking laws, regulatory agencies have broad and sweeping discretion and may assess civil money penalties, require changes to certain business practices or require customer restitution at any time.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matters present loss contingencies that are both probable and estimable. Litigation and regulatory settlement-related expenses were $51 million and $54 million for the three and nine months ended September 30, 2021, respectively. Litigation and regulatory settlement-related expenses were immaterial for the three and nine months ended September 30, 2020.

There may be an exposure to loss in excess of any amounts accrued. The Company believes the estimate of the aggregate range of reasonably possible losses (meaning the likelihood of losses is more than remote but less than likely), in excess of the amounts that the Company has accrued for legal and regulatory proceedings, is up to $250 million as of September 30, 2021. This estimated range of reasonably possible losses is based on currently available information for those proceedings in which the Company is involved and considers the Company's best estimate of such losses for those matters for which an estimate can be made. It does not represent the Company's maximum potential loss exposure. Various aspects of the proceedings underlying the estimated range will change from time to time and actual results may vary significantly from the estimate.

The Company's estimated range noted above involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years and, in some cases, a wide range of business activities), unspecified damages and/or the novelty of the legal issues presented. The outcome of pending matters could adversely affect the Company's reputation and be material to the Company's 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.

In July 2015, the Company announced that its subsidiaries, Discover Bank, The Student Loan Corporation and Discover Products Inc. (the "Discover Subsidiaries"), agreed to a consent order with the CFPB with respect to certain private student loan servicing practices (the “2015 Order”). The 2015 Order expired in July 2020. On December 22, 2020, the Discover Subsidiaries agreed to a consent order (the “2020 Order”) with the CFPB resolving the agency’s investigation into Discover Bank’s compliance with the 2015 Order. In connection with the 2020 Order, Discover is required to implement a redress and compliance plan and must pay at least $10 million in consumer redress to consumers who may have been harmed and paid a $25 million civil money penalty to the CFPB.

On March 8, 2016, a class-action lawsuit was filed against the Company, other credit card networks, other issuing banks and EMVCo in the United States District Court for the Northern District of California (B&R Supermarket, Inc., d/b/a

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Milam's Market, et al. v. Visa, Inc. et al.) alleging a conspiracy by defendants to shift fraud liability to merchants with the migration to the EMV security standard and chip technology. The plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys' fees, costs and injunctive relief. In May 2017, the Court entered an order transferring the entire action to a federal court in New York that is presiding over certain related claims that are pending in the actions consolidated as MDL 1720. On August 28, 2020, the Court granted the plaintiffs' Motion to Certify a Class. The defendants appealed the ruling, which was denied on January 20, 2021. The Company filed a Motion to Compel Arbitration, on which briefing closed in March 2021. On September 27, 2021, the court ruled the motion was premature and stated it would not issue a ruling until after the issuance of class notices. The court set the deadline for expert discovery on February 22, 2022. The Company is not in a position at this time to assess the likely outcome or its exposure, if any, with respect to this matter. However, the Company will seek to defend itself vigorously against all claims asserted by the plaintiffs.

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. Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement, provides a three-level hierarchy for classifying fair value measurements of financial instruments based on whether the inputs to the valuation techniques used are observable or unobservable. It also requires certain disclosures about those measurements. The three-level valuation hierarchy is as follows:

•Level 1: Fair values determined by Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

•Level 2: Fair values determined by Level 2 inputs are those that utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive markets, quoted prices for the identical assets in an inactive market and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company evaluates factors such as the frequency of transactions, the size of the bid-ask spread and the significance of adjustments made when considering transactions involving similar assets or liabilities to assess the relevance of those observed prices. If relevant and observable prices are available, the fair values of the related assets or liabilities would be classified as Level 2.

•Level 3: Fair values determined by Level 3 inputs are those based on unobservable inputs and include situations where there is little, if any, market activity for the asset or liability being valued. In instances where the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy in which the measurements classified based on the lowest level input that is significant to the fair value measurement in its entirety. Accordingly, the Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.

The Company evaluates the classification of each fair value measurement within the hierarchy at least quarterly.

The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and involves consideration of factors specific to the asset or liability. Furthermore, certain techniques used to measure fair value involve some degree of judgment and, as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange.

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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, 2021
Assets
Fair value - OCI
United States Treasury and U.S. GSE securities	$	7,571	$	9	$	—	$	7,580
Residential mortgage-backed securities - Agency	—		211		—		211
Available-for-sale investment securities	$	7,571	$	220	$	—	$	7,791



Fair value - Net income
Marketable equity securities	$	600	$	—	$	—	$	600
Derivative financial instruments - fair value hedges(1)	$	—	$	1	$	—	$	1










Balance at December 31, 2020
Assets
Fair value - OCI
United States Treasury securities	$	9,354	$	—	$	—	$	9,354
Residential mortgage-backed securities - Agency	—		300		—		300
Available-for-sale investment securities	$	9,354	$	300	$	—	$	9,654



Fair value - Net income

Derivative financial instruments - fair value hedges(1)	$	—	$	1	$	—	$	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 Company's condensed consolidated statements of financial condition.

Available-for-Sale Investment Securities

Investment securities classified as available-for-sale consist of United States Treasury and U.S. GSE securities and RMBS. The fair value estimates of investment securities classified as Level 1, consisting of United States Treasury securities, are determined based on quoted market prices for the same securities. The Company classifies these U.S. GSE securities and RMBS as Level 2, the fair value estimates of which are based on the best information available. This data may consist of observed market prices for similar securities, 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 the availability of information.

The Company validates the fair value estimates provided by pricing services primarily by comparing to valuations obtained through other pricing sources. The Company evaluates pricing variances among different pricing sources to ensure that the valuations utilized are reasonable. The Company also corroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as market interest rate curves. The Company further performs due diligence in understanding the procedures and techniques performed by the pricing services to derive fair value estimates.

At September 30, 2021, amounts reported in RMBS reflect U.S. government agency and U.S. GSE obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac with an aggregate par value of $201 million, a weighted-average coupon of 3.24% and a weighted-average remaining maturity of two years.

Marketable Equity Securities

The Company holds non-controlling equity positions in payment service entities that have actively traded stock and therefore have readily determinable fair values. The Company classifies these equity securities as Level 1, the fair value estimates of which are determined based on quoted share prices for the same securities.

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Derivative Financial Instruments

The Company's derivative financial instruments consist of interest rate swaps and foreign exchange forward contracts. These instruments are classified as Level 2 as their fair values are estimated using proprietary pricing models, containing certain assumptions based on readily observable market-based inputs, including interest rate curves, option volatility and foreign currency forward and spot rates. In determining fair values, the pricing models use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity and the observable market-based inputs. The fair values of the interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments are based on an expectation of future interest rates derived from the observable market interest rate curves. The Company considers collateral and master netting agreements that mitigate credit exposure to counterparties in determining the counterparty credit risk valuation adjustment. The fair values of the currency instruments are valued by comparing the contracted forward exchange rate pertaining to the specific contract maturities to the current market exchange rate.

The Company validates the fair value estimates of interest rate swaps primarily through comparison to the fair value estimates computed by the counterparties to each of the derivative transactions. The Company evaluates pricing variances among different pricing sources to ensure that the valuations utilized are reasonable. The Company also corroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as market interest rate curves. The Company performs due diligence in understanding the impact of any changes to the valuation techniques performed by proprietary pricing models before implementation, working closely with the third-party valuation service and reviewing the service's control objectives at least annually. The Company corroborates the fair value of foreign exchange forward contracts through independent calculation of the fair value estimates.

As of October 16, 2020, the Company revised its valuation methodology to reflect changes made by central clearinghouses that changed the discounting methodology and interest calculation of cash variation margin from OIS to the Secured Overnight Financing Rate (“SOFR”) for U.S. Dollar cleared interest rate swaps. The Company's valuation methodology will result in valuations for cleared interest rate swaps that better reflect cleared swap prices obtainable in the markets in which the Company transacts. Pursuant to ASC Topic 848, the Company has elected and applied certain optional expedients and exceptions that provide contract modification and hedge accounting relief to eligible interest rate swaps affected by the change in the discounting methodology. The changes in valuation methodology are applied prospectively as a change in accounting estimate and are immaterial to the Company’s financial statements.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair value in periods subsequent to the initial recognition of the assets may be applicable whenever one is tested for impairment. The Company recognized $92 million of impairments related to these assets during the nine months ended September 30, 2021. No impairments were recognized during the three months ended September 30, 2021. See Note 5: Intangible Assets for more information on the impact of the COVID-19 pandemic on intangible assets.

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Financial Instruments Measured at Other Than Fair Value

The following tables disclose the estimated fair value of the Company's financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions):


Balance at September 30, 2021	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Carrying Value
Assets
Amortized cost
Residential mortgage-backed securities - Agency	$	—	$	227	$	—	$	227	$	223
Held-to-maturity investment securities	$	—	$	227	$	—	$	227	$	223

Net loan receivables	$	—	$	—	$	90,019	$	90,019	$	82,681

Carrying value approximates fair value(1)
Cash and cash equivalents	$	12,716	$	—	$	—	$	12,716	$	12,716
Restricted cash	$	32	$	—	$	—	$	32	$	32

Accrued interest receivables(2)	$	—	$	968	$	—	$	968	$	968

Liabilities
Amortized cost
Time deposits(3)	$	—	$	22,300	$	—	$	22,300	$	21,831


Long-term borrowings - owed to securitization investors	$	—	$	9,014	$	110	$	9,124	$	9,064
Other long-term borrowings	—		10,204		—		10,204		9,452
Long-term borrowings	$	—	$	19,218	$	110	$	19,328	$	18,516

Carrying value approximates fair value(1)
Accrued interest payables(2)	$	—	$	124	$	—	$	124	$	124

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Balance at December 31, 2020	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	$	—	$	269	$	—	$	269	$	260
Held-to-maturity investment securities	$	—	$	269	$	—	$	269	$	260

Net loan receivables	$	—	$	—	$	91,200	$	91,200	$	82,223

Carrying value approximates fair value(1)
Cash and cash equivalents	$	13,564	$	—	$	—	$	13,564	$	13,564
Restricted cash	$	25	$	—	$	—	$	25	$	25
Other short-term investments	$	2,200	$	—	$	—	$	2,200	$	2,200
Accrued interest receivables(2)	$	—	$	992	$	—	$	992	$	992

Liabilities
Amortized cost
Time deposits(3)	$	—	$	29,090	$	—	$	29,090	$	28,269


Long-term borrowings - owed to securitization investors	$	—	$	10,794	$	130	$	10,924	$	10,840
Other long-term borrowings	—		11,418		—		11,418		10,401
Long-term borrowings	$	—	$	22,212	$	130	$	22,342	$	21,241

Carrying value approximates fair value(1)
Accrued interest payables(2)	$	—	$	233	$	—	$	233	$	233

(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.

(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 before engaging in any transaction with the Company. The Company regularly monitors counterparties to ensure compliance with the Company's risk policies and limits. In determining the counterparty credit risk valuation adjustment for the fair values of derivatives, if any, the Company considers collateral and legally enforceable master netting agreements that mitigate credit exposure to related counterparties.

All derivatives are recorded in other assets at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values. See Note 15: Fair Value Measurements for a description of the valuation methodologies used for derivatives. Cash collateral amounts associated with derivative positions that are cleared through an exchange are legally characterized as settlement of the derivative positions. Such collateral amounts are reflected as offsets to the associated derivatives balances recorded in other assets or in accrued expenses and other liabilities. Other cash collateral posted and held balances are recorded in other assets and deposits, respectively, in the 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.

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Derivatives Designated as Hedges

Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows arising from changes in interest rates, or other types of forecasted transactions, are considered cash flow hedges. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.

Cash Flow Hedges

The Company uses interest rate swaps to manage its exposure to changes in interest rates related to future cash flows resulting from interest received on interest-earning assets and interest payments on funding instruments. These interest rate swaps qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"). As of September 30, 2021 and December 31, 2020, the Company's outstanding cash flow hedges related only to interest receipts from credit card receivables and had an initial maximum period of two years.

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, 2021, will be reclassified to interest income as interest receipts are accrued on the Company's then outstanding credit card receivables. During the next 12 months, the Company estimates it will reclassify $3 million of pretax earnings primarily related to one terminated derivative formerly designated as a cash flow hedge.

Fair Value Hedges

The Company is exposed to changes in the fair value of its fixed-rate debt obligations due to changes in interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value of certain fixed-rate long-term borrowings, including securitized debt and bank notes, attributable to changes in LIBOR or OIS rate, which are benchmark interest rates 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 relating to the risk being hedged are recorded in interest expense. The changes generally provide substantial offset to one another, with any difference recognized in interest expense.

Derivatives Not Designated as Hedges

Foreign Exchange Forward Contracts

The Company has foreign exchange forward contracts that are economic hedges and are not designated as accounting hedges. The Company enters into foreign exchange forward contracts to manage foreign currency risk. Changes in the fair value of these contracts are recorded in other income.

Derivatives Cleared Through an Exchange

Cash variation margin payments on derivatives cleared through an exchange are legally considered settlement payments and are accounted for with corresponding derivative positions as one unit of account and not presented separately as collateral. With settlement payments on derivative positions cleared through this exchange reflected as offsets to the associated derivative asset and liability balances, the fair values of derivative instruments and collateral balances shown are generally reduced.

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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, 2021							December 31, 2020
	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	$	250	1	$	—	$	—	$	250	$	—	$	—
Interest rate swaps—fair value hedge	$	8,275	10	1		—		$	11,625	1		—
Derivatives not designated as hedges
Foreign exchange forward contracts(1)	$	26	6	—		—		$	24	—		—
Interest rate swaps	$	5	1	—		—		$	—	—		—
Total gross derivative assets/liabilities(2)				1		—				1		—
Less: collateral held/posted(3)				—		—				—		—
Total net derivative assets/liabilities				$	1	$	—			$	1	$	—

(1)The foreign exchange forward contracts have notional amounts of EUR 6 million, GBP 6 million, SGD 1 million and INR 788 million as of September 30, 2021, and notional amounts of EUR 6 million, GBP 6 million, SGD 1 million and INR 596 million as of December 31, 2020.

(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, 2021, the Company had no outstanding contracts. At December 31, 2020, the Company had one outstanding contract with a total notional amount of $27 million and an immaterial fair value.

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

The following amounts were recorded on the statements of financial condition related to cumulative basis adjustments for fair value hedges (dollars in millions):


	September 30, 2021				December 31, 2020
	Carrying Amount of Hedged Liability		Cumulative Amount of Fair Value Hedging Adjustment Increasing the Carrying Amount of Hedged Liability		Carrying Amount of Hedged Liabilities		Cumulative Amount of Fair Value Hedging Adjustment Increasing the Carrying Amount of Hedged Liability
Long-term borrowings	$	8,885	$	115	$	11,881	$	281

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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 on the Condensed Consolidated Statements of Income
	Interest Expense
	Deposits		Long-Term Borrowings		Other Income
For the Three Months Ended September 30, 2021
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	$	(156)	$	(113)	$	18

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

Gains on fair value hedging relationships
Gains on hedged items	$	—	$	45	$	—
Gains (losses) on interest rate swaps	—		(9)		—
Total gains on fair value hedging relationships	$	—	$	36	$	—




For the Three Months Ended September 30, 2020
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	$	(287)	$	(126)	$	17

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

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

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

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	Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income
	Interest Expense
	Deposits		Long-Term Borrowings		Other Income
For the Nine Months Ended September 30, 2021
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	$	(519)	$	(356)		$	47

The effects of cash flow and fair value hedging
Gains (losses) on cash flow hedging relationship
Amounts reclassified from OCI into earnings	$	—	$	(2)		$	—

Gains on fair value hedging relationships
Gains on hedged items	$	—	$	167		$	—
Gains (losses) on interest rate swaps	—		(38)			—
Total gains on fair value hedging relationships	$	—	$	129		$	—




For the Nine Months Ended September 30, 2020
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	$	(1,000)	$	(479)		$	59

The effects of cash flow and fair value hedging
Losses on cash flow hedging relationship
Amounts reclassified from OCI into earnings	$	(9)	$	(2)		$	—

Gains on fair value hedging relationship
Gains (losses) on hedged items	$	—	$	(326)		$	—
Gains on interest rate swaps	—		434			—
Total gains on fair value hedging relationships	$	—	$	108		$	—

For the impact of the derivative instruments on OCI, see Note 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 the derivatives held with that counterparty. These collateral receivable or payable amounts are generally not offset against the fair value of these derivatives but are recorded separately in other assets or deposits. Most of the Company's cash collateral amounts relate to positions cleared through an exchange and are reflected as offsets to the associated derivatives balances recorded in other assets and accrued expenses and other liabilities.

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

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17. Segment Disclosures

The Company manages its business activities in two segments: Digital Banking and Payment Services.

•Digital Banking: The Digital Banking segment includes Discover-branded credit cards issued to individuals on the Discover Network and other consumer products and services, including private student loans, personal loans, home loans and other consumer lending and deposit products. The majority of Digital Banking revenues relate to interest income earned on the segment's loan products. Additionally, the Company's credit card products generate substantially all revenues related to discount and interchange, protection products and loan fee income.

•Payment Services: The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and the Company's Network Partners business, which provides payment transaction processing and settlement services on the Discover Network. The majority of Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue from Diners Club.

The business segment reporting provided to and used by the Company's chief operating decision-maker is prepared using the following principles and allocation conventions:

•The Company aggregates operating segments when determining reportable segments.

•Corporate overhead is not allocated between segments; all corporate overhead is included in the Digital Banking segment.

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

•The Company's assets are not allocated among the operating segments in the information reviewed by the Company's chief operating decision-maker.

•The revenues of each segment are derived from external sources. The segments do not earn revenue from intercompany sources.

•Income taxes are not specifically allocated between the operating segments in the information reviewed by the Company's chief operating decision-maker.

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


	Digital Banking		Payment Services		Total
For the Three Months Ended September 30, 2021
Interest income
Credit card loans	$	2,193	$	—	$	2,193
Private student loans	184		—		184
Personal loans	219		—		219
Other loans	30		—		30
Other interest income	48		—		48
Total interest income	2,674		—		2,674
Interest expense	269		—		269
Net interest income	2,405		—		2,405
Provision for credit losses	185		—		185
Other income (loss)	447		(75)		372
Other expense	1,151		39		1,190
Income (loss) before income taxes	$	1,516	$	(114)	$	1,402

For the Three Months Ended September 30, 2020
Interest income
Credit card loans	$	2,171	$	—	$	2,171
Private student loans	182		—		182
Personal loans	237		—		237
Other loans	27		—		27
Other interest income	64		—		64
Total interest income	2,681		—		2,681
Interest expense	416		—		416
Net interest income	2,265		—		2,265
Provision for credit losses	750		—		750
Other income	371		78		449
Other expense	969		36		1,005
Income before income taxes	$	917	$	42	$	959

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	Digital Banking		Payment Services		Total
For the Nine Months Ended September 30, 2021
Interest income
Credit card loans	$	6,452	$	—	$	6,452
Private student loans	554		—		554
Personal loans	662		—		662
Other loans	85		—		85
Other interest income	156		—		156
Total interest income	7,909		—		7,909
Interest expense	875		—		875
Net interest income	7,034		—		7,034
Provision for credit losses	(45)		—		(45)
Other income	1,284		833		2,117
Other expense	3,290		203		3,493
Income before income tax expense	$	5,073	$	630	$	5,703

For the Nine Months Ended September 30, 2020
Interest income
Credit card loans	$	6,760	$	—	$	6,760
Private student loans	569		—		569
Personal loans	722		—		722
Other loans	78		—		78
Other interest income	206		—		206
Total interest income	8,335		—		8,335
Interest expense	1,482		—		1,482
Net interest income	6,853		—		6,853
Provision for credit losses	4,603		—		4,603
Other income	1,091		320		1,411
Other expense	3,069		172		3,241
Income before income tax expense	$	272	$	148	$	420

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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 certain amounts classified as other income.

The following table presents revenue from contracts with customers disaggregated by business segment and reconciles revenue from contracts with customers to total other income (dollars in millions):


	Digital Banking		Payment Services		Total
For the Three Months Ended September 30, 2021
Other income subject to ASC 606
Discount and interchange revenue, net(1)	$	280	$	19	$	299
Protection products revenue	43		—		43
Transaction processing revenue	—		58		58
Other income	3		15		18
Total other income subject to ASC 606(2)	326		92		418
Other income not subject to ASC 606
Loan fee income	121		—		121
Unrealized gains (losses) on equity investments	—		(167)		(167)

Total other income (loss) not subject to ASC 606	121		(167)		(46)
Total other income (loss) by operating segment	$	447	$	(75)	$	372

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		—		44
Transaction processing revenue	—		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		—		100


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

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	Digital Banking		Payment Services		Total
For the Nine Months Ended September 30, 2021
Other income subject to ASC 606
Discount and interchange revenue, net(1)	$	826	$	53	$	879
Protection products revenue	129		—		129
Transaction processing revenue	—		167		167
Other (loss) income	(4)		51		47
Total other income subject to ASC 606(2)	951		271		1,222
Other income not subject to ASC 606
Loan fee income	333		—		333
Unrealized gains on equity investments	—		562		562

Total other income not subject to ASC 606	333		562		895
Total other income by operating segment	$	1,284	$	833	$	2,117

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		—		135
Transaction processing revenue	—		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		—		304

Realized gains on equity investments	—		79		79
Total other income not subject to ASC 606	304		79		383
Total other income by operating segment	$	1,091	$	320	$	1,411

(1)Net of rewards, including Cashback Bonus rewards, of $689 million and $514 million for the three months ended September 30, 2021 and 2020, respectively, and $1.8 billion and $1.4 billion for the nine months ended September 30, 2021 and 2020, respectively.

(2)Excludes deposit product fees that are reported within net interest income, which were immaterial for the three and nine months ended September 30, 2021 and 2020.

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 in the Company's annual report on Form 10-K for the year ended December 31, 2020.

19. Subsequent Events

The Company has evaluated events and transactions that have occurred subsequent to September 30, 2021, and determined that there were no subsequent events that would require recognition or disclosure in the condensed consolidated financial statements.

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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 on 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 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 of this quarterly report and in "Risk Factors," "Business," 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, 2020, which is filed with the Securities and Exchange Commission ("SEC") and available at the SEC's internet site (https://www.sec.gov).

Introduction and Overview

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

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Our primary revenues consist of interest income earned on loan receivables and fees earned from customers, financial institutions, merchants and issuers. The primary expenses required to operate our business include funding costs (interest expense), credit loss provisions, customer rewards and expenses incurred to grow, manage and service our loan receivables and networks. Our business activities are funded primarily through consumer deposits, securitization of loan receivables and the issuance of unsecured debt.

COVID-19 Pandemic Response and Impact

The COVID-19 pandemic has continued to have a widespread and unprecedented impact on a global scale. While the United States economy continues to recover from a brief but severe recession triggered by the COVID-19 pandemic, 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 the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2020, under "Risk Factors". This section includes a discussion of the significant areas of potential impact on us of the COVID-19 pandemic and specific actions we are taking or expect to take in this time of uncertainty.

Financial Results and Outlook

The United States economy continues to recover from the impacts of the COVID-19 pandemic. The easing of COVID-19 restrictions, economic expansion and government stimulus have positively impacted credit performance and elevated payment rates. We saw an increase in sales volume for the three and nine months ended September 30, 2021, compared to the same periods in 2020. Additionally, we had modest loan growth during the three months ended September 30, 2021.

We also decreased our allowance for credit losses from December 31, 2020. Refer to "— Loan Quality — Provision and Allowance for Credit Losses" for more details on the current period allowance for credit losses.

Our outlook remains unchanged from what we disclosed in the second quarter of 2021. We anticipate modest loan growth in 2021 driven by positive sales trends and new account growth. We expect net interest margin to remain generally flat relative to the first quarter of 2021 through the remainder of 2021, with some variability from quarter to quarter. We expect net charge-offs to be lower year-over-year driven by continued stable credit performance. We remain committed to disciplined expense management and will continue to make investments for profitable long-term growth through increased marketing and investments in core technology capabilities and efficiency improvements.

Regulatory and Legislative

Federal, state and local governments and independent banking agencies have taken extraordinary measures to support the United States economy and mitigate the impacts of the COVID-19 pandemic on the economy and society at large. These policies have included regulatory relief and flexibility to financial institutions, liquidity to capital markets and financial support to businesses and consumers, including fiscal stimulus, payment forbearance, small business lending programs, increased unemployment payments and other forms of assistance. Lawmakers continue to offer additional proposals in an attempt to mitigate harm to the economy and consumers. The effects of these programs are broad and very complex and depend upon a wide variety of factors, some of which are yet to be identified. Thus, the ultimate impact of these programs and policies on our business, results of operations and financial condition is difficult to quantify and may not be known for some time. For more information, see “— Regulatory Environment and Developments” below.

Loan Receivables and Allowance for Credit Losses

At the onset of the pandemic, we continued to lend to customers but tightened our standards for new accounts and for growing existing accounts across all products in our loan portfolio. Additionally, we temporarily reduced our customer acquisition and brand marketing in response to the significant economic downturn at the onset of the COVID-19 pandemic. As a result of the strong credit performance observed in the current year and positive economic outlook, we returned most of our underwriting criteria to pre-pandemic standards during the second quarter of 2021. Additionally, we increased our investments in credit card and private student loan marketing and business development in the second and third quarters of 2021 to support our loan growth initiatives.

In the third quarter of 2021, we decreased our allowance for credit losses in anticipation of lower credit losses driven by improving macroeconomic forecasts and continued stable credit performance. Our allowance for credit losses includes the

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risk associated with all loans and considers the effects of all loan modifications, including troubled debt restructurings ("TDRs") and loan modifications exempt from the TDR designation under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act”). As of September 30, 2021, the allowance for credit losses 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 actions that could impact our business. Refer to "— Loan Quality — Impact of the COVID-19 Pandemic on the Loan Portfolio" for more details on the current period allowance for credit losses.

Capital and Liquidity

We maintained liquid assets and capital levels in excess of historical norms as of September 30, 2021 as consumer loan payment rates and deposit balances remain above their pre-pandemic levels. We maintain good access to all of our diverse funding channels. For example, we took advantage of the low-rate, tight-credit-spread environment by issuing approximately $1.8 billion of credit card asset-backed securities in September 2021.

We remain well-capitalized with capital ratios in excess of regulatory minimums and took prudent actions to preserve and augment our capital when the macroeconomic and operating environment turned uncertain last year. Our capital levels allow us to capitalize on loan receivable growth as customers moderate loan payment rates and continue to increase spending as the economy more fully re-opens from the COVID-19 pandemic.

Payment Services

As governments across the world have taken steps to minimize the transmission of COVID-19, the number of cross-border transactions processed on the Discover Global Network has declined. Certain negatively impacted categories such as travel may have an outsized impact on some of our Diners Club franchisees. The impacts from the COVID-19 pandemic 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. As economic uncertainty persists, these shifts may continue to result in changes to the Payment Services segment’s results of operations.

Fair Value and Impairments

With the uncertain nature of the pandemic's overall impact on the economy, we continue to assess the effects of COVID-19 with respect to our goodwill and intangible assets, investment securities and other long-term assets. See Note 5: Intangible Assets to our condensed consolidated financial statements for more information on the impact of the COVID-19 pandemic on intangible assets.

Business Continuity and Operations

We have re-opened some of our physical locations with appropriate health safety measures and capacity limitations, including our corporate headquarters. However, we have informed employees that they may continue to work from home and will not be required to return to our physical locations prior to January 2022. Notwithstanding the shift to work-from-home, we have been able to successfully operate with no significant impact to our operations or service levels. As a result, upon the return to our physical locations, we will offer flexible work-from-home arrangements that will provide our employees the option to work remotely on a more frequent basis than before the pandemic.

Operational changes necessitated by the rapid shift in employee location have not thus far had a material adverse effect on us or our financial condition; however, the shift has caused us to grow increasingly dependent on third-party service providers, including those with which we have no relationship such as our employees’ internet service providers. For more information on the risks associated with reliance on third-party service providers and the shift to work from home, see the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2020, under "Risk Factors".

Regulatory Environment and Developments

As the United States and global economies attempt to normalize from the COVID-19 pandemic, the banking agencies continue to evaluate whether additional actions are warranted to assist consumers, financial institutions and the overall economy. On March 31, 2021, the Consumer Financial Protection Bureau ("CFPB") announced it was rescinding several of its policy statements and withdrawing its participation in several interagency policy statements issued in response to the COVID-19 pandemic that had been intended to provide flexibility to financial institutions. The CFPB stated that the

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rescissions "reflect the Bureau's commitment to consumer protection and the fact that financial institutions have had a year to adapt their operations to the difficulties posed by the pandemic."

In addition, the United States Congress has taken legislative action to address the economic disruptions caused by the COVID-19 pandemic, including the March 2020 CARES Act and December 2020 Omnibus and COVID Relief and Response Act. Most recently, the American Rescue Plan Act of 2021 ("ARPA"), enacted in March 2021, contained additional stimulus payments, increased unemployment benefits and increased small business funding under the Payment Protection Program. The ARPA also significantly increased and expanded the Child Tax Credit for one year and provides additional funding for rental assistance programs. These Congressional efforts offered financial assistance and benefits to consumers and small businesses. As the pandemic continues, additional legislative and regulatory action may be proposed and could include provisions that significantly impact our prospects and business practices. The impact of these legislative and regulatory initiatives on our business, the economy and the United States consumer will depend upon a wide variety of factors, some of which are yet to be identified.

Banking

Capital Standards and Stress Testing

DFS is subject to mandatory supervisory stress tests every other year and is required to submit annual capital plans to the Federal Reserve based on forward-looking internal analysis of income and capital levels under expected and stressful conditions. DFS is also subject to capital buffer requirements, including the Stress Capital Buffer ("SCB"), which requires maintenance of regulatory capital levels above a threshold established based on the results of supervisory stress tests after accounting for planned dividend payments.

In June 2020, the Federal Reserve issued a notice informing DFS that it and all other firms that participated in the 2020 Comprehensive Capital Analysis and Review ("CCAR") exercise would be required to submit revised capital plans to be assessed by the Federal Reserve under newly developed scenarios incorporating economic stresses reflecting the ongoing COVID-19 pandemic. The Federal Reserve notified all firms subject to CCAR that they would be subject to temporary restrictions on capital distributions in the third and fourth quarter of 2020 that restricted most share repurchases and limited dividends based on a formula that takes into account the firm's average net income over the preceding four quarters.

On November 2, 2020, DFS submitted its revised capital plan as part of the CCAR resubmission process, and the Federal Reserve publicly announced the results of its analysis on December 18, 2020. The results indicate that DFS' regulatory capital ratios remained above all minimum requirements under each of the stress test scenarios. However, due to ongoing economic uncertainty, the Federal Reserve extended the temporary restrictions on capital distributions, with modifications, for all firms subject to the Federal Reserve's capital planning rule through the second quarter of 2021. Following an announcement by the Federal Reserve on June 24, 2021, these restrictions were lifted and, effective June 30, 2021, DFS was authorized to make capital distributions that are consistent with the Federal Reserve's capital rule, inclusive of DFS' final SCB requirement of 3.5% that was previously announced by the Federal Reserve on August 10, 2020, and that remained in effect until the conclusion of the 2021 CCAR process and the subsequent, related announcement of DFS' adjusted SCB requirement.

On January 19, 2021, the Federal Reserve finalized regulatory amendments that made targeted changes to the capital planning, regulatory reporting and SCB requirements for firms subject to Category IV standards to be consistent with the Federal Reserve’s regulatory tailoring framework. The final rules generally align to instructions the Federal Reserve previously provided to Category IV firms regarding their respective capital plan submissions. The amended rules also provide Category IV firms, including DFS, with the option to submit to supervisory stress tests during off years if they wish for the Federal Reserve to reset the stress test portion of their SCB requirement. In connection with the final rulemaking, the Federal Reserve revised the scope of application of its existing regulatory guidance for capital planning to align with the tailoring framework. However, the timing and substance of any additional changes to existing guidance or new guidance are uncertain.

On June 24, 2021, the Federal Reserve publicly announced the results of its supervisory stress tests for the firms required to participate in the 2021 CCAR process. In accordance with the capital plan rule amendments that were finalized in January 2021, DFS elected not to participate in the 2021 supervisory stress tests. Nevertheless, DFS was required to submit a capital plan based on a forward-looking internal assessment of income and capital under baseline and stressful conditions. This plan was submitted by DFS to the Federal Reserve on April 5, 2021. The Federal Reserve thereafter used our 2021 capital plan submission to assess its capital planning process and positions and, as of August 5, 2021, announced DFS'

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adjusted SCB requirement of 3.6% to reflect DFS' planned common stock dividends. This adjusted SCB is effective as of October 1, 2021.

London Interbank Offered Rate

On July 27, 2017, the UK Financial Conduct Authority ("FCA") announced that it would no longer encourage or compel banks to continue to contribute quotes and maintain the London Interbank Offered Rate ("LIBOR") after 2021. To support a smooth transition away from LIBOR, the Federal Reserve and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee ("ARRC"), a group of private-market participants tasked with facilitating a successful transition from U.S. dollar ("USD") LIBOR to a more robust reference rate. The ARRC initially identified the Secured Overnight Financing Rate ("SOFR") as its recommended alternative reference rate for USD LIBOR. The ARRC has also established several priorities and milestones to support the use of SOFR and SOFR-based indices, including developing contractual "fallback" language for capital markets and consumer products; providing clarity on legal, tax, accounting and regulatory matters; promoting broad outreach and education efforts around the LIBOR transition; and recommending spread adjustments for SOFR and SOFR-based indices, which will be of critical importance to market participants once USD LIBOR settings cease in 2023.

With regard to recent LIBOR transition developments, on March 5, 2021, the FCA announced the future cessation and loss of representativeness for all LIBOR benchmark settings. While non-USD and several less frequently referenced USD LIBOR settings will cease publication immediately after December 31, 2021, commonly referenced USD LIBOR settings will cease publication immediately after June 30, 2023; this future cessation event will trigger fallback provisions in many financial contracts to convert their benchmark index from LIBOR to an alternative rate, usually some form of SOFR. On July 29, 2021, the ARRC announced its recommendation of forward-looking term rates based on SOFR as additional alternative reference rate options.

We have a cross-functional team overseeing and managing our transition away from the use of LIBOR. This team assesses evolving industry and marketplace norms and conventions for LIBOR-indexed instruments, evaluates the impacts stemming from the future cessation of LIBOR publication and oversees and takes actions to transition our LIBOR exposures to alternative benchmark rates, usually SOFR. Our existing LIBOR exposures are limited primarily to three instruments—variable-rate student loans, interest rate swaps and capital markets securities—and we have materially reduced our remaining exposures in all of these instruments.

As of September 30, 2021, LIBOR-indexed variable-rate loans comprise approximately 44% of our private student loan portfolio and approximately 5% of our aggregate loan portfolio. These outstanding student loans indexed to LIBOR will convert to a SOFR index in 2023 when 3-month USD LIBOR will no longer be published. United States banking regulators have directed banks to cease entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021. Therefore, beginning in November 2021, we will only originate new variable-rate student loans indexed to term SOFR.

We ceased entering into new LIBOR-indexed interest rate derivatives in 2018 and have since actively reduced LIBOR exposures in our derivatives portfolio. During the third quarter of 2021, we terminated our last LIBOR-indexed interest rate swap maturing after June 2023; our one remaining LIBOR-indexed interest rate swap will mature in January 2022.

Most of our capital markets securities indexed to USD LIBOR are floating-rate asset-backed securities. Beginning in 2018, we included fallback provisions in all newly-issued securities that will facilitate an orderly transition from LIBOR to SOFR once 1- and 3-month LIBOR cease to be published in 2023. Approximately $1.5 billion of our capital markets securities that mature after June 2023 with no fallback provisions would be covered under pending federal legislation that would allow us to replace the LIBOR index with SOFR under a safe-harbor provision. Approximately $800 million of our capital markets securities contain fallback provisions that would not be covered under pending federal legislation; however, shortly after the expected June 2023 USD LIBOR cessation date, these securities will either mature or we may exercise our right to call and redeem them.

We have prepared for the cessation of USD LIBOR by taking steps to avoid new exposures and actively reduce our remaining exposures. We are on track to complete before year-end 2021 any remaining transition work, including providing our customers with information about the cessation of USD LIBOR and how it will affect their contracts with us.

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Consumer Financial Services

The CFPB regulates consumer financial products and services and examines certain providers of consumer financial products and services, including Discover. The CFPB's authority includes rulemaking, supervisory and enforcement powers with respect to federal consumer protection laws; preventing "unfair, deceptive or abusive acts or practices" and ensuring that consumers have access to fair, transparent and competitive financial products and services. Historically, the CFPB's policy priorities focused on several financial products of the type we offer (e.g., credit cards and other consumer lending products). In addition, the CFPB is required by statute to undertake certain actions, including its biennial review of the consumer credit card market. In December 2020, certain of our subsidiaries entered into a consent order with the CFPB regarding identified private student loan servicing practices. See Note 14: Litigation and Regulatory Matters to our condensed consolidated financial statements for more information.

Former Federal Trade Commissioner Rohit Chopra was sworn in as the Director of the CFPB on October 12, 2021. Under Mr. Chopra’s leadership, the CFPB’s priorities are expected to focus on, among other things, vigorous enforcement of existing consumer protection laws, with a particular focus on unfair, deceptive and abusive acts and practices and fair lending, student lending and servicing, fair lending, debt collection and credit reporting. These strategies and priorities and any resulting regulatory developments, findings, potential supervisory or enforcement actions and ratings could negatively impact business strategies, limit or change our business practices, limit consumer product offerings, invest more management time and resources in compliance efforts, limit fees charged for services, limit our ability to implement certain enhancements to product features and functionality or limit our ability to obtain related required regulatory approvals. The additional expense, time and resources needed to comply with ongoing or new regulatory requirements may adversely impact the cost of and access to credit for consumers and results of business operations.

Data Security and Privacy

Policymakers at the federal and state levels remain focused on enhancing data security and data breach incident response requirements. Furthermore, regulations and legislation at various levels of government have been proposed and enacted to augment consumer data privacy standards. The California Consumer Privacy Act ("CCPA") creates a broad set of privacy rights and remedies modeled in part on the European Union's General Data Protection Regulation. The CCPA went into effect on January 1, 2020, and the California Attorney General's final regulations became effective on August 14, 2020, with enforcement beginning July 1, 2020. The California Privacy Rights Act ("CPRA"), a ballot measure led by the original proponent of the CCPA, passed on November 3, 2020, and largely enters into force on January 1, 2023. The CPRA replaces the CCPA to enhance consumer privacy protections further and creates a new California Privacy Protection Agency ("CPPA"). In September, the CPPA Board initiated the CPRA regulatory phase by issuing a request for preliminary comments. While the CPRA retains an exemption for information collected, processed, sold, or disclosed subject to the Gramm-Leach-Bliley Act, we continue to evaluate the impact of the CPRA on our businesses and other providers of consumer financial services.

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Segments

We manage our business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. For a detailed description of each segment's operations and the allocation conventions used in our business segment reporting, see Note 17: Segment Disclosures to our condensed consolidated financial statements.

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Digital Banking
Interest income
Credit card loans	$	2,193	$	2,171	$	6,452	$	6,760
Private student loans	184		182		554		569
Personal loans	219		237		662		722
Other loans	30		27		85		78
Other interest income	48		64		156		206
Total interest income	2,674		2,681		7,909		8,335
Interest expense	269		416		875		1,482
Net interest income	2,405		2,265		7,034		6,853
Provision for credit losses	185		750		(45)		4,603
Other income	447		371		1,284		1,091
Other expense	1,151		969		3,290		3,069
Income before income taxes	1,516		917		5,073		272
Payment Services


Other (loss) income	(75)		78		833		320
Other expense	39		36		203		172
(Loss) income before income taxes	(114)		42		630		148
Total income before income taxes	$	1,402	$	959	$	5,703	$	420

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Network Transaction Volume
PULSE Network	$	59,872	$	54,993	$	183,126	$	157,026
Network Partners	10,377		8,917		29,474		23,177
Diners Club(1)	6,547		5,839		18,570		17,915
Total Payment Services	76,796		69,749		231,170		198,118
Discover Network—Proprietary(2)	49,360		38,699		135,763		106,228
Total Network Transaction Volume	$	126,156	$	108,448	$	366,933	$	304,346
Transactions Processed on Networks
Discover Network	868		679		2,345		1,889
PULSE Network	1,415		1,270		4,124		3,668
Total Transactions Processed on Networks	2,283		1,949		6,469		5,557
Credit Card Volume
Discover Card Volume(3)	$	50,389	$	39,783	$	138,772	$	110,362
Discover Card Sales Volume(4)	$	47,613	$	37,134	$	130,817	$	101,843

(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 activities.

(4)Represents Discover card activity related to sales net of returns.

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Digital Banking

Our Digital Banking segment reported pretax income of $1.5 billion and $5.1 billion, respectively, for the three and nine months ended September 30, 2021, as compared to a pretax income of $917 million and $272 million, respectively, for the three and nine months ended September 30, 2020.

Net interest income increased for the three months ended September 30, 2021, as compared to the same period in 2020, primarily driven by lower funding costs. Interest income remained flat during the three months ended September 30, 2021, as compared to the same period in 2020, due to favorable interest charge-offs offset by a lower card revolve rate. Interest expense decreased during the three months ended September 30, 2021, as compared to the same period in 2020, due to lower average market rates, a lower funding base, lower pricing on deposits and higher coupon maturities.

Net interest income increased for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily driven by lower funding costs, partially offset by a lower average level of outstanding loan receivables and lower yields on loans. Interest income decreased during the nine months ended September 30, 2021, as compared to the same period in 2020. This decrease was primarily due to a lower average level of card loan receivables, driven by higher payment rates, as well as lower yields on loans due to the lower market rates. Interest expense decreased during the nine months ended September 30, 2021, as compared to the same period in 2020 due to lower average market rates, a lower funding base, lower pricing on deposits and higher coupon maturities.

For the three and nine months ended September 30, 2021, the overall portfolio provision for credit losses decreased as compared to the same periods in 2020, primarily due to reserve releases in the current periods versus reserve builds in the prior periods and lower net charge-offs. The overall reserve release during the three months ended September 30, 2021, was primarily driven by improvements in the macroeconomic forecast and continued stable credit performance, partially offset by modest credit card loan receivables growth and seasonality in private student loan originations during the periods. The reserve build during the three months ended September 30, 2020, was driven by a seasonal increase in private student loan originations during the period. The reserve release during the nine months ended September 30, 2021, was primarily driven by improvements in the macroeconomic forecast, continued stable credit performance and a reduction in loan receivables outstanding during the period. The reserve build during the nine months ended September 30, 2020, was primarily driven by the unfavorable change in economic outlook resulting from the COVID-19 pandemic. For a detailed discussion on provision for credit losses, see "— Loan Quality — Provision and Allowance for Credit Losses."

Total other income increased for the three and nine months ended September 30, 2021, as compared to the same periods in 2020, which was primarily due to an increase in discount and interchange revenue. The increase in discount and interchange revenue was partially offset by an increase in rewards costs, both of which were the result of higher sales volume during the period.

Total other expense increased for the three months ended September 30, 2021, as compared to the same period in 2020, primarily due to increases in marketing and business development, other expense and professional fees. Marketing and business development increased due to accelerated growth investments primarily in card. The increase in other expense was driven by a legal accrual. The professional fees increase was driven primarily by an increase in recovery fees.

Total other expense increased for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to increases in employee compensation and benefits, other expense, professional fees and marketing and business development. Employee compensation and benefits increased as a result of higher bonus accruals and higher average salaries, partially offset by lower headcount. The increase in other expense was driven by a legal accrual. The professional fees increase was driven primarily by an increase in recovery fees. Marketing and business development increased due to accelerated growth investments primarily in card.

Discover card sales volume was $47.6 billion and $130.8 billion, respectively, for the three and nine months ended September 30, 2021, which was an increase of 28.2% and 28.4%, respectively, as compared to the same periods in 2020. This volume growth was primarily driven by higher consumer spending across all spending categories, reflecting the easing of COVID-19 restrictions and continued economic expansion.

Payment Services

Our Payment Services segment reported pretax loss of $114 million and pretax income of $630 million, respectively, for the three and nine months ended September 30, 2021, as compared to pretax income of $42 million and $148 million for the same periods in 2020. The decrease in segment pretax income for the three months ended September 30, 2021, was driven

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by unrealized losses on equity investments. Unrealized losses on equity investments are the result of changes in the fair value of our investments in payment services entities that have actively traded stock. The increase in segment pretax income for the nine months ended September 30, 2021, was due to unrealized gains on equity investments. Unrealized gains on equity investments are the result of investments in payment services entities that are carried at fair value because the shares are actively traded. This increase was partially offset by a decrease in realized gains on the sale of equity investments during the prior period.

Critical Accounting Estimates

In preparing our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"), management must make judgments and use estimates and assumptions about the effects of matters that are uncertain. For estimates that involve a high degree of judgment and subjectivity, it is possible that different estimates could reasonably be derived for the same period. For estimates that are particularly sensitive to economic or market conditions changes, significant changes to the estimated amount from period to period are also possible. Management believes the current assumptions and other considerations used to estimate amounts reflected in our condensed consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts in our condensed consolidated financial statements, the resulting changes could have a material effect on our consolidated results of operations and, in some instances, could have a material effect on our consolidated financial condition. Management has identified the estimate related to our allowance for credit losses as a critical accounting estimate. The critical accounting estimate related to the allowance for credit losses is discussed in greater detail in our annual report on Form 10-K for the year ended December 31, 2020, under "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates." There have not been any material changes in the methods used to formulate this critical accounting estimate from those discussed in our annual report on Form 10-K for the year ended December 31, 2020.

Earnings Summary

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


	For the Three Months Ended September 30,				2021 vs. 2020 (Decrease) Increase				For the Nine Months Ended September 30,				2021 vs. 2020 (Decrease) Increase
	2021		2020		$		%		2021		2020		$		%
Interest income	$	2,674	$	2,681	$	(7)	NM		$	7,909	$	8,335	$	(426)	(5)	%
Interest expense	269		416		(147)		(35)	%	875		1,482		(607)		(41)	%
Net interest income	2,405		2,265		140		6	%	7,034		6,853		181		3	%
Provision for credit losses	185		750		(565)		(75)	%	(45)		4,603		(4,648)		(101)	%
Net interest income after provision for credit losses	2,220		1,515		705		47	%	7,079		2,250		4,829		215	%
Other income	372		449		(77)		(17)	%	2,117		1,411		706		50	%
Other expense	1,190		1,005		185		18	%	3,493		3,241		252		8	%
Income before income taxes	1,402		959		443		46	%	5,703		420		5,283		NM
Income tax expense	311		188		123		65	%	1,321		78		1,243		NM
Net income	$	1,091	$	771	$	320	42	%	$	4,382	$	342	$	4,040	NM

Net Interest Income

The table that follows this section has been provided to supplement the discussion below and provide further analysis of net interest income and net interest margin. Net interest income represents the difference between interest income earned on our interest-earning assets and the interest expense incurred to finance those assets. We analyze net interest income in total by calculating net interest margin (net interest income as a percentage of average total loan receivables) and net yield on interest-earning assets (net interest income as a percentage of average total interest-earning assets). We also separately consider the impact of the level of loan receivables and the related interest yield and the impact of the cost of funds related to each of our funding sources, along with the income generated by our liquidity portfolio, on net interest income.

Our interest-earning assets consist of: (i) cash and cash equivalents primarily related to amounts on deposit with the Federal Reserve Bank of Philadelphia, (ii) restricted cash, (iii) other short-term investments, (iv) investment securities and (v) loan receivables. Our interest-bearing liabilities consist primarily of deposits, both direct-to-consumer and brokered, and

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long-term borrowings, including amounts owed to securitization investors. The following factors influence net interest income:

•The level and composition of loan receivables, including the proportion of credit card loans to other loans, as well as the proportion of loan receivables bearing interest at promotional rates as compared to standard rates;

•The credit performance of our loans, particularly with regard to charge-offs of finance charges, which reduces interest income;

•The terms of long-term borrowings and certificates of deposit upon initial offering, including maturity and interest rate;

•The interest rates necessary to attract and maintain direct-to-consumer deposits;

•The level and composition of other interest-earning assets, including our liquidity portfolio and interest-bearing liabilities;

•Changes in the interest rate environment, including the levels of interest rates and the relationships among interest rate indices, such as the prime rate, the Federal Funds rate, interest rate on excess reserves and LIBOR; and

•The effectiveness of interest rate swaps in our interest rate risk management program.

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Average Balance Sheet Analysis

(dollars in millions)


	For the Three Months Ended September 30,
	2021						2020
	Average Balance		Yield/Rate		Interest		Average Balance		Yield/Rate		Interest
Assets
Interest-earning assets
Cash and cash equivalents	$	12,192	0.16	%	$	3	$	12,552	0.12	%	$	4
Restricted cash	571		0.03	%	NM		775		0.09	%	NM
Other short-term investments	NM		0.10	%	NM		4,529		0.15	%	2
Investment securities	8,431		2.09	%	45		10,760		2.13	%	58
Loan receivables(1)
Credit card loans(2)	69,416		12.53	%	2,193		69,643		12.40	%	2,171
Private student loans	9,932		7.36	%	184		9,790		7.40	%	182
Personal loans	6,900		12.61	%	219		7,255		13.03	%	237
Other loans	2,108		5.41	%	30		1,734		6.25	%	27
Total loan receivables	88,356		11.79	%	2,626		88,422		11.78	%	2,617
Total interest-earning assets	109,550		9.68	%	2,674		117,038		9.11	%	2,681
Allowance for credit losses	(7,020)						(8,183)
Other assets	6,430						5,981
Total assets	$	108,960					$	114,836
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits	$	22,804	1.76	%	101		$	32,063	2.33	%	188
Money market deposits(3)	8,108		0.53	%	11		8,104		0.94	%	19
Other interest-bearing savings deposits	41,059		0.42	%	44		36,655		0.87	%	80
Total interest-bearing deposits	71,971		0.86	%	156		76,822		1.49	%	287
Borrowings
Short-term borrowings	6		0.24	%	NM		350		3.10	%	3
Securitized borrowings(4)(5)	8,292		1.10	%	22		12,115		1.04	%	31
Other long-term borrowings(5)(6)	9,550		3.78	%	91		10,426		3.60	%	95
Total borrowings	17,848		2.53	%	113		22,891		2.23	%	129
Total interest-bearing liabilities	89,819		1.19	%	269		99,713		1.66	%	416
Other liabilities and stockholders' equity	19,141						15,123
Total liabilities and stockholders' equity	$	108,960					$	114,836
Net interest income					$	2,405					$	2,265
Net interest margin(7)			10.80	%					10.19	%
Net yield on interest-earning assets(8)			8.71	%					7.70	%
Interest rate spread(9)			8.49	%					7.45	%

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	For the Nine Months Ended September 30,
	2021						2020
	Average Balance		Yield/Rate		Interest		Average Balance		Yield/Rate		Interest
Assets
Interest-earning assets
Cash and cash equivalents	$	15,725	0.12	%	$	14	$	11,522	0.36	%	$	31
Restricted cash	536		0.03	%	NM		544		0.48	%	2
Other short-term investments	235		0.12	%	NM		1,667		0.15	%	2
Investment securities	9,125		2.08	%	142		10,658		2.14	%	171
Loan receivables(1)
Credit card loans(2)	68,522		12.59	%	6,452		71,934		12.55	%	6,760
Private student loans	10,044		7.38	%	554		9,869		7.70	%	569
Personal loans	6,953		12.73	%	662		7,477		12.90	%	722
Other loans	2,002		5.64	%	85		1,609		6.48	%	78
Total loan receivables	87,521		11.84	%	7,753		90,889		11.95	%	8,129
Total interest-earning assets	113,142		9.35	%	7,909		115,280		9.66	%	8,335
Allowance for credit losses	(7,521)						(6,991)
Other assets	6,189						5,787
Total assets	$	111,810					$	114,076
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits	$	24,856	1.90	%	354		$	33,202	2.46	%	611
Money market deposits(3)	8,151		0.53	%	32		7,635		1.28	%	73
Other interest-bearing savings deposits	40,760		0.43	%	133		33,852		1.25	%	316
Total interest-bearing deposits	73,767		0.94	%	519		74,689		1.79	%	1,000
Borrowings
Short-term borrowings	3		0.21	%	NM		118		3.10	%	3
Securitized borrowings(4)(5)	9,798		1.05	%	77		13,051		1.55	%	152
Other long-term borrowings(5)(6)	10,037		3.72	%	279		11,193		3.91	%	327
Total borrowings	19,838		2.40	%	356		24,362		2.64	%	482
Total interest-bearing liabilities	93,605		1.25	%	875		99,051		2.00	%	1,482
Other liabilities and stockholders’ equity	18,205						15,025
Total liabilities and stockholders’ equity	$	111,810					$	114,076
Net interest income					$	7,034					$	6,853
Net interest margin(7)			10.74	%					10.07	%
Net yield on interest-earning assets(8)			8.31	%					7.94	%
Interest rate spread(9)			8.10	%					7.66	%

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

(2)Interest income on credit card loans includes $73 million and $70 million of amortization of balance transfer fees for the three months ended September 30, 2021 and 2020, respectively, and $217 million and $227 million for the nine months ended September 30, 2021 and 2020, respectively.

(3)Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding for the three and nine months ended September 30, 2020.

(4)Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the three and nine months ended September 30, 2021 and 2020.

(5)Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding for the three and nine months ended September 30, 2021 and 2020.

(6)Includes the impact of one terminated derivative formerly designated as a fair value hedge for the three and nine months ended September 30, 2021.

(7)Net interest margin represents net interest income as a percentage of average total loan receivables.

(8)Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.

(9)Interest rate spread represents the difference between the rate on total interest-earning assets and total interest-bearing liabilities.

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Loan Quality

Impact of the COVID-19 Pandemic on the Loan Portfolio

The COVID-19 pandemic and its impact on the economy have significantly affected our sales volume and credit card loan growth. We tightened standards for new accounts and for growing existing accounts across all products and reduced our marketing and customer acquisition expenditures at the onset of the pandemic. Due to the strong economic recovery from the COVID-19 pandemic-induced recession, we returned most of our underwriting criteria to pre-pandemic standards and resumed our investment in marketing and business development during the second quarter of 2021. This change in our credit underwriting, in addition to changes in consumer spending behavior, increased marketing and the re-opening of the United States economy upon expiration of COVID-19 restrictions, contributed to an increase in sales volume for the three and nine months ended September 30, 2021, when compared to the same periods in 2020. Our outstanding loan receivables as of September 30, 2021, decreased when compared to December 31, 2020, due to elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows. The decrease in outstanding loan receivables was partially offset by the robust credit card sales trends and seasonality in private student loan originations during the nine months ended September 30, 2021.

At the onset of the COVID-19 pandemic, we expanded borrower relief offerings to include Skip-a-Pay (payment deferral) ("SaP") and other loan modification programs, complementing the assistance already available through our existing loan modification programs. On August 31, 2020, we ceased offering enrollments in the SaP and other loan modification programs specifically developed in response to the COVID-19 pandemic. The accounts using these modifications as a result of the COVID-19 pandemic were evaluated for potential exclusion from the TDR designation either due to the insignificance of the concession or because they qualified for an exemption pursuant to the CARES Act. The SaP programs provided only an insignificant delay in payment on the enrolled accounts or loans and therefore those deferrals were not classified as TDRs.

Section 4013 of the CARES Act provides certain financial institutions with the option to suspend the application of accounting and reporting guidance for TDRs for a limited period of time for loan modifications made to address the effects of the COVID-19 pandemic. Section 541 of the Omnibus and COVID Relief and Response Act extended the TDR accounting and reporting relief provided by the CARES Act through the earlier of January 1, 2022, or the date that is 60 days after the termination of the presidentially-declared national emergency. We elected to apply the option to suspend the application of accounting and reporting guidance for TDRs as provided under Section 4013 of the CARES Act and as subsequently extended. As such, the number of accounts and corresponding balances designated as a TDR for the three and nine months ended September 30, 2021 and 2020, have been favorably impacted by the exclusion of certain modifications from the TDR designation pursuant to these exemptions and are expected to remain lower than they otherwise would have been. The payment status of modified accounts excluded from the TDR designation pursuant to the CARES Act is reflected in our delinquency reporting.

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The table below reflects the number and balance of both new loan modifications reported as TDRs and new loan modifications excluded from the TDR designation pursuant to the CARES Act (dollars in millions)(1):


	Accounts that entered a loan modification program and were classified as TDRs during the period			Accounts that entered a loan modification program and were exempt from the TDR designation pursuant to the CARES Act(1)
	Number of Accounts	Balances		Number of Accounts	Balances
For the Three Months Ended September 30, 2021
Credit card loans	13,964	$	86	27,925	$	200
Private student loans	102	$	2	2,325	$	46
Personal loans	888	$	10	239	$	3

For the Three Months Ended September 30, 2020(2)
Credit card loans	20,779	$	150	80,656	$	591
Private student loans	118	$	2	1,922	$	35
Personal loans	2,505	$	33	2,193	$	39

For the Nine Months Ended September 30, 2021(3)
Credit card loans	48,887	$	315	97,449	$	697
Private student loans	355	$	7	7,038	$	135
Personal loans	3,102	$	38	1,177	$	18

For the Nine Months Ended September 30, 2020(3)
Credit card loans	130,869	$	875	155,676	$	1,169
Private student loans	1,767	$	32	3,416	$	62
Personal loans	6,315	$	83	2,431	$	43

(1)SaP programs were not considered TDRs and therefore are not included in accounts excluded from the TDR designation by the CARES Act.

(2)Certain prior period amounts have been reclassified to conform to the current period presentation.

(3)As the TDR exemption pursuant to the CARES Act took effect in March 2020, the nine months ended September 30, 2021, is not comparable to the same period in 2020.

The number and balance of new credit card and personal loan modifications, including the combined total of those identified as TDRs and those exempt from the TDR designation, decreased during the three and nine months ended September 30, 2021, when compared to the same periods in 2020. The decrease in both periods is primarily due to the impacts of several rounds of government stimulus and disaster relief programs, which reduced the need for our customers to enroll in a loan modification program. The number and balance of loan modifications across all products, including the combined total of those identified as TDRs and those exempt from the TDR designation, during the three and nine months ended September 30, 2020, were favorably impacted by the utilization of SaP programs in lieu of traditional loan modification programs. Additionally, enrollments in personal loan modification programs were favorably impacted by tighter underwriting standards that were implemented in early 2020.

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The following table provides the number of accounts that exited a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act and corresponding outstanding balances along with the amount of the outstanding balances that were delinquent (30 or more days past due) upon exiting the temporary loan modification program (dollars in millions)(1):


	Three Months Ended September 30, 2021

	Number of Accounts	Outstanding Balances		Balances Delinquent(2)
Credit card loans	42,067	$	254	$	35
Private student loans(3)	2,290	$	40	NM
Personal loans(3)	1,307	$	21	NM

	Nine Months Ended September 30, 2021

	Number of Accounts	Outstanding Balances		Balances Delinquent(2)
Credit card loans	155,712	$	955	$	129
Private student loans(3)	6,024	$	106	NM
Personal loans(3)	4,101	$	61	NM

(1)As the TDR exemption pursuant to the CARES Act took effect in March 2020, the nine months ended September 30, 2021, is not comparable to the same period in 2020. The number of accounts that exited a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act and corresponding outstanding balances were not meaningful for the three and nine months ended September 30, 2020.

(2)Includes balances charged off at the end of the month the account exited the temporary loan modification program. The balances charged off were not meaningful for the three and nine months ended September 30, 2021 and 2020.

(3)The private student loan and personal loan balances that were delinquent upon exiting a temporary loan modification program were not meaningful for the three and nine months ended September 30, 2021 and 2020.

Our estimate of expected loss reflected in our allowance for credit losses includes the risk associated with all loans. We consider the effects of all loan modifications, including TDRs, loan modifications exempt from the TDR designation pursuant to the CARES Act and SaP programs. We believe we have appropriately reflected the risk of the accounts using these programs and the economic impact of the COVID-19 pandemic on our customers in the allowance for credit losses. Refer to Note 3: Loan Receivables to our condensed consolidated financial statements for more details on modification programs, TDRs and the allowance for credit losses.

Loan receivables consist of the following (dollars in millions):


	September 30, 2021		December 31, 2020
Credit card loans	$	70,320	$	71,472
Other loans
Private student loans	10,184		9,954
Personal loans	6,890		7,177
Other loans	2,148		1,846
Total other loans	19,222		18,977
Total loan receivables	89,542		90,449
Allowance for credit losses	(6,861)		(8,226)
Net loan receivables	$	82,681	$	82,223

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Provision and Allowance for Credit Losses

Provision for credit losses is the expense related to maintaining the allowance for credit losses at an appropriate level to absorb the estimate of credit losses anticipated over the remaining expected life of loan receivables at each period end date. In deriving the estimate of expected credit loss, we consider the collectability of principal, interest and fees associated with our loan receivables. We also consider expected recoveries of amounts that were either previously charged off or are expected to be charged off. Establishing the estimate for expected credit losses requires significant management judgment. The factors that influence the provision for credit losses include:

•Increases or decreases in outstanding loan balances, including:

•Changes in consumer spending, payment and credit utilization behaviors;

•The level of originations and maturities; and

•Changes in the overall mix of accounts and products within the portfolio;

•The credit quality of the loan portfolio, which reflects our credit granting practices and the effectiveness of collection efforts, among other factors;

•The impact of general economic conditions on the consumer, including national and regional conditions, unemployment levels, bankruptcy trends and interest rate movements;

•The level and direction of historical losses; and

•Regulatory changes or new regulatory guidance.

Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates" in our annual report on Form 10-K for the year ended December 31, 2020, and Note 3: Loan Receivables to our condensed consolidated financial statements for more details on how we estimate the allowance for credit losses.

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The following tables provide changes in our allowance for credit losses (dollars in millions):


	For the Three Months Ended September 30, 2021
	Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at June 30, 2021	$	5,409	$	828	$	745	$	44	$	7,026
Additions
Provision for credit losses(1)	178		46		(64)		—		160
Deductions
Charge-offs	(495)		(23)		(38)		—		(556)
Recoveries	206		6		19		—		231
Net charge-offs	(289)		(17)		(19)		—		(325)

Balance at September 30, 2021	$	5,298	$	857	$	662	$	44	$	6,861

	For the Three Months Ended September 30, 2020
	Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
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		—		174
Net charge-offs	(604)		(14)		(49)		(1)		(668)

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

	For the Nine Months Ended September 30, 2021
	Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at December 31, 2020	$	6,491	$	840	$	857	$	38	$	8,226
Additions
Provision for credit losses(1)	(18)		61		(96)		6		(47)
Deductions
Charge-offs	(1,778)		(63)		(150)		—		(1,991)
Recoveries	603		19		51		—		673
Net charge-offs	(1,175)		(44)		(99)		—		(1,318)

Balance at September 30, 2021	$	5,298	$	857	$	662	$	44	$	6,861

	For the Nine Months Ended September 30, 2020
	Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at December 31, 2019(2)	$	2,883	$	148	$	348	$	4	$	3,383
Cumulative effect of ASU No. 2016-13 adoption(3)	1,667		505		265		24		2,461
Balance at January 1, 2020	4,550		653		613		28		5,844
Additions
Provision for credit losses(2)	3,916		233		426		11		4,586
Deductions
Charge-offs	(2,480)		(62)		(224)		(1)		(2,767)
Recoveries	505		16		42		—		563
Net charge-offs	(1,975)		(46)		(182)		(1)		(2,204)

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

(1)Excludes a $25 million and $40 million reclassification of the liability for expected credit losses on unfunded commitments for the three months ended September 30, 2021 and 2020, respectively, and $2 million and $17 million for the nine months ended September 30, 2021 and 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in our condensed consolidated statements of financial condition.

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

(3)Represents the adjustment to the allowance for credit losses due to the adoption of ASU No. 2016-13 on January 1, 2020.

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The release in the allowance for credit losses between September 30, 2021 and June 30, 2021, was primarily driven by improving macroeconomic forecasts and continued stable credit performance, partially offset by modest loan growth during the period. The modest growth in loan receivables during the three months ended September 30, 2021, was driven by the robust credit card sales trends as COVID-19 restrictions continue to ease and the United States economy continues to more fully reopen. Additionally, credit card sales from new accounts and seasonality in private student loan originations contributed to an increase in ending outstanding loan receivables. The loan receivables growth was partially offset by elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows.

In estimating the allowance at September 30, 2021, we used a macroeconomic forecast that projected (i) a peak unemployment rate of 6.1%, decreasing to 5.5% and 4.0% through the end of 2021 and 2022, respectively; and (ii) a 6.4% and 3.5% annualized growth in the real gross domestic product for 2021 and 2022, respectively. Labor market conditions, which historically have been an important determinant of credit loss trends, continue to improve despite the spread of the COVID-19 delta variant. However, the unemployment rate and initial and continuing jobless claims remain moderately elevated relative to pre-pandemic levels. In estimating expected credit losses, we considered the uncertainties associated with borrower behavior, payment trends and credit performance subsequent to the expiration of government stimulus programs, such as the CARES Act and ARPA, and disaster relief programs, such as foreclosure moratoriums and federal student loan and mortgage payment forbearance. During the third quarter of 2021, several disaster relief programs expired or were rescinded entirely. As the government's response to the pandemic wanes, there is uncertainty regarding the sustainability of the recent credit quality trends in our loan receivables portfolio. Accordingly, the estimation of the allowance for credit losses has required significant management judgment.

The forecast period we deemed reasonable and supportable was 18 months for all periods presented except March 31, 2020, where the forecast period was 12 months due to the uncertainty caused by the rapidly changing economic environment experienced at the onset of the COVID-19 pandemic. The 18-month reasonable and supportable forecast period was deemed appropriate based on the observed economic phase transition from recovery to expansion and the associated stabilization of macroeconomic forecasts. For all periods presented, we determined that a reversion period of 12 months was appropriate for similar reasons. Due to the uncertainties associated with borrower behavior resulting from government stimulus and disaster relief programs, we applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented with the following exceptions: at March 31, 2020 and December 31, 2019, we applied a straight-line method for all loan products. At June 30, 2020, we applied a weighted reversion method for credit card loans and a straight-line method for all other loan products.

The provision for credit losses is the amount of expense realized after considering the level of net charge-offs in the period and the required amount of allowance for credit losses at the balance sheet date. For the three months ended September 30, 2021, the provision for credit losses decreased by $550 million, or 77%, compared to the same period in 2020. For the nine months ended September 30, 2021, the provision for credit losses decreased by $4.6 billion, or 101%, compared to the same period in 2020. The decrease in both periods was primarily due to reserve releases in the current periods versus reserve builds in the prior periods and lower net charge-offs. The reserve releases during the three and nine months ended September 30, 2021, were primarily driven by favorable change in the macroeconomic outlook related to the economic impacts of the COVID-19 pandemic-induced recession and continued stable credit performance. The reserve builds during the three and nine months ended September 30, 2020, were primarily due to the unfavorable change in economic outlook resulting from the COVID-19 pandemic.

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Net Charge-offs

Our net charge-offs include the principal amount of losses charged off less principal recoveries and exclude charged-off and recovered interest and fees and fraud losses. Charged-off and recovered interest and fees are recorded in interest income and loan fee income, respectively, which is effectively a reclassification of the provision for credit losses, while fraud losses are recorded in other expense.

The following table presents amounts and rates of net charge-offs of key loan products (dollars in millions):


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021				2020				2021				2020
	$		%		$		%		$		%		$		%
Credit card loans	$	289	1.65	%	$	604	3.45	%	$	1,175	2.29	%	$	1,975	3.67	%
Private student loans	$	17	0.68	%	$	14	0.58	%	$	44	0.58	%	$	46	0.63	%
Personal loans	$	19	1.11	%	$	49	2.69	%	$	99	1.91	%	$	182	3.24	%

The decreases in net charge-offs and the net charge-off rates for credit card and personal loans for the three and nine months ended September 30, 2021, when compared to the same periods in 2020, were primarily due to the impacts of government stimulus and disaster relief programs and to a lesser extent improved collection and recovery strategies. Additionally, the net charge-offs and the net charge-off rate of personal loans for three and nine months ended September 30, 2021, were favorably impacted by tighter underwriting standards that were implemented in early 2020. The net charge-offs and net charge-off rate for private student loans remained relatively flat for the three and nine months ended September 30, 2021, when compared to the same periods in 2020, due to the impacts of government stimulus and disaster relief programs.

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Delinquencies

Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.

The following table presents the amounts and delinquency rates of key loan products that are 30 and 90 days or more delinquent, loan receivables that are not accruing interest regardless of delinquency and loans restructured in TDR programs (dollars in millions):


	September 30, 2021				December 31, 2020
	$		%		$		%
Loans 30 or more days delinquent
Credit card loans	$	1,040	1.48	%	$	1,478	2.07	%
Private student loans	$	158	1.55	%	$	138	1.39	%
Personal loans	$	49	0.71	%	$	78	1.08	%

Loans 90 or more days delinquent(1)
Credit card loans	$	467	0.66	%	$	739	1.03	%
Private student loans	$	36	0.35	%	$	28	0.28	%
Personal loans	$	13	0.19	%	$	25	0.35	%

Loans not accruing interest	$	232	0.24	%	$	243	0.26	%

Troubled debt restructurings:
Credit card loans(2)(3)(4)
Currently enrolled	$	888	1.26	%	$	1,225	1.71	%
No longer enrolled	300		0.43		448		0.63
Total credit card loans	$	1,188	1.69	%	$	1,673	2.34	%
Private student loans(5)	$	258	2.53	%	$	286	2.87	%
Personal loans(6)	$	197	2.86	%	$	222	3.09	%

(1)Credit card loans that were 90 or more days delinquent at September 30, 2021 and December 31, 2020, included $58 million and $44 million, respectively, in modified loans exempt from the TDR designation under the CARES Act. Within private student and personal loans that were 90 or more days delinquent at September 30, 2021 and December 31, 2020, the respective amounts associated with modifications exempt from the TDR designation under the CARES Act were immaterial.

(2)We estimate that interest income recognized on credit card loans restructured in TDR programs was $24 million and $50 million for the three months ended September 30, 2021 and 2020, respectively, and $84 million and $181 million for the nine months ended September 30, 2021 and 2020, respectively. We do not separately track interest income on loans in TDR programs. We estimate this amount by applying an average interest rate to the average loans in the various TDR programs.

(3)We estimate that the incremental interest income that would have been recorded in accordance with the original terms of credit card loans restructured in TDR programs was $34 million and $43 million for the three months ended September 30, 2021 and 2020, respectively, and $106 million and $144 million for the nine months ended September 30, 2021 and 2020, respectively. We do not separately track the amount of incremental interest income that would have been recorded if the loans in TDR programs had not been restructured and interest had instead been recorded in accordance with the original terms. We estimate this amount by applying the difference between the average interest rate earned on non-modified loans and the average interest rate earned on loans in the TDR programs to the average loans in the TDR programs.

(4)Credit card loans restructured in TDR programs include $44 million and $94 million at September 30, 2021 and December 31, 2020, respectively, which are also included in loans 90 or more days delinquent.

(5)Private student loans restructured in TDR programs include $8 million and $6 million at September 30, 2021 and December 31, 2020, respectively, which are also included in loans 90 or more days delinquent.

(6)Personal loans restructured in TDR programs include $4 million and $6 million at September 30, 2021 and December 31, 2020, respectively, which are also included in loans 90 or more days delinquent.

The 30-day and 90-day delinquency rates in the table above include all loans, including TDRs, modified loans exempt from TDR status and prior modifications that are no longer required to be reported as TDRs. The 30-day and 90-day delinquency rates for credit card and personal loans at September 30, 2021, decreased compared to December 31, 2020, primarily due to the impacts of government stimulus and disaster relief programs. Additionally, the 30-day and 90-day delinquency rates for personal loans were favorably impacted by tighter underwriting standards that were implemented in early 2020. The 30-day and 90-day delinquency rate for private student loans at September 30, 2021, increased compared to December 31, 2020, as the impacts of government stimulus and disaster relief programs began to wane. The increase in the 30-day and 90-day delinquency rate for private student loans was partially offset by an increase in outstanding private student loan receivables resulting from seasonality in originations.

The balance of private student and credit card loans reported as TDRs decreased at September 30, 2021, compared to December 31, 2020, primarily due to the exclusion of accounts qualifying for the exemption from the TDR designation

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pursuant to the CARES Act and elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows.

The balance of personal loans reported as TDRs decreased at September 30, 2021, compared to December 31, 2020, due to elevated payment rates resulting from the several rounds of government stimulus and associated improvement in household cash flows. Additionally, enrollments in personal loan modification programs were favorably impacted by tighter underwriting standards that were implemented in early 2020, resulting in a lower balance of personal loans entering into our loan modification programs. To provide additional clarity with respect to credit card loans classified as TDRs, the table above presents loans that are currently enrolled in modification programs separately from loans that have exited those programs but retain that classification.

The following table provides the balance of loan receivables restructured through a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act (dollars in millions):


	September 30, 2021				December 31, 2020
	$		%		$		%
Credit card loans	$	1,541	2.19	%	$	1,351	1.89	%
Private student loans	$	218	2.14	%	$	101	1.01	%
Personal loans	$	54	0.78	%	$	73	1.02	%

We believe loan modification programs are useful in assisting customers experiencing financial difficulties and help to prevent defaults. We plan to continue to use loan modification programs as a means to provide relief to customers experiencing financial difficulties. See Note 3: Loan Receivables to our condensed consolidated financial statements for additional description of our use of loan modification programs to provide relief to customers experiencing financial hardship.

Modified and Restructured Loans

For information regarding modified and restructured loans, see "— Loan Quality — Delinquencies", "— Loan Quality — Impact of the COVID-19 Pandemic on the Loan Portfolio", "— COVID-19 Pandemic Response and Impact — Loan Receivables and Allowance for Credit Losses" and Note 3: Loan Receivables to our condensed consolidated financial statements.

Other Income

The following table presents the components of other income (dollars in millions):


	For the Three Months Ended September 30,				2021 vs 2020 Increase (Decrease)				For the Nine Months Ended September 30,				2021 vs. 2020 Increase (Decrease)
	2021		2020		$		%		2021		2020		$		%
Discount and interchange revenue, net(1)	$	299	$	238	$	61	26	%	$	879	$	691	$	188	27	%
Protection products revenue	43		44		(1)		(2)	%	129		135		(6)		(4)	%
Loan fee income	121		100		21		21	%	333		304		29		10	%
Transaction processing revenue	58		50		8		16	%	167		143		24		17	%
Unrealized (losses) gains on equity investments	(167)		—		(167)		100	%	562		—		562		100	%
Realized gains on equity investments	—		—		—		—	%	—		79		(79)		(100)	%
Other income	18		17		1		6	%	47		59		(12)		(20)	%
Total other income	$	372	$	449	$	(77)	(17)	%	$	2,117	$	1,411	$	706	50	%

Total other income decreased for the three months ended September 30, 2021, as compared to the same period in 2020, primarily due to unrealized losses on equity investments offset by an increase in net discount and interchange revenue and loan fee income. Unrealized losses on equity investments are the result of changes in the fair value of our investments in payment services entities that have actively traded stock. The increase in net discount and interchange revenue was partially

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offset by an increase in rewards costs, both of which were the result of higher sales volume. Loan fee income increased due to lower late fee charge offs.

Total other income increased for the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to unrealized gains on equity investments and an increase in net discount and interchange revenue. Unrealized gains on equity investments are the result of investments in payment services entities that are carried at fair value because the shares are actively traded. The increase in discount and interchange revenue was partially offset by an increase in rewards costs, both of which were the result of higher sales volume. The increase in total other income was partially offset by a decrease in realized gains on the sale of equity investments during the prior period.

Other Expense

The following table represents the components of other expense (dollars in millions):


	For the Three Months Ended September 30,				2021 vs. 2020 Increase (Decrease)				For the Nine Months Ended September 30,				2021 vs. 2020 Increase (Decrease)
	2021		2020		$		%		2021		2020		$		%
Employee compensation and benefits	$	483	$	471	$	12	3	%	$	1,487	$	1,390	$	97	7	%
Marketing and business development	210		140		70		50	%	539		500		39		8	%
Information processing and communications	121		111		10		9	%	375		342		33		10	%
Professional fees	198		151		47		31	%	567		525		42		8	%
Premises and equipment	23		26		(3)		(12)	%	69		83		(14)		(17)	%
Other expense	155		106		49		46	%	456		401		55		14	%
Total other expense	$	1,190	$	1,005	$	185	18	%	$	3,493	$	3,241	$	252	8	%

Income Tax Expense

The following table presents the calculation of the effective income tax rate (dollars in millions):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
Income before income taxes	$	1,402		$	959		$	5,703		$	420
Income tax expense	$	311		$	188		$	1,321		$	78
Effective income tax rate	22.2		%	19.6		%	23.2		%	18.6		%

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Liquidity and Capital Resources

Impact of the COVID-19 Pandemic on Liquidity and Capital

The United States economy has made substantial progress recovering from a brief but severe recession caused by responses to the COVID-19 pandemic, with measures of aggregate output and income expanding for multiple quarters and surpassing their pre-pandemic levels. While the unemployment rate has fallen substantially from its pandemic peak, the labor market has not fully recovered from the recession. Nonfarm payroll employment and labor force participation rates, important indicators in the Federal Reserve's monetary policy considerations, remain below pre-pandemic levels. However, job openings have reached record highs, suggesting that the labor market recovery will continue.

We remain well-capitalized with capital ratios in excess of regulatory minimums and our own internal targets. Consequently, we resumed our common stock repurchase program during the first quarter of 2021. However, we maintain ample capital to finance loan receivable growth as and when customers moderate loan payment rates and continue to increase spending as the economy continues to more fully reopen from the COVID-19 pandemic.

Our level of liquid assets remains in excess of historical norms as of September 30, 2021 as consumer loan payment rates and deposit balances remain above their pre-pandemic levels. Although these factors have curtailed our need for wholesale funding, we maintain good access to all of our diverse funding channels. Credit spreads have tightened materially this year, nearing record-low levels as of September 30, 2021. We took advantage of the low-rate, tight-credit-spread environment by issuing approximately $1.8 billion of credit card asset-backed securities in September 2021.

Funding and Liquidity

We seek to maintain stable, diversified and cost-effective funding sources and a strong liquidity profile to fund our business and repay or refinance our maturing obligations under normal operating conditions and periods of economic or financial stress. In managing our liquidity risk, we seek to maintain a prudent liability maturity profile and ready access to an ample store of primary and contingent liquidity sources. Our primary funding sources include direct-to-consumer and brokered deposits, public term asset-backed securitizations and other short-term and long-term borrowings. Our primary liquidity sources include a liquidity portfolio comprised of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities, as well as secured borrowing capacity through private term asset-backed securitizations and Federal Home Loan Bank ("FHLB") advances. In addition, we have unused borrowing capacity with the Federal Reserve discount window, which provides another source of contingent liquidity.

Funding Sources

Deposits

We offer deposit products to customers through two 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 savings accounts, IRA certificates of deposit and checking/debit accounts. Brokered deposits include certificates of deposit and sweep accounts. In December 2020, the Federal Deposit Insurance Corporation ("FDIC") issued the final rule on revisions to its regulations on brokered deposits. Under the FDIC's final rule, our regulatory reporting must reflect changes to the categorization of deposits beginning January 1, 2022. We are evaluating those changes. In accordance with the final rule, certain retail deposit products such as affinity deposits and deposits generated through certain sweep deposit relationships may no longer be categorized as brokered for regulatory reporting purposes in the future. At September 30, 2021, we had $62.0 billion of direct-to-consumer deposits and $10.6 billion of brokered deposits.

Credit Card Securitization Financing

We securitize credit card receivables as a source of funding. We access the asset-backed securitization market using the Discover Card Master Trust I ("DCMT") and the Discover Card Execution Note Trust ("DCENT"). In connection with our securitization transactions, credit card receivables are transferred to DCMT. DCMT has issued a certificate representing the beneficial interest in its credit card receivables to DCENT. We issue DCENT DiscoverSeries notes in public and private transactions, which are collateralized by the beneficial interest certificate held by DCENT. From time to time, we may add credit card receivables to DCMT to create sufficient funding capacity for future securitizations while managing seller's interest. We retain significant exposure to the performance of the securitized credit card receivables through holdings of the seller's interest and subordinated classes of DCENT DiscoverSeries notes. At September 30, 2021, we had $8.9 billion of

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outstanding public asset-backed securities and $4.0 billion of outstanding subordinated asset-backed securities that had been issued to our wholly-owned subsidiaries.

The securitization structures include certain features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements, the insufficiency of which triggers early repayment of the securities. We refer to this as "economic early amortization," which is based on excess spread levels. Excess spread is the amount by which income received with respect to the securitized credit card receivables during a collection period including interest collections, fees and interchange, exceeds the fees and expenses of DCENT during such collection period, including interest expense, servicing fees and charged-off receivables. In the event of an economic early amortization, which would occur if the excess spread fell below 0% on a three-month rolling average basis, we would be required to repay all outstanding securitized borrowings using available collections received with respect to the securitized credit card receivables. For the three months ended September 30, 2021, the DiscoverSeries three-month rolling average excess spread was 14.92%. The period of ultimate repayment would be determined by the amount and timing of collections received.

Through our wholly-owned indirect subsidiary, Discover Funding LLC, we are required to maintain an interest in a contractual minimum level of receivables in DCMT in excess of the face value of outstanding investors' interests. This minimum interest is referred to as the minimum seller's interest. The required minimum seller's interest in the pool of trust receivables is approximately 7% in excess of the total investors' interests, which includes interests held by third parties as well as those interests held by us. If the level of receivables in DCMT were to fall below the required minimum, we would be required to add receivables from the unrestricted pool of receivables, which would increase the amount of credit card receivables restricted for securitization investors. A decline in the amount of the excess seller's interest could occur if balance repayments and charge offs exceeded new lending on the securitized accounts or as a result of changes in total outstanding investors' interests. Seller's interest exhibits seasonality as higher receivable balance repayments tend to occur in the first calendar year quarter. If we could not add enough receivables to satisfy the minimum seller's interest requirement, an early amortization (or repayment) of investors' interests would be triggered.

An early amortization event would impair our liquidity and may require us to utilize our available non-securitization-related contingent liquidity or rely on alternative funding sources, which may or may not be available at the time. We have several strategies we can deploy to prevent an early amortization event. For instance, we could add additional receivables to DCMT, which would reduce our available borrowing capacity at the Federal Reserve discount window. As of September 30, 2021, there were $24.5 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization investors for the three and nine months ended September 30, 2021. Alternatively, we could employ structured discounting, which was used effectively in 2009 to bolster excess spread and mitigate early amortization risk.

The following table summarizes expected contractual maturities of the investors' interests in credit card securitizations, excluding those that have been issued to our wholly-owned subsidiaries (dollars in millions):


At September 30, 2021	Total		Less Than One Year		One Year Through Three Years		Four Years Through Five Years		After Five Years
Scheduled maturities of long-term borrowings - owed to credit card securitization investors	$	8,954	$	2,560	$	5,796	$	598	$	—

The "AAA(sf)" and "Aaa(sf)" ratings of the DCENT DiscoverSeries Class A Notes issued to date have been based, in part, on an FDIC rule, which created a safe harbor that provides that the FDIC, as conservator or receiver, will not use its power to disaffirm or repudiate contracts, seek to reclaim or recover assets transferred in connection with a securitization, or recharacterize assets transferred in connection with a securitization as assets of the insured depository institution, provided such transfer satisfies the conditions for sale accounting treatment under previous GAAP. Although the implementation of Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 860, Transfers and Servicing, no longer qualified certain transfers of assets for sale accounting treatment, the FDIC approved a final rule that preserved the safe-harbor treatment applicable to revolving trusts and master trusts, including DCMT, so long as those trusts would have satisfied the original FDIC safe harbor if evaluated under GAAP pertaining to transfers of financial assets in effect prior to December 2009. However, other legislative and regulatory developments may impact our ability or desire to issue asset-backed securities in the future.

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Federal Home Loan Bank Advances

Discover Bank is a member bank of the FHLB of Chicago, one of 11 FHLBs that, along with the Office of Finance, compose the FHLB System. The FHLBs are government-sponsored enterprises of the United States of America ("U.S. GSEs") chartered to improve the availability of funds to support home ownership. As such, senior debt obligations of the FHLBs feature the same credit ratings as United States Treasury securities and are considered high-quality liquid assets for bank regulatory purposes. Consequently, the FHLBs benefit from consistent capital market access during nearly all macroeconomic and financial market conditions and low funding costs, which they pass on to their member banks when they borrow advances. Thus, we consider FHLB advances a stable and reliable funding source for Discover Bank for short-term contingent liquidity and long-term asset-liability management.

As a member of the FHLB of Chicago, Discover Bank has access to short- and long-term advance structures with maturities ranging from overnight to 30 years. At September 30, 2021, we had approximately $1.3 billion of borrowing capacity through the FHLB of Chicago based on the amount and type of assets pledged. As of September 30, 2021, there were no borrowings outstanding with the FHLB of Chicago. Under certain stressed conditions, we could pledge our liquidity portfolio securities and borrow against them at a modest reduction to their value.

Other Long-Term Borrowings—Private Student Loans

At September 30, 2021, $110 million of principal was outstanding on securitized debt assumed as part of our acquisition of The Student Loan Corporation. Principal and interest payments on the underlying private student loans will reduce the balance of these secured borrowings over time.

Other Long-Term Borrowings—Corporate and Bank Debt

The following table provides a summary of Discover Financial Services (Parent Company) and Discover Bank outstanding fixed-rate debt (dollars in millions):


At September 30, 2021	Principal Amount Outstanding
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2022-2027	$	3,422
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing 2022-2031	$	168
Discover Bank fixed-rate senior bank notes, maturing 2023-2030	$	5,350
Discover Bank fixed-rate subordinated bank notes, maturing 2028	$	500

Certain Discover Financial Services senior notes require us to offer to repurchase the notes at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change of control involving us and corresponding ratings downgrade below investment grade.

Short-Term Borrowings

As part of our regular funding strategy, we may, from time to time, borrow short-term funds in the federal funds market or the repurchase ("repo") market through repurchase agreements. Federal funds are short-term, unsecured loans between banks or other financial entities with a Federal Reserve account. Funds borrowed in the repo market are short-term, collateralized loans, usually secured with highly-rated investment securities such as United States Treasury bills or notes, or mortgage bonds or debentures issued by government agencies or U.S. GSEs. At September 30, 2021, there were no outstanding balances in the federal funds market or under repurchase agreements. Additionally, the FHLB of Chicago offers short-term advance structures that we may use for short-term liquidity needs. At September 30, 2021, there were no outstanding short-term advances from the FHLB.

Additional Funding Sources

Private Asset-Backed Securitizations

We have access to committed borrowing capacity through privately placed asset-backed securitizations. While we may utilize funding from these private securitizations from time to time for normal business operations, their committed nature also makes them a reliable contingency funding source. Therefore, we reserve some undrawn capacity, informed by our liquidity stress test results, for potential contingency funding needs. At September 30, 2021, we had a total committed

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capacity of $4.0 billion, none of which was drawn. We seek to ensure the stability and reliability of these securitizations by staggering their maturity dates, renewing them approximately one year prior to their scheduled maturity dates and periodically drawing them for operational tests and seasonal funding needs.

Federal Reserve

Discover Bank has access to the Federal Reserve Bank of Philadelphia's discount window. As of September 30, 2021, Discover Bank had $32.7 billion of available borrowing capacity through the discount window based on the amount and type of assets pledged, primarily consumer loans. As of September 30, 2021, we have no borrowings outstanding under the discount window and reserve this capacity as a source of contingent liquidity.

Funding Uses

Our primary uses of funds include the extensions of loans and credit, primarily through Discover Bank; the purchase of investment securities for our liquidity portfolio; working capital; and debt and capital service. We assess funding uses and liquidity needs under stressed and normal operating conditions, considering primary uses of funding, such as on-balance sheet loans and contingent uses of funding, such as the need to post additional collateral for derivatives positions. To anticipate funding needs under stress, we conduct liquidity stress tests to assess the impact of idiosyncratic, systemic and hybrid (i.e., idiosyncratic and systemic) scenarios with varying levels of liquidity risk reflecting a range of stress severity.

Credit Ratings

Our borrowing costs and capacity in certain funding markets, including those for securitizations and unsecured senior and subordinated debt, may be affected by the credit ratings of DFS, Discover Bank and the securitization trusts. Downgrades in these credit ratings could result in higher interest expense on our unsecured debt and asset securitizations, as well as higher credit enhancement requirements for both our public and private asset securitizations. In addition to increased funding costs, deterioration in credit ratings could reduce our borrowing capacity in the unsecured debt and asset securitization capital markets.

When the COVID-19 pandemic emerged in 2020, rating agencies cited their expectation that the banking industry would experience heightened loan delinquencies and charge offs from deterioration in the labor market. During the second quarter of 2020, Moody’s, Standard and Poor’s and Fitch Ratings affirmed our credit ratings. Standard and Poor’s and Fitch changed the outlook on DFS' and Discover Bank's senior unsecured credit ratings from “stable” to “negative” while Moody’s retained a “stable” outlook on the credit ratings of each. On March 25, 2021, Standard and Poor's upgraded the outlook on DFS' and Discover Bank's senior unsecured debt from "negative" to "stable," recognizing better-than-expected operating performance in 2020 and our strong loss-absorbing capacity. For similar reasons, on May 3, 2021, Fitch Ratings also affirmed the credit ratings on DFS' and Discover Bank's senior unsecured debt and revised its outlook on those ratings from "negative" to "stable." Moreover, on May 27, 2021, Moody's affirmed its credit ratings for DFS and Discover Bank while upgrading its outlook on those ratings from "stable" to "positive." On July 12, 2021, Moody's upgraded Discover Bank's long-term subordinate debt rating to "Baa2" from "Baa3", driven by revisions to their Advanced Loss Given Failure analysis. The table below reflects our current credit ratings and outlooks.

Moody's Investors Service

Standard & Poor's

Fitch
Ratings

Discover Financial Services

Senior unsecured debt

Baa3

BBB-

BBB+

Outlook for Discover Financial Services senior unsecured debt

Positive

Stable

Discover Bank

Senior unsecured debt

Baa2

BBB

BBB+

Outlook for Discover Bank senior unsecured debt

Positive

Stable

Subordinated debt

Baa2

BBB-

BBB

Discover Card Execution Note Trust

Class A(1)

Aaa(sf)

AAA(sf)

(1)An "sf" in the rating denotes rating agency identification for structured finance product ratings.

A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. A credit

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rating outlook reflects an agency's opinion regarding the likely rating direction over the medium term, often a period of about a year, and indicates the agency's belief that the issuer's credit profile is consistent with its current rating level at that point in time.

Liquidity

We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy debt obligations under stressed and normal operating conditions. In addition to the funding sources discussed in the previous section, we also maintain highly liquid, unencumbered assets in our liquidity portfolio that we expect to be able to convert to cash quickly and with little loss of value using either the repo market or outright sales.

We maintain a liquidity risk and funding management policy, which outlines the overall framework and general principles we follow in managing liquidity risk across our business. The Board of Directors approves the policy and the Asset and Liability Management Committee (the "ALCO") is responsible for its implementation. Additionally, we maintain a liquidity management framework document that outlines the general strategies, objectives and principles we utilize to manage our liquidity position and the various liquidity risks inherent in our business model. We seek to balance the trade-offs between maintaining too much liquidity, which may be costly, with having too little liquidity, which could cause financial distress. The ALCO, chaired by our Treasurer with cross-functional membership, centrally manages liquidity risk. The ALCO monitors the liquidity risk profiles of DFS and Discover Bank and oversees any actions Corporate Treasury may take to ensure that we maintain ready access to our funding sources and sufficient liquidity to meet current and projected needs. In addition, the ALCO and our Board of Directors regularly review our compliance with our liquidity limits at DFS and Discover Bank, which are established in accordance with the liquidity risk appetite set by our Board of Directors.

We employ a variety of metrics to monitor and manage liquidity. We utilize early warning indicators ("EWIs") to detect emerging liquidity stress events and a reporting and escalation process designed to be consistent with regulatory guidance. The EWIs include both idiosyncratic and systemic measures and are monitored daily and reported to the ALCO regularly. A warning from one or more of these indicators triggers prompt review and decision-making by our senior management team and, in certain instances, may lead to the convening of a senior-level response team and activation of our contingency funding plan.

In addition, we conduct liquidity stress tests regularly and ensure contingency funding is in place to address potential liquidity shortfalls. We evaluate a range of stress scenarios that are designed according to regulatory requirements, including idiosyncratic, systemic and a combination of such events that could impact funding sources and our ability to meet liquidity needs. These scenarios measure the projected liquidity position at DFS and Discover Bank across a range of time horizons by comparing estimated contingency funding needs to available contingent liquidity.

Our primary contingent liquidity sources include our liquidity portfolio securities, which we could sell, repo or borrow against, and private securitizations with unused borrowing capacity. In addition, we could borrow FHLB advances by pledging securities to the FHLB of Chicago. Moreover, we have unused borrowing capacity with the Federal Reserve discount window, which provides an additional source of contingent liquidity. We seek to maintain sufficient liquidity to satisfy all maturing obligations and fund business operations for at least 12 months in a severe stress environment. In such an environment, we may also take actions to curtail the size of our balance sheet, which would reduce the need for funding and liquidity.

At September 30, 2021, our liquidity portfolio is comprised of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities. Cash and cash equivalents were primarily deposits with the Federal Reserve and United States Treasury bills. Investment securities primarily included debt obligations of the United States Treasury and U.S. GSEs and residential mortgage-backed securities ("RMBS") issued by United States government agencies or U.S. GSEs. These investments are considered highly liquid and we expect to have the ability to raise cash by selling them, utilizing repurchase agreements or pledging certain of these investments to access secured funding. The size and composition of our liquidity portfolio may fluctuate based on the size of our balance sheet as well as operational requirements, market conditions and interest rate risk management policies. For instance, our liquidity portfolio grew during 2020 as our customer deposits increased and our loan balances declined, reflecting consumers’ response to the COVID-19 pandemic.

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At September 30, 2021, our liquidity portfolio and undrawn credit facilities were $58.0 billion, which is $5.3 billion lower than the balance at December 31, 2020. Our liquidity portfolio and undrawn credit facilities shrunk in the third quarter of 2021 due to the redemption or maturity of some of our outstanding retail notes, senior bank notes, and securitized debt and lower aggregate direct-to-consumer deposit balances resulting from reduced marketing and lower deposit pricing. During the three and nine months ended September 30, 2021, the average balance of our liquidity portfolio was $20.9 billion and $25.3 billion, respectively. Our liquidity portfolio and undrawn facilities consist of the following (dollars in millions):


	September 30, 2021		December 31, 2020
Liquidity portfolio
Cash and cash equivalents(1)	$	11,984	$	12,675
Other short-term investments	—		2,200
Investment securities(2)	7,962		9,536
Total liquidity portfolio	19,946		24,411
Private asset-backed securitizations(3)	4,000		6,000
Federal Home Loan Bank of Chicago	1,341		—
Primary liquidity sources	25,287		30,411
Federal Reserve discount window(3)	32,719		32,930
Total liquidity portfolio and undrawn credit facilities	$	58,006	$	63,341

(1)Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes.

(2)Excludes $56 million and $117 million of United States Treasury securities that have been pledged as swap collateral in lieu of cash as of September 30, 2021 and December 31, 2020, respectively.

(3)See "— Additional Funding Sources" for additional information.

Bank Holding Company Liquidity

The primary uses of funds at the unconsolidated DFS level include debt service obligations (interest payments and return of principal) and capital service and management activities, including dividend payments on capital instruments and the periodic repurchase of shares of our common stock. Our primary sources of funds at the bank holding company level include the proceeds from the issuance of unsecured debt and capital securities, as well as dividends from our subsidiaries, notably Discover Bank. Under periods of idiosyncratic or systemic stress, the bank holding company could lose or experience impaired access to the capital markets. In addition, our regulators have the discretion to restrict dividend payments from Discover Bank to the bank holding company.

We utilize a measure referred to as "Number of Months of Pre-Funding" to determine the length of time DFS can meet upcoming funding obligations, including common and preferred stock dividend payments and debt service obligations using existing cash resources. In managing this metric, we structure our debt maturity schedule to manage prudently the amount of debt maturing within a short period. See Note 7: Long-Term Borrowings to our condensed consolidated financial statements for further information regarding our debt.

Capital

Our primary sources of capital are the earnings generated by our businesses and the proceeds from issuances of capital securities. We seek to manage capital to a level and composition sufficient to support our businesses' growth and risks and to meet regulatory requirements, rating agency targets and debt investor expectations. Within these constraints, we are focused on deploying capital in a manner that provides attractive returns to our stockholders. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments.

Under regulatory capital requirements adopted by the Federal Reserve and the FDIC, DFS, along with Discover Bank, must maintain minimum capital levels. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a direct material effect on our financial condition and operating results. We must meet specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidance and regulations. Current or future legislative or regulatory reforms, such as the adoption of the Current Expected Credit Loss ("CECL") accounting model, may require us to hold more capital or adversely impact our capital level. We consider the potential impacts of these reforms in managing our capital position.

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DFS and Discover Bank are subject to regulatory capital rules issued by the Federal Reserve and the FDIC, respectively, under the Basel Committee's December 2010 framework ("Basel III rules"). Under the Basel III rules, DFS and Discover Bank are classified as "standardized approach" entities as they are United States banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposures less than $10 billion. The Basel III rules require DFS and Discover Bank to maintain minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios.

On March 27, 2020, federal bank regulatory agencies announced an interim and now final rule that allows banks that have implemented the CECL accounting model to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period. For purposes of calculating regulatory capital, we have elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, the estimated impact of CECL on regulatory capital will be phased in over three years, beginning in 2022. We estimate that electing this option raised our Common Equity Tier 1 ("CET1") capital ratios in 2020 and 2021. For additional information regarding the risk-based capital and leverage ratios, see Note 12: Capital Adequacy to our condensed consolidated financial statements.

On March 4, 2020, the Federal Reserve announced the SCB final rule, which imposes limitations on DFS' capital distributions if we do not maintain our capital ratios above stated regulatory minimum ratios based on the results of supervisory stress tests. Under this rule, DFS is required to assess whether our planned capital actions are consistent with the effective capital distribution limitations that will apply on a pro-forma basis throughout the planning horizon. The SCB reflects the difference between DFS' actual CET1 ratio at the beginning of the forecast and the projected minimum CET1 ratio based on the Federal Reserve's models in its nine-quarter severely adverse stress scenario, plus the impact to capital of four quarters of planned common stock dividend distributions. The Federal Reserve sets and adjusts firms’ respective SCB requirements based on the results of supervisory stress tests conducted as part of the Federal Reserve’s annual CCAR. On August 5, 2021, the Federal Reserve notified DFS of its adjusted SCB requirement based on the 2021 CCAR exercise; DFS’ SCB, effective October 1, 2021, is 3.6%, a slight increase from our SCB in effect for the preceding year, which was 3.5%. DFS is required to submit an annual capital plan as part of the Federal Reserve’s capital stress test process. DFS was not subject to the supervisory stress test (also referred to as CCAR) in 2021, but will be in 2022. DFS' required 2021 capital plan submission employed a forward-looking internal assessment of income and capital under baseline and stressful conditions. The 2021 capital plan was submitted to the Federal Reserve on April 5, 2021 and covered the January 1, 2021 to March 31, 2023 forecast horizon. See "— Regulatory Environment and Developments — Banking — Capital Standards and Stress Testing" for additional information. At September 30, 2021, DFS and Discover Bank met the requirements for "well-capitalized" status under the Federal Reserve's Regulation Y and the prompt corrective action rules and corresponding FDIC requirements, respectively, exceeding the regulatory minimums to which they were subject under the applicable rules.

Basel III rules also require disclosures relating to market discipline. This series of disclosures is commonly referred to as "Pillar 3." The objective is to increase the transparency of capital requirements for banking organizations. We are required to make prescribed regulatory disclosures quarterly regarding our capital structure, capital adequacy, risk exposures and risk-weighted assets. We make the Pillar 3 disclosures publicly available on our website in a report called "Basel III Regulatory Capital Disclosures."

We disclose tangible common equity, which represents common equity less goodwill and intangibles. Management believes that common stockholders' equity excluding goodwill and intangibles is meaningful to investors as a measure of our true net asset value. At September 30, 2021, tangible common equity is considered to be a non-GAAP financial measure as it is not formally defined by GAAP or codified in the federal banking regulations. Other financial services companies may also disclose this measure and definitions may vary. We advise users of this information to exercise caution in comparing this measure for different companies.

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The following table provides a reconciliation of total common stockholders' equity (a GAAP financial measure) to tangible common equity (dollars in millions):


	September 30, 2021		December 31, 2020
Total common stockholders' equity(1)	$	12,207	$	9,828
Less: goodwill	(255)		(255)
Less: intangible assets, net	(1)		(95)
Tangible common equity	$	11,951	$	9,478

(1)Total common stockholders' equity is calculated as total stockholders' equity less preferred stock.

Our Board of Directors declared common stock dividends during 2021 and 2020 as follows:

Declaration Date

Record Date

Payment Date

Dividend per Share

2021

October 19, 2021

November 24, 2021

December 09, 2021

0.50

July 20, 2021

August 19, 2021

September 02, 2021

0.50

April 20, 2021

May 20, 2021

June 03, 2021

0.44

January 19, 2021

February 18, 2021

March 04, 2021

0.44

2020

October 20, 2020

November 19, 2020

December 03, 2020

0.44

July 21, 2020

August 20, 2020

September 03, 2020

0.44

April 21, 2020

May 21, 2020

June 04, 2020

0.44

January 21, 2020

February 20, 2020

March 05, 2020

0.44

In light of the pandemic-induced economic downturn in 2020, the Federal Reserve required all large banks participating in the CCAR supervisory stress test to cap common stock dividends at the lower of the prior quarter's dividend or the average of a firm’s net income over the preceding four quarters. The Federal Reserve lifted this restriction as of July 1, 2021. As a result, our Board of Directors declared a common stock dividend of $0.50 per share on July 20, 2021, an increase of $0.06 per share from the previous rate of $0.44 per common share. See "— Regulatory Environment and Developments — Banking — Capital Standards and Stress Testing" for additional information.

Our Board of Directors declared Series C preferred stock dividends during 2021 and 2020 as follows:

Declaration Date

Record Date

Payment Date

Dividend per Depositary Share

2021

July 20, 2021

October 15, 2021

November 01, 2021

27.50

January 19, 2021

April 15, 2021

April 30, 2021

27.50

2020

July 21, 2020

October 15, 2020

October 30, 2020

27.50

January 21, 2020

April 15, 2020

April 30, 2020

27.50

Our Board of Directors declared Series D preferred stock dividends during 2021 as follows:

Declaration Date

Record Date

Payment Date

Dividend per Depositary Share

2021

July 20, 2021

September 08, 2021

September 23, 2021

30.63

January 19, 2021(1)

March 08, 2021

March 23, 2021

46.11

(1)The dividend includes $30.63 semi-annual dividend per depositary share plus $15.48 to account for the long first dividend period.

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In light of the improved macroeconomic conditions and our strong financial results, our Board of Directors approved a new share repurchase program in July 2021. The new program authorizes up to $2.4 billion of share repurchases through March 31, 2022. This share repurchase authorization replaces our prior $1.1 billion share repurchase program, which was scheduled to expire on December 31, 2021. Our decision to repurchase additional shares of common stock will depend on our financial results, prevailing and expected economic conditions, potential regulatory limitations and other considerations. We use various methods to repurchase shares under the program, including open market purchases, privately negotiated transactions or other purchases, including block trades, accelerated share repurchase transactions, or any combination of such methods. During the three months ended September 30, 2021, we repurchased approximately 6.5 million shares for approximately $813 million. During the nine months ended September 30, 2021, we repurchased 12.4 million shares for approximately $1.5 billion.

The amount and size of any future dividends and share repurchases will depend on our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors. The declaration and payment of future dividends and the amount thereof are subject to the discretion of our Board of Directors. Holders of our shares of common stock are subject to the prior dividend rights of holders of our preferred stock or the depositary shares representing such preferred stock outstanding. No dividend may be declared or paid or set aside for payment on our common stock if full dividends have not been declared and paid on all outstanding shares of preferred stock in any dividend period. In addition, as noted above, banking laws and regulations and our banking regulators may limit our ability to pay dividends and make share repurchases, including limitations on the extent our banking subsidiary (Discover Bank) can provide funds to us through dividends, loans or otherwise. Further, current or future regulatory reforms may require us to hold more capital or could adversely impact our capital level. As a result, there can be no assurance that we will declare and pay any dividends or repurchase any shares of our common stock in the future.

Certain Off-Balance Sheet Arrangements

Guarantees

Guarantees are contracts or indemnification agreements that contingently require us to make payments to a guaranteed party based on changes in an underlying asset, liability, or equity security of a guaranteed party, rate or index. Also included in guarantees are contracts that contingently require the guarantor to make payments to a guaranteed party based on another entity's failure to perform under an agreement. Our guarantees relate to transactions processed on the Discover Network and certain transactions processed by PULSE and Diners Club. See Note 13: Commitments, Contingencies and Guarantees to our condensed consolidated financial statements for further discussion regarding our guarantees.

Contractual Obligations and Contingent Liabilities and Commitments

In the normal course of business, we enter into various contractual obligations that may require future cash payments. Contractual obligations at September 30, 2021, including deposits, long-term borrowings, operating lease obligations, interest payments on fixed-rate debt, purchase obligations and other liabilities, were $94.4 billion. For a description of our contractual obligations, see our annual report on Form 10-K for the year ended December 31, 2020, under "Management's Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Contingent Liabilities and Commitments."

We extend credit for consumer loans, primarily arising 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 established in the related agreement. At September 30, 2021, our unused credit arrangements were approximately $220.1 billion. We can terminate substantially all of these arrangements at any time and therefore the arrangements do not necessarily represent future cash requirements. The arrangements are periodically reviewed based on account usage, customer creditworthiness and loan qualification. In addition, in the ordinary course of business, we guarantee payment on behalf of subsidiaries relating to contractual obligations with external parties. The activities of the subsidiaries covered by any such guarantees are included in our condensed consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses for an investment position or portfolio. We are exposed to market risk primarily from changes in interest rates.

Interest Rate Risk

We borrow money from various depositors and institutions to provide loans to our customers and invest in other assets and our business. These loans to customers and other assets earn interest, which we use to pay interest on the money borrowed. Our net interest income and, therefore, earnings will be reduced if the interest rate earned on assets increases at a slower pace than the interest rate paid on our borrowings. Changes in interest rates and our competitors' responses to those changes may influence customer payment rates, loan balances or deposit account activity. As a result, we may incur higher funding costs that could decrease our earnings.

Our interest rate risk management policies are designed to measure and manage the potential volatility of earnings that may arise from changes in interest rates by having a portfolio that reflects our mix of variable- and fixed-rate assets and liabilities. To the extent that the repricing characteristics of the assets and liabilities in a particular portfolio are not sufficiently matched, we may utilize interest rate derivative contracts, such as swap agreements, to achieve our objectives. Interest rate swap agreements effectively convert the underlying asset or liability from fixed- to floating-rate or from floating- to fixed-rate. See Note 16: Derivatives and Hedging Activities to our condensed consolidated financial statements for information on our derivatives activity.

We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12 months from our reporting date, we assume that all interest rate sensitive assets and liabilities will be impacted by a hypothetical, immediate 100 basis point change in interest rates relative to market consensus expectations as of the beginning of the period. The sensitivity is based on the hypothetical assumption that all relevant types of interest rates would change instantaneously, simultaneously and to the same degree.

Our interest-rate-sensitive assets include our variable-rate loan receivables and certain assets in our liquidity portfolio. We have limitations on our ability to mitigate interest rate risk by adjusting rates on existing balances. Further, competitive actions may limit our ability to increase the rates that we charge to customers for new loans. At September 30, 2021, the majority of our credit card and private student loans charge variable rates. Fixed-rate assets that will mature or otherwise contractually reset to a market-based indexed rate or other fixed-rate prior to the end of the 12-month measurement period are considered to be rate sensitive. The latter category includes certain revolving credit card loans that may be offered at below-market rates for an introductory period, such as balance transfers and special promotional programs, after which the loans will contractually reprice in accordance with our normal market-based pricing structure. For assets with a fixed interest rate that contractually will, or is assumed to, reset to a market-based indexed rate or other fixed rate during the next 12 months, earnings sensitivity is measured from the expected repricing date. In addition, for all interest rate sensitive assets, earnings sensitivity is calculated net of expected credit losses. For purposes of this analysis, expected credit losses are assumed to remain unchanged relative to our baseline expectations over the analysis horizon.

Interest-rate-sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12 months. Thus, liabilities that vary with changes in a market-based index, such as the federal funds rate or London Interbank Offered Rate ("LIBOR"), which will reset before the end of the next 12 months, or liabilities that have fixed rates at the fiscal period end but will mature and are assumed to be replaced with a market-based indexed rate prior to the end of the 12 months, are also considered to be rate sensitive. For these fixed-rate liabilities, earnings sensitivity is measured from the expected maturity date.

Net interest income sensitivity requires assumptions regarding market conditions, consumer behavior and overall growth and composition of the balance sheet. The degree by which our deposit rates change when benchmark interest rates change, our deposit “beta,” is one of the most significant of these assumptions. Assumptions about deposit beta and other matters are inherently uncertain and, as a result, actual earnings may differ from the simulated earnings presented below. Our actual earnings depend on multiple factors including, but not limited to, the direction and timing of changes in interest rates, the movement of short-term interest rates relative to long-term rates, balance sheet composition, competitor actions affecting pricing decisions in our loans and deposits and strategic actions undertaken by our management.

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Our current short-term interest rate risk position is modestly asset-sensitive. We believe this position is prudent given that benchmark interest rates remain well below historical levels. The following table shows the impacts to net interest income over the following 12-month period that we estimate would result from an immediate and parallel change in interest rates affecting all interest rate sensitive assets and liabilities (dollars in millions):


	At September 30, 2021				At December 31, 2020
Basis point change	$		%		$		%
+100	$	158	1.59	%	$	153	1.55	%
-100	NM		NM		NM		NM

We have not provided an estimate of any impact on net interest income of a decrease in interest rates at September 30, 2021 and December 31, 2020, as many of our interest rate sensitive assets and liabilities are tied to interest rates (i.e., Prime and Federal Funds) that are already at or near their historical minimum levels and, therefore, could not materially decrease further assuming U.S. market interest rates remain above zero percent. Sustained negative interest rates for an economy with the size and complexity of the United States would likely lead to broad macroeconomic impacts that are difficult to foresee. While there is a possibility that United States market interest rates could fall below zero percent, this has never occurred in the United States.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Glossary of Acronyms

•ALCO: Asset and Liability Management Committee

•AOCI: Accumulated Other Comprehensive Income (Loss)

•ARPA: American Rescue Plan Act of 2021

•ARRC: Alternative Reference Rates Committee

•ASC: Accounting Standards Codification

•ASU: Accounting Standards Update

•CARES Act: Coronavirus Aid, Relief, and Economic Security Act

•CCAR: Comprehensive Capital Analysis and Review

•CCPA: California Consumer Privacy Act

•CECL: Current Expected Credit Loss

•CET1: Common Equity Tier 1

•CFPB: Consumer Financial Protection Bureau

•COVID-19: Coronavirus Disease 2019

•CPPA: California Privacy Protection Agency

•CPRA: California Privacy Rights Act

•DCENT: Discover Card Execution Note Trust

•DCMT: Discover Card Master Trust

•DFS: Discover Financial Services

•EPS: Earnings Per Share

•EWI: Early Warning Indicator

•FASB: Financial Accounting Standards Board

•FCA: UK Financial Conduct Authority

•FDIC: Federal Deposit Insurance Corporation

•FHLB: Federal Home Loan Bank

•GAAP: Accounting Principles Generally Accepted in the United States

•IRS: Internal Revenue Service

•LIBOR: London Interbank Offered Rate

•OCI: Other Comprehensive Income (Loss)

•OIS: Overnight Index Swap

•RMBS: Residential Mortgage-Backed Securities

•SaP: Skip-a-Pay (payment deferral) programs

•SCB: Stress Capital Buffer

•SEC: Securities and Exchange Commission

•SOFR: Secured Overnight Financing Rate

•TDR: Troubled Debt Restructuring

•USD: United States Dollar

•U.S. GSE: Government-sponsored Enterprises of the United States of America

•VIE: Variable Interest Entity

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of legal proceedings, see Note 14: Litigation and Regulatory Matters to our condensed consolidated financial statements.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table sets forth information regarding purchases of our common stock related to our share repurchase program and employee transactions made by us or on our behalf during the most recent quarter.


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program(1)	Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs (1)
July 1 - 30, 2021
Repurchase program(1)	2,357,484	$	121.47	2,357,484	$	2,264,036,179
Employee transactions(2)	467	$	123.08	N/A	N/A
August 1 - 31, 2021
Repurchase program(1)	1,978,495	$	129.35	1,978,495	$	2,008,117,290
Employee transactions(2)	18,294	$	125.35	N/A	N/A
September 1 - 30, 2021
Repurchase program(1)	2,185,471	$	123.84	2,185,471	$	1,737,477,898
Employee transactions(2)	334	$	122.99	N/A	N/A

Total
Repurchase program(1)	6,521,450	$	124.65	6,521,450	$	1,737,477,898
Employee transactions(2)	19,095	$	125.25	N/A	N/A

(1)In January 2021, our Board of Directors approved a share repurchase program authorizing the purchase of up to $1.1 billion of our outstanding shares of common stock. The program expires on December 31, 2021. In July 2021, our Board of Directors approved a new share repurchase program authorizing the purchase of up to $2.4 billion of our outstanding shares of common stock through March 31, 2022. This share repurchase authorization replaces our prior $1.1 billion share repurchase program.

(2)Reflects shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock options.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

On October 28, 2021, the Company’s Board of Directors (the “Board”) approved and adopted, effective immediately, amended and restated bylaws of the Company (the “Amended and Restated Bylaws”) to: (i) provide that stockholder meetings may be held by means of remote communication; (ii) update the procedures for stockholders to call a special meeting; (iii) update the advance notice procedures for director nominations and stockholder proposals; (iv) clarify that the Board selects the chairman of a stockholder meeting in the absence of the Chairman of the Board; (v) add provisions describing how the Board will operate and take actions during an emergency (including, without limitation, a pandemic); and (vi) make certain other clarifications and administrative or conforming revisions.

The preceding summary of the Amended and Restated Bylaws does not purport to be complete and is qualified in its entirety by reference to the Amended and Restated Bylaws, a copy of which is included as Exhibit 3.1 to this report and incorporated herein by reference.

Item 6. Exhibits

See "Exhibit Index" for documents filed herewith and incorporated herein by reference.

Exhibit Index


Exhibit Number						Description



3.1						Amended and Restated Bylaws of Discover Financial Services, as amended and restated on October 28, 2021.



















31.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1						Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

101						Interactive Data File — the following financial statements from Discover Financial Services Quarterly Report on Form 10-Q formatted in inline XBRL: (1) Condensed Consolidated Statements of Financial Condition, (2) Condensed Consolidated Statements of Income, (3) Condensed Consolidated Statements of Comprehensive Income, (4) Condensed Consolidated Statements of Changes in Stockholders' Equity, (5) Condensed Consolidated Statements of Cash Flows and (6) Notes to the Condensed Consolidated Financial Statements.

104						Cover Page Interactive Data File — the cover page from Discover Financial Services Quarterly Report on Form 10-Q formatted in inline XBRL and contained in Exhibit 101.

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Signature

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			Discover Financial Services (Registrant)

			By:						/s/ JOHN T. GREENE
									John T. Greene Executive Vice President, Chief Financial Officer

Date: October 28, 2021