x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Delaware | 36-2517428 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
2500 Lake Cook Road, Riverwoods, Illinois 60015 | (224) 405-0900 | |
(Address of principal executive offices, including zip code) | (Registrant’s telephone number, including area code) |
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Part I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
March 31, 2014 | December 31, 2013 | ||||||
(unaudited) (dollars in millions, except share amounts) | |||||||
Assets | |||||||
Cash and cash equivalents | $ | 8,731 | $ | 6,554 | |||
Restricted cash | 1,163 | 182 | |||||
Investment securities: | |||||||
Available-for-sale (amortized cost of $3,868 and $4,900 at March 31, 2014 and December 31, 2013, respectively) | 3,902 | 4,931 | |||||
Held-to-maturity (fair value of $62 and $58 at March 31, 2014 and December 31, 2013, respectively) | 62 | 60 | |||||
Total investment securities | 3,964 | 4,991 | |||||
Loan receivables: | |||||||
Mortgage loans held for sale, measured at fair value | 133 | 148 | |||||
Loan portfolio: | |||||||
Credit card | 50,879 | 53,150 | |||||
Other | 8,794 | 8,295 | |||||
Purchased credit-impaired loans | 4,046 | 4,178 | |||||
Total loan portfolio | 63,719 | 65,623 | |||||
Total loan receivables | 63,852 | 65,771 | |||||
Allowance for loan losses | (1,591 | ) | (1,648 | ) | |||
Net loan receivables | 62,261 | 64,123 | |||||
Premises and equipment, net | 668 | 654 | |||||
Goodwill | 284 | 284 | |||||
Intangible assets, net | 182 | 185 | |||||
Other assets | 2,331 | 2,367 | |||||
Total assets | $ | 79,584 | $ | 79,340 | |||
Liabilities and Stockholders’ Equity | |||||||
Deposits: | |||||||
Interest-bearing deposit accounts | $ | 44,813 | $ | 44,766 | |||
Non-interest bearing deposit accounts | 171 | 193 | |||||
Total deposits | 44,984 | 44,959 | |||||
Short-term borrowings | 124 | 140 | |||||
Long-term borrowings | 20,182 | 20,474 | |||||
Accrued expenses and other liabilities | 3,273 | 2,958 | |||||
Total liabilities | 68,563 | 68,531 | |||||
Commitments, contingencies and guarantees (Notes 8, 11, and 12) | |||||||
Stockholders’ Equity: | |||||||
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 558,034,622 and 555,349,629 shares issued at March 31, 2014 and December 31, 2013, respectively | 5 | 5 | |||||
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 575,000 shares issued or outstanding and aggregate liquidation preference of $575 at March 31, 2014 and December 31, 2013 | 560 | 560 | |||||
Additional paid-in capital | 3,739 | 3,687 | |||||
Retained earnings | 10,138 | 9,611 | |||||
Accumulated other comprehensive loss | (70 | ) | (68 | ) | |||
Treasury stock, at cost; 89,651,099 and 83,105,578 shares at March 31, 2014 and December 31, 2013, respectively | (3,351 | ) | (2,986 | ) | |||
Total stockholders’ equity | 11,021 | 10,809 | |||||
Total liabilities and stockholders’ equity | $ | 79,584 | $ | 79,340 | |||
March 31, 2014 | December 31, 2013 | ||||||
(unaudited) (dollars in millions) | |||||||
Assets | |||||||
Restricted cash | $ | 1,160 | $ | 179 | |||
Credit card loan receivables | $ | 29,157 | $ | 31,112 | |||
Purchased credit-impaired loans | $ | 2,177 | $ | 2,248 | |||
Allowance for loan losses allocated to securitized loan receivables | $ | (807 | ) | $ | (861 | ) | |
Other assets | $ | 37 | $ | 34 | |||
Liabilities | |||||||
Long-term borrowings | $ | 16,295 | $ | 16,986 | |||
Accrued interest payable | $ | 8 | $ | 9 | |||
For the Three Months Ended March 31, | |||||||
2014 | 2013 | ||||||
(unaudited) (dollars in millions, except per share amounts) | |||||||
Interest income: | |||||||
Credit card loans | $ | 1,537 | $ | 1,451 | |||
Other loans | 275 | 234 | |||||
Investment securities | 16 | 20 | |||||
Other interest income | 5 | 3 | |||||
Total interest income | 1,833 | 1,708 | |||||
Interest expense: | |||||||
Deposits | 153 | 186 | |||||
Short-term borrowings | 1 | 1 | |||||
Long-term borrowings | 116 | 111 | |||||
Total interest expense | 270 | 298 | |||||
Net interest income | 1,563 | 1,410 | |||||
Provision for loan losses | 272 | 159 | |||||
Net interest income after provision for loan losses | 1,291 | 1,251 | |||||
Other income: | |||||||
Discount and interchange revenue, net | 254 | 263 | |||||
Protection products revenue | 83 | 88 | |||||
Loan fee income | 83 | 81 | |||||
Transaction processing revenue | 44 | 53 | |||||
Gain on investments | 4 | 3 | |||||
Gain on origination and sale of mortgage loans | 16 | 51 | |||||
Other income | 31 | 43 | |||||
Total other income | 515 | 582 | |||||
Other expense: | |||||||
Employee compensation and benefits | 307 | 290 | |||||
Marketing and business development | 169 | 169 | |||||
Information processing and communications | 84 | 78 | |||||
Professional fees | 99 | 104 | |||||
Premises and equipment | 23 | 19 | |||||
Other expense | 102 | 93 | |||||
Total other expense | 784 | 753 | |||||
Income before income tax expense | 1,022 | 1,080 | |||||
Income tax expense | 391 | 407 | |||||
Net income | $ | 631 | $ | 673 | |||
Net income allocated to common stockholders | $ | 618 | $ | 659 | |||
Basic earnings per common share | $ | 1.31 | $ | 1.33 | |||
Diluted earnings per common share | $ | 1.31 | $ | 1.33 | |||
Dividends declared per common share | $ | 0.20 | $ | — | |||
For the Three Months Ended March 31, | |||||||
2014 | 2013 | ||||||
(unaudited) (dollars in millions) | |||||||
Net income | $ | 631 | $ | 673 | |||
Other comprehensive income (loss), net of taxes | |||||||
Unrealized gain (loss) on securities available for sale, net of tax | 2 | (11 | ) | ||||
Unrealized loss on cash flow hedges, net of tax | (4 | ) | (1 | ) | |||
Other comprehensive loss | (2 | ) | (12 | ) | |||
Comprehensive income | $ | 629 | $ | 661 | |||
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) | |||||||||||||||||||||||||||||||||
Balance at December 31, 2012 | 575 | $ | 560 | 553,351 | $ | 5 | $ | 3,598 | $ | 7,472 | $ | (72 | ) | $ | (1,690 | ) | $ | 9,873 | |||||||||||||||
Net income | — | — | — | — | — | 673 | — | — | 673 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (12 | ) | — | (12 | ) | ||||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | — | — | (261 | ) | (261 | ) | ||||||||||||||||||||||
Common stock issued under employee benefit plans | — | — | 15 | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||
Common stock issued and stock-based compensation expense | — | — | 1,490 | 1 | 33 | — | — | — | 34 | ||||||||||||||||||||||||
Dividends — Series B preferred stock | — | — | — | — | — | (9 | ) | — | — | (9 | ) | ||||||||||||||||||||||
Balance at March 31, 2013 | 575 | $ | 560 | 554,856 | $ | 6 | $ | 3,632 | $ | 8,136 | $ | (84 | ) | $ | (1,951 | ) | $ | 10,299 | |||||||||||||||
Balance at December 31, 2013 | 575 | $ | 560 | 555,350 | $ | 5 | $ | 3,687 | $ | 9,611 | $ | (68 | ) | $ | (2,986 | ) | $ | 10,809 | |||||||||||||||
Net income | — | — | — | — | — | 631 | — | — | 631 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | — | — | (365 | ) | (365 | ) | ||||||||||||||||||||||
Common stock issued under employee benefit plans | — | — | 14 | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||
Common stock issued and stock-based compensation expense | — | — | 2,671 | — | 51 | — | — | — | 51 | ||||||||||||||||||||||||
Dividends — common stock | — | — | — | — | — | (95 | ) | — | — | (95 | ) | ||||||||||||||||||||||
Dividends — Series B preferred stock | — | — | — | — | — | (9 | ) | — | — | (9 | ) | ||||||||||||||||||||||
Balance at March 31, 2014 | 575 | $ | 560 | 558,035 | $ | 5 | $ | 3,739 | $ | 10,138 | $ | (70 | ) | $ | (3,351 | ) | $ | 11,021 | |||||||||||||||
For the Three Months Ended March 31, | |||||||
2014 | 2013 | ||||||
(unaudited) (dollars in millions) | |||||||
Cash flows from operating activities | |||||||
Net income | $ | 631 | $ | 673 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Provision for loan losses | 272 | 159 | |||||
Deferred income taxes | 23 | 121 | |||||
Depreciation and amortization on premises and equipment | 29 | 25 | |||||
Amortization of deferred revenues | (51 | ) | (48 | ) | |||
Other depreciation and amortization | 61 | 43 | |||||
Accretion of accretable yield on acquired loans | (68 | ) | (70 | ) | |||
Gain on investments | (4 | ) | (3 | ) | |||
Loss on equity method and other investments | 7 | 4 | |||||
Gain on origination and sale of loans | (16 | ) | (51 | ) | |||
Stock-based compensation expense | 18 | 17 | |||||
Proceeds from sale of mortgage loans originated for sale | 512 | 1,249 | |||||
Net principal disbursed on mortgage loans originated for sale | (478 | ) | (1,156 | ) | |||
Changes in assets and liabilities: | |||||||
Increase in other assets | (41 | ) | (88 | ) | |||
Increase in accrued expenses and other liabilities | 234 | 617 | |||||
Net cash provided by operating activities | 1,129 | 1,492 | |||||
Cash flows from investing activities | |||||||
Maturities and sales of available-for-sale investment securities | 1,276 | 1,015 | |||||
Purchases of available-for-sale investment securities | (101 | ) | (90 | ) | |||
Maturities of held-to-maturity investment securities | 5 | 13 | |||||
Purchases of held-to-maturity investment securities | (8 | ) | — | ||||
Net principal disbursed on loans originated for investment | 1,692 | 2,102 | |||||
Purchases of loan receivables | — | (133 | ) | ||||
Purchases of other investments | (29 | ) | (31 | ) | |||
Increase in restricted cash | (981 | ) | (192 | ) | |||
Purchases of premises and equipment | (43 | ) | (59 | ) | |||
Net cash provided by investing activities | 1,811 | 2,625 | |||||
Cash flows from financing activities | |||||||
Net decrease in short-term borrowings | (16 | ) | (37 | ) | |||
Proceeds from issuance of securitized debt | 1,650 | 1,700 | |||||
Maturities and repayment of securitized debt | (2,352 | ) | (899 | ) | |||
Proceeds from issuance of other long-term borrowings | 399 | 750 | |||||
Proceeds from issuance of common stock | 1 | 5 | |||||
Purchases of treasury stock | (365 | ) | (261 | ) | |||
Net increase in deposits | 26 | 187 | |||||
Dividends paid on common and preferred stock | (106 | ) | (79 | ) | |||
Net cash (used for) provided by financing activities | (763 | ) | 1,366 | ||||
Net increase in cash and cash equivalents | 2,177 | 5,483 | |||||
Cash and cash equivalents, at beginning of period | 6,554 | 2,584 | |||||
Cash and cash equivalents, at end of period | $ | 8,731 | $ | 8,067 | |||
1. | Background and Basis of Presentation |
2. | Investments |
The Company’s investment securities consist of the following (dollars in millions): | |||||||
March 31, 2014 | December 31, 2013 | ||||||
U.S. Treasury securities(1) | $ | 1,343 | $ | 2,058 | |||
U.S. government agency securities | 1,047 | 1,561 | |||||
States and political subdivisions of states | 10 | 15 | |||||
Other securities: | |||||||
Credit card asset-backed securities of other issuers | — | 6 | |||||
Residential mortgage-backed securities - Agency(2) | 1,564 | 1,351 | |||||
Total other securities | 1,564 | 1,357 | |||||
Total investment securities | $ | 3,964 | $ | 4,991 | |||
(1) | Includes $7 million and $9 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of March 31, 2014 and December 31, 2013, respectively. |
(2) | Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. |
The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in millions): | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
March 31, 2014 | |||||||||||||||
Available-for-Sale Investment Securities(1) | |||||||||||||||
U.S. Treasury securities | $ | 1,320 | $ | 22 | $ | — | $ | 1,342 | |||||||
U.S. government agency securities | 1,025 | 22 | — | 1,047 | |||||||||||
Residential mortgage-backed securities - Agency | 1,523 | 3 | (13 | ) | 1,513 | ||||||||||
Total available-for-sale investment securities | $ | 3,868 | $ | 47 | $ | (13 | ) | $ | 3,902 | ||||||
Held-to-Maturity Investment Securities(2) | |||||||||||||||
U.S. Treasury securities(3) | $ | 1 | $ | — | $ | — | $ | 1 | |||||||
States and political subdivisions of states | 10 | — | — | 10 | |||||||||||
Residential mortgage-backed securities - Agency(4) | 51 | — | — | 51 | |||||||||||
Total held-to-maturity investment securities | $ | 62 | $ | — | $ | — | $ | 62 | |||||||
December 31, 2013 | |||||||||||||||
Available-for-Sale Investment Securities(1) | |||||||||||||||
U.S. Treasury securities | $ | 2,030 | $ | 27 | $ | — | $ | 2,057 | |||||||
U.S. government agency securities | 1,535 | 26 | — | 1,561 | |||||||||||
Credit card asset-backed securities of other issuers | 6 | — | — | 6 | |||||||||||
Residential mortgage-backed securities - Agency | 1,329 | — | (22 | ) | 1,307 | ||||||||||
Total available-for-sale investment securities | $ | 4,900 | $ | 53 | $ | (22 | ) | $ | 4,931 | ||||||
Held-to-Maturity Investment Securities(2) | |||||||||||||||
U.S. Treasury securities(3) | $ | 1 | $ | — | $ | — | $ | 1 | |||||||
States and political subdivisions of states | 15 | — | (1 | ) | 14 | ||||||||||
Residential mortgage-backed securities - Agency(4) | 44 | — | (1 | ) | 43 | ||||||||||
Total held-to-maturity investment securities | $ | 60 | $ | — | $ | (2 | ) | $ | 58 | ||||||
(1) | Available-for-sale investment securities are reported at fair value. |
(2) | Held-to-maturity investment securities are reported at amortized cost. |
(3) | Amount represents securities pledged as collateral to a government-related merchant for which transaction settlement occurs beyond the normal 24-hour period. |
(4) | Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives. |
The following table provides information about investment securities with aggregate gross unrealized losses and the length of time that individual investment securities have been in a continuous unrealized loss position (dollars in millions): | ||||||||||||||||||
Number of Securities in a Loss Position | Less than 12 months | More than 12 months | ||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||
At March 31, 2014 | ||||||||||||||||||
Available-for-Sale Investment Securities | ||||||||||||||||||
Residential mortgage-backed securities - Agency | 22 | $ | 999 | $ | (12 | ) | $ | 47 | $ | (1 | ) | |||||||
Held-to-Maturity Investment Securities | ||||||||||||||||||
State and political subdivisions of states | 4 | $ | 5 | $ | — | $ | 3 | $ | — | |||||||||
Residential mortgage backed securities - Agency | 5 | $ | 29 | $ | — | $ | — | $ | — | |||||||||
At December 31, 2013 | ||||||||||||||||||
Available-for-Sale Investment Securities | ||||||||||||||||||
Residential mortgage-backed securities - Agency | 23 | $ | 1,097 | $ | (20 | ) | $ | 48 | $ | (2 | ) | |||||||
Held-to-Maturity Investment Securities | ||||||||||||||||||
State and political subdivisions of states | 4 | $ | 8 | $ | (1 | ) | $ | 3 | $ | — | ||||||||
Residential mortgage backed securities - Agency | 2 | $ | 40 | $ | (1 | ) | $ | — | $ | — | ||||||||
Maturities of available-for-sale debt securities and held-to-maturity debt securities at the end of the period are provided in the table below (dollars in millions): | |||||||||||||||||||
One Year or Less | After One Year Through Five Years | After Five Years Through Ten Years | After Ten Years | Total | |||||||||||||||
At March 31, 2014 | |||||||||||||||||||
Available-for-sale—Amortized Cost(1) | |||||||||||||||||||
U.S. Treasury securities | $ | 126 | $ | 1,194 | $ | — | $ | — | $ | 1,320 | |||||||||
U.S. government agency securities | 102 | 923 | — | — | 1,025 | ||||||||||||||
Residential mortgage-backed securities - Agency | — | — | 422 | 1,101 | 1,523 | ||||||||||||||
Total available-for-sale investment securities | $ | 228 | $ | 2,117 | $ | 422 | $ | 1,101 | $ | 3,868 | |||||||||
Held-to-maturity—Amortized Cost(2) | |||||||||||||||||||
U.S. Treasury securities | $ | 1 | $ | — | $ | — | $ | — | $ | 1 | |||||||||
State and political subdivisions of states | — | — | — | 10 | 10 | ||||||||||||||
Residential mortgage-backed securities - Agency | — | — | — | 51 | 51 | ||||||||||||||
Total held-to-maturity investment securities | $ | 1 | $ | — | $ | — | $ | 61 | $ | 62 | |||||||||
Available-for-sale—Fair Values(1) | |||||||||||||||||||
U.S. Treasury securities | $ | 127 | $ | 1,215 | $ | — | $ | — | $ | 1,342 | |||||||||
U.S. government agency securities | 103 | 944 | — | — | 1,047 | ||||||||||||||
Residential mortgage-backed securities - Agency | — | — | 420 | 1,093 | 1,513 | ||||||||||||||
Total available-for-sale investment securities | $ | 230 | $ | 2,159 | $ | 420 | $ | 1,093 | $ | 3,902 | |||||||||
Held-to-maturity—Fair Values(2) | |||||||||||||||||||
U.S. Treasury securities | $ | 1 | $ | — | $ | — | $ | — | $ | 1 | |||||||||
State and political subdivisions of states | — | — | — | 10 | 10 | ||||||||||||||
Residential mortgage-backed securities - Agency | — | — | — | 51 | 51 | ||||||||||||||
Total held-to-maturity investment securities | $ | 1 | $ | — | $ | — | $ | 61 | $ | 62 | |||||||||
(1) | Available-for-sale investment securities are reported at fair value. |
(2) | Held-to-maturity investment securities are reported at amortized cost. |
3. | Loan Receivables |
The Company's classes of receivables within the three portfolio segments are depicted in the table below (dollars in millions): | |||||||
March 31, 2014 | December 31, 2013 | ||||||
Mortgage loans held for sale(1) | $ | 133 | $ | 148 | |||
Loan portfolio: | |||||||
Credit card loans: | |||||||
Discover card(2) | 50,685 | 52,952 | |||||
Discover business card | 194 | 198 | |||||
Total credit card loans | 50,879 | 53,150 | |||||
Other loans: | |||||||
Personal loans | 4,310 | 4,191 | |||||
Private student loans | 4,326 | 3,969 | |||||
Other | 158 | 135 | |||||
Total other loans | 8,794 | 8,295 | |||||
Purchased credit-impaired loans(3) | 4,046 | 4,178 | |||||
Total loan portfolio | 63,719 | 65,623 | |||||
Total loan receivables | 63,852 | 65,771 | |||||
Allowance for loan losses | (1,591 | ) | (1,648 | ) | |||
Net loan receivables | $ | 62,261 | $ | 64,123 | |||
(1) | Substantially all mortgage loans held for sale are pledged as collateral against the warehouse line of credit used to fund consumer residential loans. |
(2) | Amounts include $19.6 billion and $20.2 billion underlying investors’ interest in trust debt at March 31, 2014 and December 31, 2013, respectively, and $9.5 billion and $10.9 billion in seller's interest at March 31, 2014 and December 31, 2013, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for further information. |
(3) | Amounts include $2.2 billion of loans pledged as collateral against the notes issued from the Student Loan Corporation ("SLC") securitization trusts at March 31, 2014 and December 31, 2013. See Note 4: Credit Card and Student Loan Securitization Activities. Of the remaining $1.8 billion and $2.0 billion at March 31, 2014 and December 31, 2013, respectively, that were not pledged as collateral, approximately $22 million for each period represents loans eligible for reimbursement through an indemnification claim. Discover Bank must purchase such loans from the trust before a claim may be filed. |
Information related to the delinquent and non-accruing loans in the Company’s loan portfolio, which excludes loans held for sale, is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading “— Purchased Credit-Impaired Loans” (dollars in millions): | |||||||||||||||||||
30-89 Days Delinquent | 90 or More Days Delinquent | Total Past Due | 90 or More Days Delinquent and Accruing | Total Non-accruing(1) | |||||||||||||||
At March 31, 2014 | |||||||||||||||||||
Credit card loans: | |||||||||||||||||||
Discover card(2) | $ | 432 | $ | 441 | $ | 873 | $ | 402 | $ | 162 | |||||||||
Discover business card | 2 | 1 | 3 | 2 | 1 | ||||||||||||||
Total credit card loans | 434 | 442 | 876 | 404 | 163 | ||||||||||||||
Other loans: | |||||||||||||||||||
Personal loans(3) | 21 | 8 | 29 | 7 | 5 | ||||||||||||||
Private student loans (excluding PCI)(4) | 51 | 26 | 77 | 26 | — | ||||||||||||||
Other | 1 | 2 | 3 | — | 39 | ||||||||||||||
Total other loans (excluding PCI) | 73 | 36 | 109 | 33 | 44 | ||||||||||||||
Total loan receivables (excluding PCI) | $ | 507 | $ | 478 | $ | 985 | $ | 437 | $ | 207 | |||||||||
At December 31, 2013 | |||||||||||||||||||
Credit card loans: | |||||||||||||||||||
Discover card(2) | $ | 464 | $ | 445 | $ | 909 | $ | 406 | $ | 154 | |||||||||
Discover business card | 1 | 2 | 3 | 2 | 1 | ||||||||||||||
Total credit card loans | 465 | 447 | 912 | 408 | 155 | ||||||||||||||
Other loans: | |||||||||||||||||||
Personal loans(3) | 21 | 8 | 29 | 8 | 5 | ||||||||||||||
Private student loans (excluding PCI)(4) | 48 | 18 | 66 | 18 | — | ||||||||||||||
Other | 1 | 2 | 3 | — | 40 | ||||||||||||||
Total other loans (excluding PCI) | 70 | 28 | 98 | 26 | 45 | ||||||||||||||
Total loan receivables (excluding PCI) | $ | 535 | $ | 475 | $ | 1,010 | $ | 434 | $ | 200 | |||||||||
(1) | The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of non-accruing credit card loans was $7 million and $8 million for the three months ended March 31, 2014 and 2013, respectively. The Company does not separately systematically compute the amount of gross interest income that would have been recorded in accordance with the original terms of loans. This amount was estimated based on customers' quarterly average balances and rates prior to non-accrual status. |
(2) | Consumer credit card loans that are 90 or more days delinquent and accruing interest include $42 million and $41 million of loans accounted for as troubled debt restructurings at March 31, 2014 and December 31, 2013, respectively. |
(3) | Personal loans that are 90 or more days delinquent and accruing interest include $2 million of loans accounted for as troubled debt restructurings at March 31, 2014 and December 31, 2013. |
(4) | Private student loans that are 90 or more days delinquent and accruing interest include $3 million of loans accounted for as troubled debt restructurings at March 31, 2014 and December 31, 2013. |
Information related to the net charge-offs in the Company's loan portfolio, which excludes loans held for sale, is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions): | |||||||||||||
For the Three Months Ended March 31, | |||||||||||||
2014 | 2013 | ||||||||||||
Net Charge-offs | Net Charge-off Rate | Net Charge-offs | Net Charge-off Rate | ||||||||||
Credit card loans: | |||||||||||||
Discover card | $ | 293 | 2.32 | % | $ | 286 | 2.36 | % | |||||
Discover business card | 1 | 1.76 | % | 1 | 2.66 | % | |||||||
Total credit card loans | 294 | 2.32 | % | 287 | 2.36 | % | |||||||
Other loans: | |||||||||||||
Personal loans | 21 | 2.07 | % | 19 | 2.30 | % | |||||||
Private student loans (excluding PCI) | 14 | 1.31 | % | 7 | 0.82 | % | |||||||
Total other loans (excluding PCI) | 35 | 1.67 | % | 26 | 1.49 | % | |||||||
Net charge-offs as a percentage of total loans (excluding PCI) | $ | 329 | 2.22 | % | $ | 313 | 2.25 | % | |||||
Net charge-offs as a percentage of total loans (including PCI) | $ | 329 | 2.08 | % | $ | 313 | 2.08 | % | |||||
The following table provides the most recent FICO scores available for the Company’s customers as a percentage of each class of loan receivables: | |||||
Credit Risk Profile by FICO Score | |||||
660 and Above | Less than 660 or No Score | ||||
March 31, 2014 | |||||
Discover card | 82 | % | 18 | % | |
Discover business card | 92 | % | 8 | % | |
Personal loans | 97 | % | 3 | % | |
Private student loans (excluding PCI)(1) | 95 | % | 5 | % | |
December 31, 2013 | |||||
Discover card | 83 | % | 17 | % | |
Discover business card | 92 | % | 8 | % | |
Personal loans | 97 | % | 3 | % | |
Private student loans (excluding PCI)(1) | 95 | % | 5 | % | |
(1) | PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans." |
The following tables provide changes in the Company’s allowance for loan losses (dollars in millions): | |||||||||||||||||||
For the Three Months Ended March 31, 2014 | |||||||||||||||||||
Credit Card | Personal Loans | Student Loans | Other | Total | |||||||||||||||
Balance at beginning of period | $ | 1,406 | $ | 112 | $ | 113 | $ | 17 | $ | 1,648 | |||||||||
Additions: | |||||||||||||||||||
Provision for loan losses | 230 | 18 | 23 | 1 | 272 | ||||||||||||||
Deductions: | |||||||||||||||||||
Charge-offs | (408 | ) | (24 | ) | (15 | ) | — | (447 | ) | ||||||||||
Recoveries | 114 | 3 | 1 | — | 118 | ||||||||||||||
Net charge-offs | (294 | ) | (21 | ) | (14 | ) | — | (329 | ) | ||||||||||
Balance at end of period | $ | 1,342 | $ | 109 | $ | 122 | $ | 18 | $ | 1,591 | |||||||||
For the Three Months Ended March 31, 2013 | |||||||||||||||||||
Credit Card | Personal Loans | Student Loans | Other | Total | |||||||||||||||
Balance at beginning of period | $ | 1,613 | $ | 99 | $ | 75 | $ | 1 | $ | 1,788 | |||||||||
Additions: | |||||||||||||||||||
Provision for loan losses | 127 | 17 | 15 | — | 159 | ||||||||||||||
Deductions: | |||||||||||||||||||
Charge-offs | (422 | ) | (20 | ) | (7 | ) | — | (449 | ) | ||||||||||
Recoveries | 135 | 1 | — | — | 136 | ||||||||||||||
Net charge-offs | (287 | ) | (19 | ) | (7 | ) | — | (313 | ) | ||||||||||
Balance at end of period | $ | 1,453 | $ | 97 | $ | 83 | $ | 1 | $ | 1,634 | |||||||||
Net charge-offs of principal are recorded against the allowance for loan losses, as shown in the table above. 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 March 31, | |||||||
2014 | 2013 | ||||||
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income) | $ | 72 | $ | 77 | |||
Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income) | $ | 17 | $ | 16 | |||
The following tables provide additional detail of the Company’s allowance for loan losses and recorded investment in its loan portfolio (which excludes loans held for sale) by impairment methodology (dollars in millions): | |||||||||||||||||||
Credit Card | Personal Loans | Student Loans | Other Loans | Total | |||||||||||||||
At March 31, 2014 | |||||||||||||||||||
Allowance for loans evaluated for impairment as: | |||||||||||||||||||
Collectively evaluated for impairment in accordance with ASC 450-20 | $ | 1,164 | $ | 104 | $ | 84 | $ | 1 | $ | 1,353 | |||||||||
Evaluated for impairment in accordance with ASC 310-10-35(1)(2) | 178 | 5 | 10 | 17 | 210 | ||||||||||||||
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 | — | — | 28 | — | 28 | ||||||||||||||
Total allowance for loan losses | $ | 1,342 | $ | 109 | $ | 122 | $ | 18 | $ | 1,591 | |||||||||
Recorded investment in loans evaluated for impairment as: | |||||||||||||||||||
Collectively evaluated for impairment in accordance with ASC 450-20 | $ | 49,791 | $ | 4,265 | $ | 4,296 | $ | 80 | $ | 58,432 | |||||||||
Evaluated for impairment in accordance with ASC 310-10-35(1)(2) | 1,088 | 45 | 30 | 78 | 1,241 | ||||||||||||||
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 | — | — | 4,046 | — | 4,046 | ||||||||||||||
Total recorded investment | $ | 50,879 | $ | 4,310 | $ | 8,372 | $ | 158 | $ | 63,719 | |||||||||
At December 31, 2013 | |||||||||||||||||||
Allowance for loans evaluated for impairment as: | |||||||||||||||||||
Collectively evaluated for impairment in accordance with ASC 450-20 | $ | 1,218 | $ | 109 | $ | 76 | $ | 1 | $ | 1,404 | |||||||||
Evaluated for impairment in accordance with ASC 310-10-35(1)(2) | 188 | 3 | 9 | 16 | 216 | ||||||||||||||
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 | — | — | 28 | — | 28 | ||||||||||||||
Total allowance for loan losses | $ | 1,406 | $ | 112 | $ | 113 | $ | 17 | $ | 1,648 | |||||||||
Recorded investment in loans evaluated for impairment as: | |||||||||||||||||||
Collectively evaluated for impairment in accordance with ASC 450-20 | $ | 52,027 | $ | 4,160 | $ | 3,941 | $ | 56 | $ | 60,184 | |||||||||
Evaluated for impairment in accordance with ASC 310-10-35(1)(2) | 1,123 | 31 | 28 | 79 | 1,261 | ||||||||||||||
Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30 | — | — | 4,178 | — | 4,178 | ||||||||||||||
Total recorded investment | $ | 53,150 | $ | 4,191 | $ | 8,147 | $ | 135 | $ | 65,623 | |||||||||
(1) | Loan receivables evaluated for impairment in accordance with ASC 310-10-35 include credit card loans, personal loans and student loans collectively evaluated for impairment in accordance with ASC Subtopic 310-40, Receivables, which consists of modified loans accounted for as troubled debt restructurings. Other loans are individually evaluated for impairment and generally do not represent troubled debt restructurings. |
(2) | The unpaid principal balance of credit card loans was $919 million and $900 million at March 31, 2014 and December 31, 2013, respectively. The unpaid principal balance of personal loans was $44 million and $31 million at March 31, 2014 and December 31, 2013, respectively. The unpaid principal balance of student loans was $28 million and $26 million at March 31, 2014 and December 31, 2013, respectively. All loans accounted for as troubled debt restructurings have a related allowance for loan losses. |
Additional information about modified loans classified as troubled debt restructurings is shown below (dollars in millions): | |||||||||||
Average recorded investment in loans | Interest income recognized during period loans were impaired(1) | Gross interest income that would have been recorded with original terms(2) | |||||||||
For the Three Months Ended March 31, 2014 | |||||||||||
Credit card loans | |||||||||||
Modified credit card loans(3) | $ | 256 | $ | 11 | $ | 1 | |||||
Internal programs | $ | 454 | $ | 3 | $ | 15 | |||||
External programs | $ | 394 | $ | 7 | $ | 3 | |||||
Personal loans | $ | 44 | $ | 1 | $ | — | |||||
Student loans(4) | $ | 29 | $ | 1 | N/A | ||||||
For the Three Months Ended March 31, 2013 | |||||||||||
Credit card loans | |||||||||||
Modified credit card loans(3) | $ | 279 | $ | 13 | $ | 1 | |||||
Internal programs | $ | 490 | $ | 3 | $ | 17 | |||||
External programs | $ | 507 | $ | 10 | $ | 3 | |||||
Personal loans | $ | 22 | $ | 1 | $ | — | |||||
Student loans(4) | $ | 18 | $ | — | N/A | ||||||
(1) | The Company does not separately track interest income on loans in modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs. |
(2) | The Company does not separately track the amount of gross interest income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on non-impaired credit card loans and the average interest rate earned on loans in the modification programs to the average loans in the modification programs. |
(3) | This balance is considered impaired, but is excluded from the internal and external program amounts reflected in this table. Represents credit card loans that were modified in troubled debt restructurings, but are no longer enrolled in troubled debt restructuring program due to noncompliance with the terms of the modification or successful completion of a program |
(4) | Student loan customers who have been granted a forbearance are not given interest rate reductions. |
The following table provides information on loans that entered a loan modification program during the period (dollars in millions): | |||||||||||||
For the Three Months Ended March 31, | |||||||||||||
2014 | 2013 | ||||||||||||
Number of Accounts | Balances | Number of Accounts | Balances | ||||||||||
Accounts that entered a loan modification program during the period: | |||||||||||||
Credit card: | |||||||||||||
Internal programs | 12,436 | $ | 81 | 10,402 | $ | 66 | |||||||
External programs | 8,431 | $ | 44 | 9,531 | $ | 52 | |||||||
Personal loans | 712 | $ | 8 | 443 | $ | 6 | |||||||
Student loans | 307 |