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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 June 30, 2020


☐	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 July 22, 2020, there were 306,421,150 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 June 30, 2020

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	47
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	79
Item 3.	Defaults Upon Senior Securities	79
Item 4.	Mine Safety Disclosures	79
Item 5.	Other Information	80
Item 6.	Exhibits	80

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

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

Table of Contents


Part I.	FINANCIAL INFORMATION


Item 1.	Financial Statements

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Financial Condition



	June 30, 2020			December 31, 2019
	(unaudited) (dollars in millions, except share amounts)
Assets
Cash and cash equivalents	$	15,138		$	6,924
Restricted cash	29			40
Other short-term investments	2,549			—
Investment securities (includes available-for-sale securities of $10,201 and $10,323 reported at fair value with associated amortized cost of $9,734 and $10,173 at June 30, 2020 and December 31, 2019, respectively)	10,485			10,595
Loan receivables
Loan receivables	88,927			95,894
Allowance for credit losses⁽¹⁾	(8,184		)	(3,383		)
Net loan receivables	80,743			92,511
Premises and equipment, net	1,115			1,057
Goodwill	255			255
Intangible assets, net	96			155
Other assets	3,382			2,459
Total assets	$	113,792		$	113,996
Liabilities and Stockholders' Equity
Liabilities
Deposits
Interest-bearing deposit accounts	$	76,365		$	71,955
Non-interest bearing deposit accounts	999			791
Total deposits	77,364			72,746
Long-term borrowings	23,194			25,701
Accrued expenses and other liabilities	3,591			3,690
Total liabilities	104,149			102,137
Commitments, contingencies and guarantees (Notes 10, 13 and 14)
Stockholders' Equity
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 567,653,357 and 566,653,650 shares issued at June 30, 2020 and December 31, 2019, respectively	6			6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 and 5,700 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	1,056			563
Additional paid-in capital	4,216			4,206
Retained earnings	18,673			21,290
Accumulated other comprehensive income (loss)	122			(119		)
Treasury stock, at cost; 261,233,267 and 256,496,492 shares at June 30, 2020 and December 31, 2019, respectively	(14,430		)	(14,087		)
Total stockholders' equity	9,643			11,859
Total liabilities and stockholders' equity	$	113,792		$	113,996


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

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



	June 30, 2020			December 31, 2019
	(unaudited) (dollars in millions)
Assets
Restricted cash	$	29		$	40
Loan receivables	$	27,926		$	31,840
Allowance for credit losses allocated to securitized loan receivables⁽¹⁾	$	(1,972	)	$	(1,179	)
Other assets	$	7		$	5
Liabilities
Long-term borrowings	$	12,766		$	14,284
Accrued expenses and other liabilities	$	10		$	15


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

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Income



	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2020			2019		2020			2019
	(unaudited) (dollars in millions, except per share amounts)
Interest income
Credit card loans	$	2,173		$	2,396	$	4,589		$	4,758
Other loans	439			460		923			917
Investment securities	55			39		113			67
Other interest income	5			82		29			172
Total interest income	2,672			2,977		5,654			5,914
Interest expense
Deposits	340			401		713			787
Long-term borrowings	142			244		353			490
Total interest expense	482			645		1,066			1,277
Net interest income	2,190			2,332		4,588			4,637
Provision for credit losses⁽¹⁾	2,046			787		3,853			1,596
Net interest income after provision for credit losses	144			1,545		735			3,041
Other income
Discount and interchange revenue, net	237			299		453			530
Protection products revenue	44			49		91			98
Loan fee income	85			102		204			206
Transaction processing revenue	49			48		93			94
Gains on equity investments	43			—		79			—
Other income	14			22		42			50
Total other income	472			520		962			978
Other expense
Employee compensation and benefits	452			427		919			852
Marketing and business development	129			224		360			419
Information processing and communications	117			101		231			200
Professional fees	181			183		374			350
Premises and equipment	27			26		57			54
Other expense	171			117		295			227
Total other expense	1,077			1,078		2,236			2,102
(Loss) income before income taxes	(461		)	987		(539		)	1,917
Income tax (benefit) expense	(93		)	234		(110		)	438
Net (loss) income	$	(368	)	$	753	$	(429	)	$	1,479
Net (loss) income allocated to common stockholders	$	(369	)	$	747	$	(446	)	$	1,452
Basic (loss) earnings per common share	$	(1.20	)	$	2.32	$	(1.45	)	$	4.46
Diluted (loss) earnings per common share	$	(1.20	)	$	2.32	$	(1.45	)	$	4.46


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

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Comprehensive Income



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
	(unaudited) (dollars in millions)
Net (loss) income	$	(368	)	$	753		$	(429	)	$	1,479
Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax	(16		)	71			240			102
Unrealized gains (losses) on cash flow hedges, net of tax	4			(18		)	1			(30		)
Unrealized pension and post-retirement plan gains, net of tax	—			—			—			1
Other comprehensive (loss) income	(12		)	53			241			73
Comprehensive (loss) income	$	(380	)	$	806		$	(188	)	$	1,552

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Changes in Stockholders' Equity



							Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total Stockholders' Equity
	Preferred Stock			Common Stock
	Shares	Amount		Shares	Amount
	(unaudited) (dollars in millions, shares in thousands)
For the Three Months Ended June 30, 2019
Balance at March 31, 2019	6	$	563	565,973	$	6	$	4,148		$	19,484		$	(136	)	$	(12,806	)	$	11,259
Net income	—	—		—	—		—			753			—			—			753
Other comprehensive income	—	—		—	—		—			—			53			—			53
Purchases of treasury stock	—	—		—	—		—			—			—			(461		)	(461		)
Common stock issued under employee benefit plans	—	—		24	—		1			—			—			—			1
Common stock issued and stock-based compensation expense	—	—		22	—		18			—			—			—			18
Dividends — common stock ($0.40 per share)	—	—		—	—		—			(130		)	—			—			(130		)
Balance at June 30, 2019	6	$	563	566,019	$	6	$	4,167		$	20,107		$	(83	)	$	(13,267	)	$	11,493

For the Three Months Ended June 30, 2020
Balance at March 31, 2020	6	$	563	567,530	$	6	$	4,217		$	19,175		$	134		$	(14,430	)	$	9,665
Net loss	—	—		—	—		—			(368		)	—			—			(368		)
Other comprehensive loss	—	—		—	—		—			—			(12		)	—			(12		)
Common stock issued under employee benefit plans	—	—		49	—		2			—			—			—			2
Common stock issued and stock-based compensation expense	—	—		74	—		(3		)	—			—			—			(3		)
Preferred stock issued	5	493		—	—		—			—			—			—			493
Dividends — common stock ($0.44 per share)	—	—		—	—		—			(134		)	—			—			(134		)
Balance at June 30, 2020	11	$	1,056	567,653	$	6	$	4,216		$	18,673		$	122		$	(14,430	)	$	9,643

For the Six Months Ended June 30, 2019
Balance at December 31, 2018	6	$	563	564,852	$	6	$	4,130		$	18,906		$	(156	)	$	(12,319	)	$	11,130
Net income	—	—		—	—		—			1,479			—			—			1,479
Other comprehensive income	—	—		—	—		—			—			73			—			73
Purchases of treasury stock	—	—		—	—		—			—			—			(948		)	(948		)
Common stock issued under employee benefit plans	—	—		51	—		3			—			—			—			3
Common stock issued and stock-based compensation expense	—	—		1,116	—		34			—			—			—			34
Dividends — common stock ($0.80 per share)	—	—		—	—		—			(262		)	—			—			(262		)
Dividends — Series C preferred stock ($2,750 per share)	—	—		—	—		—			(16		)	—			—			(16		)
Balance at June 30, 2019	6	$	563	566,019	$	6	$	4,167		$	20,107		$	(83	)	$	(13,267	)	$	11,493

For the Six Months Ended June 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 loss	—	—		—	—		—			(429		)	—			—			(429		)
Other comprehensive income	—	—		—	—		—			—			241			—			241
Purchases of treasury stock	—	—		—	—		—			—			—			(343		)	(343		)
Common stock issued under employee benefit plans	—	—		113	—		4			—			—			—			4
Common stock issued and stock-based compensation expense	—	—		886	—		6			—			—			—			6
Preferred stock issued	5	493		—	—		—			—			—			—			493
Dividends — common stock ($0.88 per share)	—	—		—	—		—			(270		)	—			—			(270		)
Dividends — Series C preferred stock ($2,750 per share)	—	—		—	—		—			(16		)	—			—			(16		)
Balance at June 30, 2020	11	$	1,056	567,653	$	6	$	4,216		$	18,673		$	122		$	(14,430	)	$	9,643

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Cash Flows



	For the Six Months Ended June 30,
	2020			2019
	(unaudited) (dollars in millions)
Cash flows from operating activities
Net (loss) income	$	(429	)	$	1,479
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses⁽¹⁾	3,853			1,596
Deferred income taxes	(531		)	(50		)
Depreciation and amortization	246			202
Amortization of deferred revenues and accretion of accretable yield on acquired loans	(165		)	(201		)
Net (gain) loss on investments and other assets	(51		)	21
Other, net	68			39
Changes in assets and liabilities
Decrease (increase) in other assets	388			(23		)
(Decrease) increase in accrued expenses and other liabilities	(112		)	850
Net cash provided by operating activities	3,267			3,913

Cash flows from investing activities
Purchases of other short-term investments	(2,548		)	(1,000		)
Maturities of available-for-sale investment securities	438			70
Purchases of available-for-sale investment securities	—			(4,115		)
Maturities of held-to-maturity investment securities	18			12
Purchases of held-to-maturity investment securities	(30		)	(34		)
Net principal repaid (disbursed) on loans originated for investment	5,614			(950		)
Proceeds from sale of other investments	94			—
Purchases of other investments	(40		)	(21		)
Purchases of premises and equipment	(153		)	(151		)
Net cash provided by (used for) investing activities	3,393			(6,189		)

Cash flows from financing activities
Proceeds from issuance of securitized debt	—			1,234
Maturities and repayment of securitized debt	(1,666		)	(4,070		)
Proceeds from issuance of other long-term borrowings	495			595
Maturities and repayment of other long-term borrowings	(1,753		)	(7		)
Proceeds from issuance of common stock	5			4
Purchases of treasury stock	(343		)	(948		)
Net increase in deposits	4,601			1,955
Proceeds from issuance of preferred stock	493			—
Dividends paid on common and preferred stock	(289		)	(279		)
Net cash provided by (used for) financing activities	1,543			(1,516		)
Net increase (decrease) in cash, cash equivalents and restricted cash	8,203			(3,792		)
Cash, cash equivalents and restricted cash, at beginning of period	6,964			15,145
Cash, cash equivalents and restricted cash, at end of period	$	15,167		$	11,353

Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	15,138		$	10,313
Restricted cash	29			1,040
Cash, cash equivalents and restricted cash, at end of period	$	15,167		$	11,353


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

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

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

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

Basis of Presentation

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

Recently Issued Accounting Pronouncements (Not Yet Adopted)

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

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Recently Adopted Accounting Pronouncements

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

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

Measurement of credit impairment of available-for-sale debt securities generally remains unchanged under the new rules, but any credit impairment is recorded through an allowance, rather than a direct write-down of the security. The Company invests in U.S. Treasury and residential mortgage-backed securities issued by government agencies, which have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments.

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


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


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


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


•	Immaterial adjustments to the following:


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


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

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

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2.	Investments

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

	June 30, 2020		December 31, 2019
U.S. Treasury bills⁽¹⁾	$	2,549	$	—
Total other short-term investments	$	2,549	$	—

U.S. Treasury securities⁽²⁾	$	9,838	$	9,906
Residential mortgage-backed securities - Agency⁽³⁾	647		689
Total investment securities	$	10,485	$	10,595


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


(2)	Includes $159 million and $121 million of U.S. Treasury securities pledged as swap collateral as of June 30, 2020 and December 31, 2019, respectively.


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

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At June 30, 2020
Available-for-Sale Investment Securities⁽¹⁾
U.S. Treasury securities	$	9,385	$	453	$	—		$	9,838
Residential mortgage-backed securities - Agency	349		14		—			363
Total available-for-sale investment securities	$	9,734	$	467	$	—		$	10,201
Held-to-Maturity Investment Securities⁽²⁾
Residential mortgage-backed securities - Agency⁽³⁾	$	284	$	9	$	—		$	293
Total held-to-maturity investment securities	$	284	$	9	$	—		$	293

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


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


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


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

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

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The following table provides information about available-for-sale 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
	Number of Securities in a Loss Position	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
At December 31, 2019
Available-for-Sale Investment Securities
U.S. Treasury securities	11	$	1,402	$	(8	)	$	—	$	—

There were no proceeds from sales or recognized gains and losses on available-for-sale securities during the three or six months ended June 30, 2020 and 2019. See Note 9: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three and six months ended June 30, 2020 and 2019.

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

At June 30, 2020	One Year or Less		After One Year Through Five Years		After Five Years Through Ten Years		After Ten Years		Total
Available-for-Sale Investment Securities—Amortized Cost
U.S. Treasury securities	$	1,374	$	8,011	$	—	$	—	$	9,385
Residential mortgage-backed securities - Agency⁽¹⁾	—		64		285		—		349
Total available-for-sale investment securities	$	1,374	$	8,075	$	285	$	—	$	9,734
Held-to-Maturity Investment Securities—Amortized Cost
Residential mortgage-backed securities - Agency⁽¹⁾	$	—	$	—	$	—	$	284	$	284
Total held-to-maturity investment securities	$	—	$	—	$	—	$	284	$	284
Available-for-Sale Investment Securities—Fair Values
U.S. Treasury securities	$	1,391	$	8,447	$	—	$	—	$	9,838
Residential mortgage-backed securities - Agency⁽¹⁾	—		66		297		—		363
Total available-for-sale investment securities	$	1,391	$	8,513	$	297	$	—	$	10,201
Held-to-Maturity Investment Securities—Fair Values
Residential mortgage-backed securities - Agency⁽¹⁾	$	—	$	—	$	—	$	293	$	293
Total held-to-maturity investment securities	$	—	$	—	$	—	$	293	$	293


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

Other Investments

As a part of the Company's community reinvestment initiatives, the Company has made equity investments in certain limited partnerships and limited liability companies that finance the construction and rehabilitation of affordable rental housing, as well as stimulate economic development in low to moderate income communities. These investments are accounted for using the equity method of accounting and are recorded within other assets. The related commitment for future investments is recorded in accrued expenses and other liabilities within the condensed consolidated statements of financial condition. The portion of each investment's operating results allocable to the Company reduces the carrying value of the investments and is recorded in other expense within the condensed consolidated statements of income. The Company further reduces the carrying value of the investments by recognizing any amounts that are in excess of future net tax benefits in other expense. The Company earns a return primarily through the receipt of tax credits allocated to the affordable housing projects and the community revitalization projects. These investments are not consolidated as the Company does not have a controlling financial interest in the entities. As of June 30, 2020 and December 31, 2019, the Company had outstanding investments in these entities of $335 million and $336 million, respectively, and related contingent liabilities of $63 million and $74 million, respectively. Of the above outstanding equity investments, the Company had $301 million and $298 million of investments related to affordable housing projects as of June 30, 2020 and December 31, 2019, respectively, which had $47 million and $59 million related contingent liabilities, respectively.

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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 June 30, 2020 and December 31, 2019, the carrying value of these investments, which is recorded within other assets, was $25 million and $42 million, respectively.


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):

	June 30, 2020			December 31, 2019
Credit card loans⁽¹⁾⁽²⁾	$	70,201		$	77,181
Other loans⁽³⁾
Private student loans⁽⁴⁾	9,730			9,653
Personal loans	7,316			7,687
Other	1,680			1,373
Total other loans	18,726			18,713
Total loan receivables	88,927			95,894
Allowance for credit losses⁽⁵⁾	(8,184		)	(3,383		)
Net loan receivables	$	80,743		$	92,511


(1)	Amounts include carrying values of $16.6 billion and $18.9 billion underlying investors' interest in trust debt at June 30, 2020 and December 31, 2019, respectively, and $11.0 billion and $12.7 billion in seller's interest at June 30, 2020 and December 31, 2019, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.


(2)	Unbilled accrued interest receivable on credit card loans, which is presented as part of other assets in the Company's condensed consolidated statements of financial condition, was $379 million and $471 million at June 30, 2020 and December 31, 2019, respectively.


(3)	Accrued interest receivable on private student, personal and other loans, which is presented as part of other assets in the Company's condensed consolidated statements of financial condition, was $494 million, $48 million and $6 million, respectively, at June 30, 2020 and $461 million, $53 million and $4 million, respectively, at December 31, 2019.


(4)	Amounts include carrying values of $274 million and $292 million in loans pledged as collateral against the note issued from a student loan securitization trust at June 30, 2020 and December 31, 2019, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.


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

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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 as well as information from credit bureaus, such as FICO or other credit scores, relating to the customer's broader credit performance. Key credit quality indicators that are actively monitored for credit card, private student and personal loans include FICO scores and delinquency status. These indicators are important to understand the overall credit performance of the Company's customers and their ability to repay.

FICO scores are generally obtained at origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that 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 most recent FICO scores available for the Company's customers by the amortized cost basis (excluding accrued interest receivable presented in other assets) for credit card, private student and personal loan receivables (dollars in millions):

	Credit Risk Profile by FICO Score
	June 30, 2020								December 31, 2019
	660 and Above				Less than 660 or No Score				660 and Above				Less than 660 or No Score
	$		%		$		%		$		%		$		%
Credit card loans⁽¹⁾	$	56,772	81	%	$	13,429	19	%	$	61,997	80	%	$	15,184	20	%
Private student loans by origination year⁽²⁾⁽³⁾
2020	$	321	98	%	$	8	2	%
2019	1,714		96	%	72		4	%	$	1,176	93	%	$	92	7	%
2018	1,437		95	%	72		5	%	1,518		95	%	79		5	%
2017	1,114		94	%	67		6	%	1,198		95	%	69		5	%
2016	850		94	%	57		6	%	934		94	%	58		6	%
Prior	3,749		93	%	269		7	%	4,229		93	%	300		7	%
Total private student loans	$	9,185	94	%	$	545	6	%	$	9,055	94	%	$	598	6	%
Personal loans by origination year
2020	$	1,454	99	%	$	9	1	%
2019	2,840		97	%	91		3	%	$	3,529	98	%	$	62	2	%
2018	1,440		92	%	120		8	%	1,941		93	%	140		7	%
2017	821		89	%	98		11	%	1,167		90	%	136		10	%
2016	307		88	%	43		12	%	475		88	%	65		12	%
Prior	77		83	%	16		17	%	145		84	%	27		16	%
Total personal loans	$	6,939	95	%	$	377	5	%	$	7,257	94	%	$	430	6	%


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


(2)	A majority of student loans originations occur in the third quarter and disbursements can span across 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):

	June 30, 2020						December 31, 2019
	30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due		30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due
Credit card loans	$	677	$	846	$	1,523	$	999	$	1,020	$	2,019
Private student loans by origination year⁽¹⁾⁽²⁾
2020	$	—	$	—	$	—
2019	1		—		1		$	1	$	—	$	1
2018	9		4		13		4		1		5
2017	12		5		17		11		2		13
2016	13		5		18		14		5		19
Prior	78		26		104		106		37		143
Total private student loans	$	113	$	40	$	153	$	136	$	45	$	181
Personal loans by origination year
2020	$	2	$	—	$	2
2019	14		7		21		$	11	$	3	$	14
2018	17		9		26		27		11		38
2017	12		7		19		22		10		32
2016	5		3		8		10		5		15
Prior	2		1		3		4		2		6
Total personal loans	$	52	$	27	$	79	$	74	$	31	$	105


(1)	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.


(2)	Includes PCD loans for all periods presented.

In response to the economic impact of COVID-19, the Company employed skip-a-pay programs as short-term offerings, which allow customers on a monthly or other periodic basis to request approval to skip their payment(s) for that month or period. Current accounts enrolled in these programs do not advance to delinquency, and delinquent accounts enrolled in these programs do not advance to the next delinquency cycle, or to charge-off.

In addition to the skip-a-pay programs, the Company has other modification programs that customers have utilized during the period. Due to provisions in the CARES Act or interagency guidance, some accounts in these programs do not constitute TDRs.

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Allowance for Credit Losses

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

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

	For the Three Months Ended June 30, 2020
	Credit Card			Student Loans			Personal Loans			Other		Total
Balance at March 31, 2020	$	5,306		$	765		$	807		$	35	$	6,913
Additions
Provision for credit losses⁽¹⁾	1,873			49			114			2		2,038
Deductions
Charge-offs	(852		)	(20		)	(78		)	—		(950		)
Recoveries	164			5			14			—		183
Net charge-offs	(688		)	(15		)	(64		)	—		(767		)
Balance at June 30, 2020	$	6,491		$	799		$	857		$	37	$	8,184

	For the Three Months Ended June 30, 2019
	Credit Card			Student Loans			Personal Loans			Other		Total
Balance at March 31, 2019⁽²⁾	$	2,622		$	168		$	338		$	6	$	3,134
Additions
Provision for credit losses⁽²⁾	692			15			80			—		787
Deductions
Charge-offs	(789		)	(18		)	(91		)	—		(898		)
Recoveries	166			3			11			—		180
Net charge-offs⁽³⁾	(623		)	(15		)	(80		)	—		(718		)
Other⁽⁴⁾	—			(1		)	—			—		(1		)
Balance at June 30, 2019⁽²⁾	$	2,691		$	167		$	338		$	6	$	3,202

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

	For the Six Months Ended June 30, 2020
	Credit Card			Student Loans			Personal Loans			Other		Total
Balance at December 31, 2019⁽²⁾	$	2,883		$	148		$	348		$	4	$	3,383
Cumulative effect of ASU No. 2016-13 adoption⁽⁵⁾	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⁾	3,312			178			377			9		3,876
Deductions
Charge-offs	(1,721		)	(42		)	(162		)	—		(1,925		)
Recoveries	350			10			29			—		389
Net charge-offs	(1,371		)	(32		)	(133		)	—		(1,536		)
Balance at June 30, 2020	$	6,491		$	799		$	857		$	37	$	8,184

	For the Six Months Ended June 30, 2019
	Credit Card			Student Loans			Personal Loans			Other		Total
Balance at December 31, 2018⁽²⁾	$	2,528		$	169		$	338		$	6	$	3,041
Additions
Provision for credit losses⁽²⁾	1,402			30			164			—		1,596
Deductions
Charge-offs	(1,563		)	(37		)	(185		)	—		(1,785		)
Recoveries	324			7			21			—		352
Net charge-offs⁽³⁾	(1,239		)	(30		)	(164		)	—		(1,433		)
Other⁽⁴⁾	—			(2		)	—			—		(2		)
Balance at June 30, 2019⁽²⁾	$	2,691		$	167		$	338		$	6	$	3,202


(1)	Excludes an $8 million build and $23 million release of the liability for expected credit losses on unfunded commitments for the three months and six months ended June 30, 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition.


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


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


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


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

The allowance for credit losses was $8.2 billion at June 30, 2020, which reflects a $1.3 billion build over the amount of the allowance for credit losses at March 31, 2020. The allowance build across all loan products primarily reflects an economic outlook with updated assumptions about the impact of the COVID-19 pandemic. In estimating the allowance at June 30, 2020, the Company used a macroeconomic forecast that assumes a peak unemployment rate of 16%, recovering to just under 11% at the end of 2020 with slow recovery over the next few years, and an annualized real Gross Domestic Product decline of approximately 30% quarter-over-quarter or down approximately 10% on a year-over-year basis. The estimate also contemplated the impact of government stimulus programs and company-initiated loan modification programs on borrower payment behavior. The impact of COVID-19 on the economy has led to uncertainty in assumptions surrounding factors such as the length and depth of economic stresses and borrower behavior, which required significant management judgment in estimating the allowance for credit losses.

Company-initiated loan modification programs include those offered specifically in response to COVID-19 as well as existing programs offered to customers experiencing difficulty making their payments. In addition to skip-a-pay programs, the Company has other modification programs that customers have utilized during the period related to the pandemic. The accounts using these modifications are generally excluded from TDR status either because the concessions are insignificant or they qualify for exemption pursuant to the CARES Act or interagency guidance. All modifications are considered as part of the process for determining the allowance for credit losses.

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

At adoption of CECL and at June 30, 2020, the forecast period management deemed to be reasonable and supportable was 18 months. This period decreased to 12 months at March 31, 2020 due to the uncertainty caused by the rapidly changing economic environment due to the COVID-19 pandemic. In the second quarter, the reasonable and supportable period was 18 months based on the view that the present macroeconomic conditions will last for a longer period than previously expected. For both quarters, the reversion period was 12 months. Since adoption of CECL, a straight-line method was used to revert to appropriate historical information. During the quarter ended June 30, 2020, the high degree of economic stress led the Company to apply a weighted reversion method for credit card loans that puts more emphasis on the loss forecast model rather than lower historical losses. At June 30, 2020, the reversion method remained straight-line for all other products.

The increase in net charge-offs on credit card loans for the three and six months ended June 30, 2020 when compared to the same periods in 2019 was due to seasoning of recent years' loan growth.

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 June 30,				For the Six Months Ended June 30,
	2020		2019		2020		2019
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)	$	136	$	128	$	279	$	255
Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)	$	33	$	30	$	68	$	61

Delinquent and Non-Accruing Loans

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

	30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due		90 or More Days Delinquent and Accruing		Total Non-accruing⁽¹⁾
At June 30, 2020
Credit card loans	$	677	$	846	$	1,523	$	782	$	221
Other loans
Private student loans⁽²⁾	113		40		153		39		13
Personal loans	52		27		79		25		9
Other	5		3		8		—		10
Total other loans	170		70		240		64		32
Total loan receivables	$	847	$	916	$	1,763	$	846	$	253

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

(1)

The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of non-accruing credit card loans was $8 million and $11 million for the three months ended June 30, 2020 and 2019, respectively, and $18 million and $23 million for the six months ended June 30, 2020 and 2019, respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. This amount was estimated based on customers' current balances and most recent interest rates.


(2)	Includes PCD loans for all periods presented.

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Troubled Debt Restructurings

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

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 loans are generally suspended while in the program and if certain criteria are met, may be reinstated following completion of the program. Beginning in 2020, credit card accounts of borrowers that have previously participated in a temporary interest rate reduction program and that have both demonstrated financial stability and had their charging privileges reinstated at a market-based interest rate, are excluded from the balance of TDRs.

The permanent modification program involves closing the account, changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The permanent modification program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. The Company also makes permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans typically receive a reduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. These loans remain in the population of TDRs until they are paid off or charged off.

At June 30, 2020 and December 31, 2019, there were $5.6 billion of private student loans in repayment and $21 million and $46 million, respectively, in forbearance. To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance or programs that include payment deferral, temporary payment reduction, 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 credit quality of the borrower using FICO scores.

For personal loan customers, in certain situations the Company offers various payment programs, including temporary and permanent programs. The temporary programs normally consist of a reduction of the minimum payment for a period of no longer than 12 months with the option of a final balloon payment required at the end of the loan term or an extension of the maturity date with the total term not exceeding nine years. Further, in certain circumstances the interest rate on the loan is reduced. The permanent programs involve changing the terms of the loan in order to pay off the outstanding balance over a longer term and in certain circumstances reducing the interest rate on the loan. Similar to the temporary programs, the total term may not exceed nine years. The Company also allows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are classified as TDRs.

Borrower performance after using payment programs or forbearance is monitored and 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 as a means to provide relief to customers experiencing temporary financial difficulties and, as a result, expects to have additional loans classified as TDRs in the future.

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In order to evaluate the primary financial effects that resulted from credit card loans entering into a TDR program during the three and six months ended June 30, 2020 and 2019, the Company quantified the amount by which interest and fees were reduced during the periods. During the three months ended June 30, 2020 and 2019, the Company forgave approximately $18 million and $17 million, respectively, of interest and fees as a result of accounts entering into a credit card loan TDR program. During the six months ended June 30, 2020 and 2019, the Company forgave approximately $39 million and $34 million, respectively, of interest and fees as a result of 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.

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

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

	For the Three Months Ended June 30,
	2020			2019
	Number of Accounts	Balances		Number of Accounts	Balances
Accounts that entered a TDR program during the period
Credit card loans⁽¹⁾	27,966	$	191	84,568	$	551
Private student loans	62	$	1	1,710	$	30
Personal loans	1,332	$	17	2,670	$	36

	For the Six Months Ended June 30,
	2020			2019
	Number of Accounts	Balances		Number of Accounts	Balances
Accounts that entered a TDR program during the period
Credit card loans⁽¹⁾	120,702	$	800	176,924	$	1,143
Private student loans	1,780	$	33	3,286	$	61
Personal loans	3,880	$	51	5,270	$	71


(1)	Accounts that entered a credit card TDR program include $176 million and $173 million that were converted from revolving line-of-credit arrangements to term loans during the three months ended June 30, 2020 and 2019, respectively, and $386 million and $336 million for the six months ended June 30, 2020 and 2019, respectively.

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

	For the Three Months Ended June 30,
	2020			2019
	Number of Accounts	Aggregated Outstanding Balances Upon Default		Number of Accounts	Aggregated Outstanding Balances Upon Default
TDRs that subsequently defaulted
Credit card loans⁽¹⁾⁽²⁾	11,841	$	66	16,220	$	95
Private student loans⁽³⁾	246	$	5	290	$	6
Personal loans⁽²⁾	622	$	9	946	$	14

	For the Six Months Ended June 30,
	2020			2019
	Number of Accounts	Aggregated Outstanding Balances Upon Default		Number of Accounts	Aggregated Outstanding Balances Upon Default
TDRs that subsequently defaulted
Credit card loans⁽¹⁾⁽²⁾	32,326	$	183	31,872	$	185
Private student loans⁽³⁾	604	$	12	570	$	11
Personal loans⁽²⁾	1,822	$	27	1,794	$	27


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


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


(3)	For student loans, defaults have been defined as loans that are 60 or more days delinquent. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.

Of the account balances that defaulted as shown above for the three months ended June 30, 2020 and 2019, approximately 61% and 39%, respectively, and for the six months ended June 30, 2020 and 2019, approximately 48% and 39%, respectively, of the total balances were charged off at the end of the month in which they defaulted from a TDR program.

Significant Loan Receivables Accounting Policies

With the adoption of ASU No. 2016-13 on January 1, 2020, certain significant accounting policies have changed since disclosed in Note 2: Summary of Significant Accounting Policies to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, 2019. Refer to Note 1: Background and Basis of Presentation for details on adoption of the standard. Impacts on all significant loan receivables accounting policies are summarized as follows:


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


•	The relevance of the PCI loan policy was eliminated by CECL and therefore it was removed as a significant accounting policy.


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


•	The allowance for credit losses policy was updated to reflect the CECL approach for estimating credit losses.


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

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

Loan Receivables

Loan receivables consist of credit card receivables and other loans. Loan receivables also include unamortized net deferred loan origination fees and costs. Credit card loan receivables are reported at their principal amounts outstanding and include uncollected billed interest and fees and are reduced for unearned revenue related to balance transfer fees. Other loans consist of student loans, personal loans and other loans and are reported at their principal amounts outstanding. For student loans, principal amounts outstanding also include accrued interest that has been capitalized. The Company's loan receivables are deemed to be held for investment at origination or acquisition because management has the intent and ability to hold them for the foreseeable future. Cash flows associated with loans originated or acquired for investment are classified as cash flows from investing activities, regardless of a subsequent change in intent.

Allowance for Credit Losses

The Company maintains an allowance for credit losses at a level that is appropriate to absorb credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. The estimate of expected credit losses considers uncollectible principal, interest and fees associated with the Company's loan receivables existing as of the balance sheet date. Additionally, the estimate includes expected recoveries of amounts that were either previously charged off or are expected to be charged off. The allowance is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for credit losses. Charge-offs of principal amounts of loans outstanding are deducted from the allowance and subsequent recoveries of such amounts increase the allowance. Charge-offs of loan balances representing unpaid interest and fees result in a reversal of interest and fee income, respectively, which is effectively a reclassification of the provision for credit losses.

The Company calculates its allowance for credit losses by estimating expected credit losses separately for classes of the loan portfolio with similar risk characteristics, which results in segmenting the portfolio by loan product type. The allowance for credit losses for each loan product type is based on: 1) a reasonable and supportable forecast period, 2) a reversion period and 3) a post-reversion period based on historical information covering the remaining life of the loan, all of which is netted with expected recoveries. The lengths of the reasonable and supportable forecast and reversion periods can vary and are subject to a quarterly assessment that considers the economic outlook and level of variability among macroeconomic forecasts. Generally, a straight-line method is used to revert from the reasonable and supportable forecast period to the post-reversion period, but in certain stressed scenarios, a weighted approach may be deemed more appropriate.

Several analyses are used to help estimate credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. The Company's estimation process includes models that predict customer losses based on risk characteristics and portfolio attributes, macroeconomic variables, and historical data and analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance.

For credit card loans, the Company uses a modeling framework that includes the following components for estimating expected credit losses:


•	Probability of default: this model estimates the probability of charge-off at different points in time over the life of each loan.


•	Exposure at default: this model estimates the portion of the balance sheet date balance remaining at any given time of charge-off for each loan. Given that there is no stated life of a receivable balance on a revolving credit card account, the Company applies a percentage of expected payments to estimate the portion of the balance that would remain at the time of charge-off.


•	Loss given default: this model estimates the percentage of exposure (i.e. net loss) at time of charge-off that cannot be recovered, with the offsetting forecast recoveries being the driver of this estimate.


•	Recoveries from previously charged-off accounts are estimated separately and are netted as part of the aggregation of all of the components of the card loss modeling framework.

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For student loans and personal loans, the Company uses vintage-based models that estimate expected credit losses over the life of the loan, net of recovery estimates, impacted mainly by time elapsed since origination, credit quality of origination vintages and macroeconomic forecasts.

The models described above for credit card, student and personal loans are developed utilizing historical data and applicable macroeconomic variable inputs based on statistical analysis and behavioral relationships with credit performance. Expected recoveries from loans charged off as of the balance sheet date are modeled separately and included in the allowance estimate. The Company leverages these models and recent macroeconomic forecasts for the portion of the estimate associated with the reasonable and supportable forecast period. To estimate expected credit losses for the remainder of the life of the credit card loans, the Company reverts to historical experience of credit card loans with characteristics similar to those as of the balance sheet date and observed over various phases of a credit cycle. To estimate expected credit losses for the remainder of the life of student and personal loans, the Company reverts to use of average macroeconomic variables over an appropriate historical period.

The considerations in these models include past and current loan performance, loan growth and seasoning, risk management practices, account collection strategies, economic conditions, bankruptcy filings, policy changes and forecasting uncertainties. Consideration of past and current loan performance includes the post-modification performance of loans modified in a TDR. For the credit card loan portfolio, the Company estimates its credit losses on a loan-level basis, which includes loans that are delinquent and/or no longer accruing interest and/or loans that have been modified under a TDR. For the remainder of its portfolio, including student, personal and other loans, the Company estimates its credit losses on a pooled basis. For all loan types, recoveries are estimated at a pooled level based on estimates of future cash flows derived using historical experience.

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

The Company records a liability for expected credit losses for unfunded commitments on all other loans, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition. This liability is evaluated quarterly for appropriateness and is maintained through an adjustment to the provision for credit losses. No liability for expected credit losses is required for unused lines of credit on the Company’s credit card loans because they are unconditionally cancellable.


4.	Credit Card and Student Loan Securitization Activities

The Company's securitizations are accounted for as secured borrowings and the related trusts are treated as consolidated subsidiaries of the Company. For a description of the Company's principles of consolidation with respect to VIEs, see Note 1: Background and Basis of Presentation to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, 2019.

Credit Card Securitization Activities

The Company accesses the term asset securitization market through the Discover Card Master Trust I ("DCMT") and the Discover Card Execution Note Trust ("DCENT"). Credit card loan receivables are transferred into DCMT and beneficial interests in DCMT are transferred into DCENT. DCENT issues debt securities to investors that are reported in long-term borrowings.

The DCENT debt structure consists of four classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. In order to issue senior, higher rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower rated or more highly subordinated classes of notes. The subordinated classes are held by wholly-owned subsidiaries of Discover Bank. The Company is exposed to credit-related risk of loss associated with trust assets as of the balance sheet date through the retention of these subordinated interests. The estimated loss is included in the allowance for credit losses estimate.

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

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

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):

	June 30, 2020			December 31, 2019
Restricted cash	$	19		$	28

Investors' interests held by third-party investors	12,450			14,100
Investors' interests held by wholly-owned subsidiaries of Discover Bank	4,184			4,796
Seller's interest	11,018			12,652
Loan receivables⁽¹⁾	27,652			31,548
Allowance for credit losses allocated to securitized loan receivables⁽¹⁾⁽²⁾	(1,972		)	(1,179		)
Net loan receivables	25,680			30,369
Other	5			5
Carrying value of assets of consolidated variable interest entities	$	25,704		$	30,402


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


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

The debt securities issued by the consolidated trusts are subject to credit, payment and interest rate risks on the transferred credit card loan receivables. To protect investors in the securities, there are certain features or triggering events that could cause an early amortization of the debt securities, including triggers related to the impact of the performance of the trust receivables on the availability and adequacy of cash flows to meet contractual requirements. As of June 30, 2020, no economic or other early amortization events have occurred.

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

Student Loan Securitization Activities

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

Securities issued to investors are outstanding from only one of the two remaining student loan securitization trusts. Principal payments on the long-term secured borrowings are made as cash is collected on the underlying loans that are used as collateral on the secured borrowings. The Company does not have access to cash collected by the securitization trust until cash is released in accordance with the trust indenture agreement. Similar to the credit card securitizations, the Company continues to own and service the accounts that generate the student loan receivables held by the trust and receives servicing fees from the trust based on a percentage of the principal balance outstanding. Although the servicing fee income offsets the fee expense related to the trust and thus is eliminated in consolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead to a termination of the servicing rights and the loss of future servicing income, net of related expenses.

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

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):

	June 30, 2020		December 31, 2019
Restricted cash	$	10	$	12
Student loan receivables	274		292
Carrying value of assets of consolidated variable interest entities	$	284	$	304


5.	Intangible Assets

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

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 methodology used for annual impairment testing. As a result of this analysis, the Company made the determination that the trade names and international transaction processing rights were impaired and recognized a charge in its Payment Services segment of $36 million and $23 million, respectively. The impairment was recorded in other expense.

The trade names have a remaining net book value of $92 million 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 certificates of deposit and checking accounts, while brokered deposits include certificates of deposit and sweep accounts.

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

	June 30, 2020		December 31, 2019
Certificates of deposit in amounts less than $100,000	$	22,974	$	25,113
Certificates of deposit in amounts $100,000 or greater⁽¹⁾	10,392		9,268
Savings deposits, including money market deposit accounts	42,999		37,574
Total interest-bearing deposits	$	76,365	$	71,955


(1)	Includes $3.0 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 June 30, 2020 and December 31, 2019, respectively.

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

	June 30, 2020
Three months or less	$	1,954
Over three months through six months	1,639
Over six months through twelve months	3,941
Over twelve months	2,858
Total	$	10,392

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):

	June 30, 2020
2020	$	9,868
2021	13,767
2022	4,092
2023	2,148
2024	1,346
Thereafter	2,145
Total	$	33,366

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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):

	June 30, 2020					December 31, 2019
	Maturity	Interest Rate	Weighted-Average Interest Rate	Outstanding Amount		Outstanding Amount
Securitized Debt
Fixed-rate asset-backed securities⁽¹⁾	2020-2024	1.85%-3.32%	2.56%	$	7,955	$	8,609
Floating-rate asset-backed securities⁽²⁾	2021-2024	0.41%-0.78%	0.58%	4,667		5,515
Total Discover Card Master Trust I and Discover Card Execution Note Trust				12,622		14,124

Floating-rate asset-backed security⁽³⁾⁽⁴⁾	2031	4.25%	4.25%	144		160
Total student loan securitization trust				144		160
Total long-term borrowings - owed to securitization investors				12,766		14,284

Discover Financial Services (Parent Company)
Fixed-rate senior notes	2022-2027	3.75%-5.20%	4.16%	3,316		3,296
Fixed-rate retail notes	2021-2031	2.85%-4.60%	3.73%	337		340

Discover Bank
Fixed-rate senior bank notes⁽¹⁾	2021-2030	2.45%-4.65%	3.89%	6,255		6,785
Fixed-rate subordinated bank notes	2028-2028	4.68%-4.68%	4.68%	520		996
Total long-term borrowings				$	23,194	$	25,701


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


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


(3)	The student loan securitization trust floating-rate asset-backed security includes an issuance with the following interest rate term: Prime rate + 100 basis points as of June 30, 2020.


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

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

	June 30, 2020
2020	$	1,854
2021	4,246
2022	5,208
2023	3,421
2024	2,635
Thereafter	5,830
Total	$	23,194

The Company has access to committed borrowing capacity through private securitizations to support the funding of its credit card loan receivables. As of June 30, 2020, the total commitment of secured credit facilities through private providers was $6.0 billion, none of which was drawn as of June 30, 2020. Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers, which have various expirations in calendar years 2021 through 2022. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each individual conduit provider. The terms of each agreement provide for a commitment fee to be paid on the unused capacity and include various affirmative and negative covenants, including performance metrics and legal requirements similar to those required to issue any term securitization transaction.

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8.	Preferred Stock

On June 22, 2020, the Company issued and sold 5,000 shares of 6.125% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (the “preferred stock”), with a par value of $0.01 per share. Each share of preferred stock has a liquidation preference of $1,000 and is represented by 100 depositary shares. Proceeds, net of underwriting discount and estimated expenses, received from the preferred stock issuance totaled approximately $493 million. The preferred stock is redeemable at the Company’s option, subject to regulatory approval, either (1) in whole or in part during the three-month period prior to, and including, each reset date (as defined in the certificate of designations for the preferred stock) or (2) in whole but not in part, at any time within 90 days following a regulatory capital event (as defined in the certificate of designations for the preferred stock), in each case at a redemption price equal to $1,000 per share of preferred stock plus declared and unpaid dividends. Any dividends declared on the preferred stock will be payable semi-annually in arrears at a rate of 6.125% per annum until September 23, 2025, after which the dividend rate will reset every five years to a fixed annual rate equal to the 5-year Treasury rate plus 5.783%. For more information on the Company's preferred stock, see Note 12: Common and Preferred Stock to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, 2019.


9.	Accumulated Other Comprehensive Income

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

	Unrealized Gains on Available-for-Sale Investment Securities, Net of Tax			(Losses) Gains on Cash Flow Hedges, Net of Tax			Losses on Pension Plan, Net of Tax			AOCI
For the Three Months Ended June 30, 2020
Balance at March 31, 2020	$	368		$	(20	)	$	(214	)	$	134
Net change	(16		)	4			—			(12		)
Balance at June 30, 2020	$	352		$	(16	)	$	(214	)	$	122

For the Three Months Ended June 30, 2019
Balance at March 31, 2019	$	41		$	10		$	(187	)	$	(136	)
Net change	71			(18		)	—			53
Balance at June 30, 2019	$	112		$	(8	)	$	(187	)	$	(83	)

For the Six Months Ended June 30, 2020
Balance at December 31, 2019	$	112		$	(17	)	$	(214	)	$	(119	)
Net change	240			1			—			241
Balance at June 30, 2020	$	352		$	(16	)	$	(214	)	$	122

For the Six Months Ended June 30, 2019
Balance at December 31, 2018	$	10		$	22		$	(188	)	$	(156	)
Net change	102			(30		)	1			73
Balance at June 30, 2019	$	112		$	(8	)	$	(187	)	$	(83	)

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

	Before Tax			Tax Benefit (Expense)			Net of Tax
For the Three Months Ended June 30, 2020
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period	$	(20	)	$	4		$	(16	)
Net change	$	(20	)	$	4		$	(16	)
Cash Flow Hedges
Net unrealized gains arising during the period	$	—		$	1		$	1
Amounts reclassified from AOCI	5			(2		)	3
Net change	$	5		$	(1	)	$	4
Pension Plan

For the Three Months Ended June 30, 2019
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period	$	94		$	(23	)	$	71
Net change	$	94		$	(23	)	$	71
Cash Flow Hedges
Net unrealized losses arising during the period	$	(22	)	$	6		$	(16	)
Amounts reclassified from AOCI	(2		)	—			(2		)
Net change	$	(24	)	$	6		$	(18	)

For the Six Months Ended June 30, 2020
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period	$	317		$	(77	)	$	240
Net change	$	317		$	(77	)	$	240
Cash Flow Hedges
Net unrealized losses arising during the period	$	(7	)	$	3		$	(4	)
Amounts reclassified from AOCI	7			(2		)	5
Net change	$	—		$	1		$	1

For the Six Months Ended June 30, 2019
Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period	$	134		$	(32	)	$	102
Net change	$	134		$	(32	)	$	102
Cash Flow Hedges
Net unrealized losses arising during the period	$	(35	)	$	9		$	(26	)
Amounts reclassified from AOCI	(5		)	1			(4		)
Net change	$	(40	)	$	10		$	(30	)
Pension Plan
Unrealized gains arising during the period	$	1		$	—		$	1
Net change	$	1		$	—		$	1

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10.	Income Taxes

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
(Loss) income before income taxes	$	(461	)	$	987		$	(539	)	$	1,917
Income tax (benefit) expense	$	(93	)	$	234		$	(110	)	$	438
Effective income tax rate	20.2		%	23.8		%	20.4		%	22.9		%

The income tax expense decreased $327 million and $548 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods in 2019 due to pretax losses for the current periods. The effective tax rate for the three and six months ended June 30, 2020 is lower due to a lower projected pretax income for the full year. The Company calculates its provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year to pretax income or loss excluding unusual or infrequent occurring discrete items. The Company is projecting a lower pretax income for the full year, therefore the effective tax rate for the full year is lower from the historical annual effective tax rate.

The Company is subject to examination by the Internal Revenue Service ("IRS") and tax authorities in various state, local and foreign tax jurisdictions. The Company regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions resulting from these and subsequent years' examinations. The years 2011-2015 are currently under review by the IRS Office of Appeals. At this time, the potential change in unrecognized tax benefits is not expected to be significant over the next 12 months. The Company believes that its reserves are sufficient to cover any tax, penalties and interest that would result from such examinations.


11.	Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS") (in millions, except per share amounts):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
Numerator
Net (loss) income	$	(368	)	$	753		$	(429	)	$	1,479
Preferred stock dividends	—			—			(16		)	(16		)
Net (loss) income available to common stockholders	(368		)	753			(445		)	1,463
Income allocated to participating securities	(1		)	(6		)	(1		)	(11		)
Net (loss) income allocated to common stockholders	$	(369	)	$	747		$	(446	)	$	1,452
Denominator
Weighted-average shares of common stock outstanding	306			322			307			325
Effect of dilutive common stock equivalents	—			1			—			1
Weighted-average shares of common stock outstanding and common stock equivalents	306			323			307			326

Basic (loss) earnings per common share	$	(1.20	)	$	2.32		$	(1.45	)	$	4.46
Diluted (loss) earnings per common share	$	(1.20	)	$	2.32		$	(1.45	)	$	4.46

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

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12.	Capital Adequacy

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

The Company and Discover Bank are subject to regulatory and capital rules issued by the Federal Reserve and FDIC, respectively, under the Basel Committee's December 2010 framework ("Basel III rules"). The Basel III rules, which became effective for the Company January 2015, were subject to phase-in periods through the end of 2018, based on the Company being classified as a "Standardized Approach" entity. As of January 1, 2019, the Basel III rules subject to transition have all been fully phased in with the exception of certain transition provisions that were frozen pursuant to regulation issued in November 2017. Pursuant to a final rule issued in July 2019, the transition provisions that were previously frozen have been replaced with new permanent rules effective in April 2020. Additionally, on March 27, 2020, federal bank regulatory agencies announced an interim final rule that allows banks that have implemented CECL the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period. For purposes of calculating regulatory capital, the Company has elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the interim final rule adopted by federal bank regulatory agencies on March 27, 2020. Pursuant to the interim final rule, the estimated impact of CECL on regulatory capital will be phased in over a three-year period beginning in 2022.

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

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

	Actual				Minimum Capital Requirements			Capital Requirements To Be Classified as Well-Capitalized
	Amount		Ratio⁽¹⁾		Amount		Ratio	Amount⁽²⁾		Ratio⁽²⁾
June 30, 2020
Total capital (to risk-weighted assets)
Discover Financial Services	$	13,367	14.7	%	$	7,252	≥8.0%	$	9,065	≥10.0%
Discover Bank	$	13,029	14.5	%	$	7,167	≥8.0%	$	8,958	≥10.0%
Tier 1 capital (to risk-weighted assets)
Discover Financial Services	$	11,665	12.9	%	$	5,439	≥6.0%	$	5,439	≥6.0%
Discover Bank	$	10,941	12.2	%	$	5,375	≥6.0%	$	7,167	≥8.0%
Tier 1 capital (to average assets)
Discover Financial Services	$	11,665	10.0	%	$	4,645	≥4.0%	N/A		N/A
Discover Bank	$	10,941	9.5	%	$	4,597	≥4.0%	$	5,746	≥5.0%
Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services	$	10,609	11.7	%	$	4,079	≥4.5%	N/A		N/A
Discover Bank	$	10,941	12.2	%	$	4,031	≥4.5%	$	5,823	≥6.5%

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


(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 June 30, 2020, the Company had unused credit arrangements for loans of approximately $214.0 billion. Such arrangements arise primarily from agreements with customers for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions in the related agreements. These arrangements, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification.

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Contingencies

See Note 14: Litigation and Regulatory Matters for a description of potential liability arising from pending litigation or regulatory proceedings involving the Company.

Guarantees

The Company has obligations under certain guarantee arrangements, including contracts, indemnification agreements, and representations and warranties, which contingently require the Company to make payments to the guaranteed party based on changes in an underlying asset, liability or equity security of a guaranteed party, rate or index. Also included as guarantees are contracts that contingently require the Company to make payments to a guaranteed party based on another entity's failure to perform under an agreement. The Company's use of guarantees is disclosed below by type of guarantee.

Securitizations Representations and Warranties

As part of the Company's financing activities, the Company provides representations and warranties that certain assets pledged as collateral in secured borrowing arrangements conform to specified guidelines. Due diligence is performed by the Company, which is intended to ensure that asset guideline qualifications are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company may be required to replace, repurchase or sell such assets. In its credit card securitization activities, the Company would replace nonconforming receivables through the allocation of excess seller's interest or from additional transfers from the unrestricted pool of receivables. If the Company could not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors' interests would be triggered. In its student loan securitizations, the Company would generally repurchase the loans from the trust at the outstanding principal amount plus interest.

The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of third-party investor interests in credit card asset-backed securities, and the principal amount of any student loan secured borrowings, plus any unpaid interest for the corresponding secured borrowings. The Company has recorded substantially all of the maximum potential amount of future payments in long-term borrowings on the Company's condensed consolidated statements of financial condition. The Company has not recorded any incremental contingent liability associated with its secured borrowing representations and warranties. Management believes that the probability of having to replace, repurchase or sell assets pledged as collateral under secured borrowing arrangements, including an early amortization event, is low.

Counterparty Settlement Guarantees

Diners Club and DFS Services LLC (on behalf of PULSE) have various counterparty exposures, which are listed below.

•

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.


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

The maximum potential amount of future payments related to such contingent obligations is dependent upon the transaction volume processed between the time a potential counterparty defaults on its settlement and the time at which the Company disables the settlement of any further transactions for the defaulting party. The Company has some contractual remedies to offset these counterparty settlement exposures (such as letters of credit or pledged deposits), however, there is no limitation on the maximum amount the Company may be liable to pay.

The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether particular counterparties will fail to meet their settlement obligations. In the event that all licensees and/or issuers were to become

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

The Company believes that the estimated amounts of maximum potential future payments are not representative of the Company's actual potential loss exposure given Diners Club's and PULSE's insignificant historical losses from these counterparty exposures. As of June 30, 2020, the Company had not recorded any material contingent liability in the condensed consolidated financial statements for these counterparty exposures and management believes that the probability of any payments under these arrangements is low.

Discover Network Merchant Chargeback Guarantees

The Company operates the Discover Network, issues payment cards and permits third parties to issue payment cards. The Company is contingently liable for certain transactions processed on the Discover Network in the event of a dispute between the payment card customer and a merchant. The contingent liability arises if the disputed transaction involves a merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in the customer's favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn credits its customer's account. The Discover Network will then charge back the disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by the applicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect the amount subject to dispute from the merchant or merchant acquirer (e.g., in the event of merchant default or dissolution or after expiration of the time period for chargebacks in the applicable agreement), the Discover Network will bear the loss for the amount credited or refunded to the customer. In most instances, a loss by the Discover Network is unlikely to arise in connection with payments on card transactions because most products or services are delivered when purchased and credits are issued by merchants on returned items in a timely fashion, thus minimizing the likelihood of cardholder disputes with respect to amounts paid by the Discover Network. However, where the product or service is not scheduled to be provided to the customer until a later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases. Losses related to merchant chargebacks were not material for the three and six months ended June 30, 2020 and 2019.

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

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2020		2019		2020		2019
Aggregate sales transaction volume⁽¹⁾	$	38,123	$	42,831	$	79,086	$	81,590


(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 June 30, 2020 or December 31, 2019. The Company mitigates the risk of potential loss exposure by withholding settlement from merchants, obtaining third-party guarantees, or obtaining escrow deposits or letters of credit from certain merchant acquirers or merchants that are considered higher risk due to various factors such as time delays in the delivery of products or services. As of June 30, 2020 and December 31, 2019, the Company had escrow deposits and settlement withholdings of $34 million and $8 million, respectively, which are recorded in interest-bearing deposit accounts and accrued expenses and other liabilities on the Company's condensed consolidated statements of financial condition.


14.	Litigation and Regulatory Matters

In the normal course of business, from time to time, the Company has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate

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amounts of damages. The litigation process is not predictable and can lead to unexpected results. The Company contests liability and/or the amount of damages as appropriate in each pending matter.

The Company has historically offered its customers an arbitration clause in its customer agreements. The arbitration clause allows the Company and its customers to quickly and economically resolve disputes. Additionally, the arbitration clause has in some instances limited the costs of, and the Company's exposure to, litigation. Future legal and regulatory challenges and prohibitions may cause the Company to discontinue its offering and use of such clauses. From time to time, the Company is involved in legal actions challenging its arbitration clause. Bills may be periodically introduced in Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses.

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

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matters present loss contingencies that are both probable and estimable. Litigation and regulatory settlement related expense was not material for the three and six months ended June 30, 2020 and 2019.

There may be an exposure to loss in excess of any amounts accrued. The Company believes the estimate of the aggregate range of reasonably possible losses (meaning those losses the likelihood of which is more than remote but less than likely) in excess of the amounts that the Company has accrued for legal and regulatory proceedings is up to $165 million. This estimated range of reasonably possible losses is based upon currently available information for those proceedings in which the Company is involved, takes into account the Company's best estimate of such losses for those matters for which an estimate can be made, and does not represent the Company's maximum potential loss exposure. Various aspects of the legal proceedings underlying the estimated range will change from time to time and actual results may vary significantly from the estimate.

The Company's estimated range above involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years and, in some cases, a wide range of business activities), unspecified damages and/or the novelty of the legal issues presented. The outcome of pending matters could be material to the Company's condensed consolidated financial condition, operating results and cash flows for a particular future period, depending on, among other things, the level of the Company's income for such period, and could adversely affect the Company's reputation.

On July 22, 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 resolving the agency's investigation with respect to certain student loan servicing practices. The order required the Discover Subsidiaries to provide redress of approximately $16 million to consumers who may have been affected by the activities described in the order related to certain collection calls, overstatements of minimum payment due amounts in billing statements and provision of interest paid information to consumers, and provide regulatory disclosures with respect to loans acquired in default. In addition, the Discover Subsidiaries were required to pay a $2.5 million civil money penalty to the CFPB. As required by the consent order, on October 19, 2015, the Discover Subsidiaries submitted to the CFPB a redress plan and a compliance plan designed to ensure that the Discover Subsidiaries provide redress and otherwise comply with the terms of the order. The CFPB is currently investigating Discover Bank's compliance with the order and certain student loan servicing practices. Discover Bank is cooperating with the CFPB in connection with the investigation. Discover Bank is enhancing the compliance plan submitted to the CFPB in 2015. The investigation could lead to a supervisory action, which may result in legal fees, penalties, fines and remediation expenses, and could require Discover Bank to change certain business practices.

On March 8, 2016, a class action lawsuit was filed against the Company, other credit card networks, other issuing banks, and EMVCo in the U.S. District Court for the Northern District of California (B&R Supermarket, Inc., d/b/a Milam's Market, et al. v. Visa, Inc. et al.) alleging a conspiracy by defendants to shift fraud liability to merchants with the migration to

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the EMV security standard and chip technology. Plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys' fees, costs and injunctive relief. In May 2017, the Court entered an order transferring the entire action to a federal court in New York that is presiding over certain related claims that are pending in the actions consolidated as MDL 1720. On March 11, 2018, the Court entered an order denying the plaintiffs' motion for class certification without prejudice to filing a renewed motion. Plaintiffs filed a renewed motion for class certification on July 16, 2018. Defendants filed their Opposition to Class Certification on March 15, 2019; a hearing date is yet to be scheduled. The Company is not in a position at this time to assess the likely outcome or its exposure, if any, with respect to this matter, but will seek to vigorously defend against all claims asserted by the plaintiffs.


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 financial instruments, which is based on whether the inputs to the valuation techniques used to measure the fair value of each financial instrument are observable or unobservable. It also requires certain disclosures about those measurements. The three-level valuation hierarchy is as follows:


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

•

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

•

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

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

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

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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 June 30, 2020
Assets
Fair value - OCI
U.S. Treasury securities	$	9,838	$	—	$	—	$	9,838
Residential mortgage-backed securities - Agency	—		363		—		363
Available-for-sale investment securities	$	9,838	$	363	$	—	$	10,201

Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges⁽¹⁾	$	—	$	5	$	—	$	5

Fair value - Net income
Derivative financial instruments - fair value hedges⁽¹⁾	$	—	$	2	$	—	$	2

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

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

Fair value - Net income
Derivative financial instruments - fair value hedges⁽¹⁾	$	—	$	4	$	—	$	4
Derivative financial instruments - foreign exchange forward contracts⁽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 U.S. Treasury securities and residential mortgage-backed securities. The fair value estimates of investment securities classified as Level 1, consisting of U.S. Treasury securities, are determined based on quoted market prices for the same securities. The Company classifies residential mortgage-backed securities as Level 2, the fair value estimates of which are based on the best information available. This data may consist of observed market prices, broker quotes or discounted cash flow models that incorporate assumptions such as benchmark yields, issuer spreads, prepayment speeds, credit ratings and losses, the priority of which may vary based on availability of information.

The Company validates the fair value estimates provided by pricing services primarily by comparison to valuations obtained through other pricing sources. The Company evaluates pricing variances amongst 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.

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At June 30, 2020, amounts reported in residential mortgage-backed securities reflect government-rated obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae with a par value of $345 million, a weighted-average coupon of 2.81% and a weighted-average remaining maturity of three years.

Derivative Financial Instruments

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

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

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

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair value in periods subsequent to the initial recognition of the assets is applicable if one or more of the assets is determined to be impaired. The Company had $59 million of impairments related to these assets during the three months ended June 30, 2020. See Note 5: Intangible Assets for more information on the impact of COVID-19 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 June 30, 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	$	—	$	293	$	—	$	293	$	284
Held-to-maturity investment securities	$	—	$	293	$	—	$	293	$	284

Net loan receivables	$	—	$	—	$	88,833	$	88,833	$	80,743

Carrying value approximates fair value⁽¹⁾
Cash and cash equivalents	$	15,138	$	—	$	—	$	15,138	$	15,138
Restricted cash	$	29	$	—	$	—	$	29	$	29
Other short-term investments	$	2,549	$	—	$	—	$	2,549	$	2,549
Accrued interest receivables⁽²⁾	$	—	$	977	$	—	$	977	$	977

Liabilities
Amortized cost
Time deposits⁽³⁾	$	—	$	34,303	$	—	$	34,303	$	33,366
Short-term borrowings	$	—	$	—	$	—	$	—	$	—

Long-term borrowings - owed to securitization investors	$	—	$	12,701	$	144	$	12,845	$	12,766
Other long-term borrowings	—		11,157		—		11,157		10,428
Long-term borrowings	$	—	$	23,858	$	144	$	24,002	$	23,194

Carrying value approximates fair value⁽¹⁾
Accrued interest payables⁽²⁾	$	—	$	255	$	—	$	255	$	255

(1) The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year).
(2) Accrued interest receivable and payable carrying values are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company's
condensed consolidated statements of financial condition.
(3) Excludes deposits without contractually defined maturities for all periods presented.

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

Balance at December 31, 2019	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Carrying Value
Assets
Amortized cost
Residential mortgage-backed securities - Agency	$	—	$	274	$	—	$	274	$	272
Held-to-maturity investment securities	$	—	$	274	$	—	$	274	$	272

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

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

Liabilities
Amortized cost
Time deposits⁽³⁾	$	—	$	34,910	$	—	$	34,910	$	34,381
Short-term borrowings	$	—	$	—	$	—	$	—	$	—

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

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


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


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


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


16.	Derivatives and Hedging Activities

The Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or speculative purposes. Certain derivatives used to manage the Company's exposure to foreign currency are not designated as hedges and do not qualify for hedge accounting.

Derivatives may give rise to counterparty credit risk, which generally is addressed through collateral arrangements as described under the sub-heading "— Collateral Requirements and Credit-Risk Related Contingency Features." The Company enters into derivative transactions with established dealers that meet minimum credit criteria established by the Company. All counterparties must be pre-approved prior to engaging in any transaction with the Company. Counterparties are monitored on a regular basis by the Company to ensure compliance with the Company's risk policies and limits. In determining the counterparty credit risk valuation adjustment for the fair values of derivatives, the Company considers collateral and legally enforceable master netting agreements that mitigate credit exposure to related counterparties.

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

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financial condition. Collateral amounts recorded in the condensed consolidated statements of financial condition are based on the net collateral posted or held position for each applicable legal entity's master netting arrangement with each counterparty.

Derivatives Designated as Hedges

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

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 payments on credit card securitized debt and deposits. The Company's outstanding cash flow hedges are for an initial maximum period of seven years for deposits. The derivatives are designated as hedges of the risk of changes in cash flows on the Company's Federal Funds rate-based interest payments, and qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815").

The change in the fair value of derivatives designated as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows affect earnings. Amounts reported in AOCI related to derivatives at June 30, 2020 will be reclassified to interest expense as interest payments are accrued on certain of the Company's floating-rate securitized debt and deposits. During the next 12 months, the Company estimates it will reclassify $7 million of pretax expense to interest expense related to its derivatives designated as cash flow hedges.

Fair Value Hedges

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

Derivatives Not Designated as Hedges

Foreign Exchange Forward Contracts

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

Derivatives Cleared Through an Exchange

The legal characterization of cash 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 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):

	June 30, 2020								December 31, 2019
	Notional Amount		Number of Outstanding Derivative Contracts	Derivative Assets		Derivative Liabilities			Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedges
Interest rate swaps—cash flow hedge	$	900	3	$	—	$	5		$	900	$	—	$	2
Interest rate swaps—fair value hedge	$	13,475	17	—		2			$	14,275	—		4
Derivatives not designated as hedges
Foreign exchange forward contracts⁽¹⁾	$	23	6	—		—			$	38	—		1
Total gross derivative assets/liabilities⁽²⁾				—		7					—		7

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


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

(2)

In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At June 30, 2020, the Company had one outstanding contracts with a total notional amount of $13 million and immaterial fair value. At December 31, 2019, the Company had two outstanding contracts with a total notional amount of $42 million and immaterial fair value.


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

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

	June 30, 2020				December 31, 2019
	Carrying Amount of Hedged Assets/Liabilities		Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities		Carrying Amount of Hedged Assets/Liabilities		Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of Hedged Assets/Liabilities
Long-term borrowings	$	13,836	$	398	$	14,244	$	13

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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 in Income
	Interest Expense
	Deposits			Long-Term Borrowings			Other Income
For the Three Months Ended June 30, 2020
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded	$	(340	)	$	(142	)	$	14

The effects of cash flow and fair value hedging
Losses on cash flow hedging relationship
Amounts reclassified from OCI into earnings	$	(4	)	$	(1	)	$	—

Gains on fair value hedging relationship
Gains on hedged items	$	—		$	11		$	—
Gains on interest rate swaps	—			38			—
Total gains on fair value hedges	$	—		$	49		$	—

For the Three Months Ended June 30, 2019
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded	$	(401	)	$	(244	)	$	22

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

(Losses) gains on fair value hedging relationship
Losses on hedged items	$	—		$	(85	)	$	—
Gains on interest rate swaps	—			74			—
Total losses on fair value hedges	$	—		$	(11	)	$	—

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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 in Income
	Interest Expense
	Deposits			Long-Term Borrowings			Other Income
For the Six Months Ended June 30, 2020
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded	$	(713	)	$	(353	)	$	42

The effects of cash flow and fair value hedging
Losses on cash flow hedging relationship
Amounts reclassified from OCI into earnings	$	(5	)	$	(2	)	$	—

(Losses) gains on fair value hedging relationship
Losses on hedged items	$	—		$	(385	)	$	—
Gains on interest rate swaps	—			443			—
Total gains on fair value hedges	$	—		$	58		$	—

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

For the Six Months Ended June 30, 2019
Total amounts of income and expense line items presented in the statements of income in which the effects of fair value or cash flow hedges are recorded	$	(787	)	$	(490	)	$	50

The effects of cash flow and fair value hedging
Gains on cash flow hedging relationship
Amounts reclassified from OCI into earnings	$	2		$	3		$	—

(Losses) gains on fair value hedging relationship
Losses on hedged items	$	—		$	(140	)	$	—
Gains on interest rate swaps	—			116			—
Total losses on fair value hedges	$	—		$	(24	)	$	—

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 these derivatives held with that counterparty. The Company may also be required to post collateral with a counterparty for its fair value and cash flow hedge interest rate swaps depending on the credit rating it or Discover Bank receives from specified major credit rating agencies. These collateral receivable or payable amounts are generally not offset against the fair value of these derivatives, but are recorded separately in other assets or deposits. Most of the Company's cash collateral amounts relate to positions cleared through an exchange and are reflected as offsets to the associated derivatives balances recorded in other assets and accrued expenses and other liabilities.

At June 30, 2020, Discover Bank's credit rating met specified thresholds set by its counterparties. However, if its credit rating is reduced below investment grade, Discover Bank would be required to post additional collateral. The amount of

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additional collateral as of June 30, 2020 would have been $20 million. DFS (Parent Company) had no outstanding derivatives as of June 30, 2020, and therefore, no collateral was required.

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


17.	Segment Disclosures

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

•

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

•

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

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


•	The Company aggregates operating segments when determining reportable segments.


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


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


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


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


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

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

	Direct Banking			Payment Services		Total
For the Three Months Ended June 30, 2020
Interest income
Credit card loans	$	2,173		$	—	$	2,173
Private student loans	182			—		182
Personal loans	231			—		231
Other	86			—		86
Total interest income	2,672			—		2,672
Interest expense	482			—		482
Net interest income	2,190			—		2,190
Provision for credit losses	2,046			—		2,046
Other income	354			118		472
Other expense	982			95		1,077
(Loss) income before income taxes	$	(484	)	$	23	$	(461	)

For the Three Months Ended June 30, 2019
Interest income
Credit card loans	$	2,396		$	—	$	2,396
Private student loans	203			—		203
Personal loans	241			—		241
Other	136			1		137
Total interest income	2,976			1		2,977
Interest expense	645			—		645
Net interest income	2,331			1		2,332
Provision for credit losses⁽¹⁾	787			—		787
Other income	436			84		520
Other expense	1,039			39		1,078
Income before income taxes	$	941		$	46	$	987

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

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

	Direct Banking			Payment Services		Total
For the Six Months Ended June 30, 2020
Interest income
Credit card loans	$	4,589		$	—	$	4,589
Private student loans	387			—		387
Personal loans	485			—		485
Other	193			—		193
Total interest income	5,654			—		5,654
Interest expense	1,066			—		1,066
Net interest income	4,588			—		4,588
Provision for credit losses	3,853			—		3,853
Other income	720			242		962
Other expense	2,100			136		2,236
(Loss) income before income tax expense	$	(645	)	$	106	$	(539	)

For the Six Months Ended June 30, 2019
Interest income
Credit card loans	$	4,758		$	—	$	4,758
Private student loans	408			—		408
Personal loans	478			—		478
Other	269			1		270
Total interest income	5,913			1		5,914
Interest expense	1,277			—		1,277
Net interest income	4,636			1		4,637
Provision for credit losses⁽¹⁾	1,596			—		1,596
Other income	808			170		978
Other expense	2,028			74		2,102
Income before income tax expense	$	1,820		$	97	$	1,917


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

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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 amounts classified as other income.

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

	Direct Banking		Payment Services		Total
For the Three Months Ended June 30, 2020
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾	$	222	$	15	$	237
Protection products revenue	44		—		44
Transaction processing revenue	—		49		49
Other income	3		11		14
Total other income subject to ASC 606⁽²⁾	269		75		344
Other income not subject to ASC 606
Loan fee income	85		—		85
Gains on equity investments	—		43		43
Total other income not subject to ASC 606	85		43		128
Total other income by operating segment	$	354	$	118	$	472

For the Three Months Ended June 30, 2019
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾	$	283	$	16	$	299
Protection products revenue	49		—		49
Transaction processing revenue	—		48		48
Other income	2		20		22
Total other income subject to ASC 606⁽²⁾	334		84		418
Other income not subject to ASC 606
Loan fee income	102		—		102
Gains on equity investments	—		—		—
Total other income not subject to ASC 606	102		—		102
Total other income by operating segment	$	436	$	84	$	520


(1)	Net of rewards, including Cashback Bonus rewards, of $385 million and $460 million for the three months ended June 30, 2020 and 2019, respectively.


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

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


	Direct Banking		Payment Services		Total
For the Six Months Ended June 30, 2020
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾	$	419	$	34	$	453
Protection products revenue	91		—		91
Transaction processing revenue	—		93		93
Other income	6		36		42
Total other income subject to ASC 606⁽²⁾	516		163		679
Other income not subject to ASC 606
Loan fee income	204		—		204
Gains on equity investments	—		79		79
Total other income not subject to ASC 606	204		79		283
Total other income by operating segment	$	720	$	242	$	962

For the Six Months Ended June 30, 2019
Other income subject to ASC 606
Discount and interchange revenue, net⁽¹⁾	$	500	$	30	$	530
Protection products revenue	98		—		98
Transaction processing revenue	—		94		94
Other income	4		46		50
Total other income subject to ASC 606⁽²⁾	602		170		772
Other income not subject to ASC 606
Loan fee income	206		—		206
Gains on equity investments	—		—		—
Total other income not subject to ASC 606	206		—		206
Total other income by operating segment	$	808	$	170	$	978


(1)	Net of rewards, including Cashback Bonus rewards, of $863 million and $906 million for the six months ended June 30, 2020 and 2019, respectively.


(2)	Excludes $1 million and $2 million of deposit product fees that are reported within net interest income for the six months ended June 30, 2020 and 2019, respectively.

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


19.	Subsequent Events

The Company has evaluated events and transactions that have occurred subsequent to June 30, 2020 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," and similar expressions. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report, and there is no undertaking to update or revise them as more information becomes available.

The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: the effect of the coronavirus disease 2019 ("COVID-19") pandemic and measures taken to mitigate the pandemic, including their impact on our credit quality and business operations as well as their impact on general economic and financial markets, changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence and consumer debt and investor sentiment; the impact of current, pending and future legislation, regulation, supervisory guidance and regulatory and legal actions, including, but not limited to, those related to financial regulatory reform, consumer financial services practices, anti-corruption and funding, capital and liquidity; the actions and initiatives of current and potential competitors; our ability to manage our expenses; our ability to successfully achieve card acceptance across our networks and maintain relationships with network participants; our ability to sustain and grow our private student loan, personal loan and home equity loan products; difficulty obtaining regulatory approval for, financing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; our ability to manage our credit risk, market risk, liquidity risk, operational risk, legal and compliance risk and strategic risk; the availability and cost of funding and capital; access to deposit, securitization, equity, debt and credit markets; the impact of rating agency actions; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; losses in our investment portfolio; limits on our ability to pay dividends and repurchase our common stock; limits on our ability to receive payments from our subsidiaries; fraudulent activities or material security breaches of key systems; our ability to remain organizationally effective; our ability to increase or sustain Discover card usage or attract new customers; our ability to maintain relationships with merchants; the effect of political, economic and market conditions, geopolitical events and unforeseen or catastrophic events; our ability to introduce new products and services; our ability to manage our relationships with third-party vendors; our ability to maintain current technology and integrate new and acquired systems; our ability to collect amounts for disputed transactions from merchants and merchant acquirers; our ability to attract and retain employees; our ability to protect our reputation and our intellectual property; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. We routinely evaluate and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or our debt or equity securities.

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

Introduction and Overview

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

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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.

Change in Accounting Principle

Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments became effective for us on January 1, 2020. The standard significantly amended accounting principles generally accepted in the United States by replacing the incurred loss model with the current expected credit loss ("CECL") approach. The CECL approach requires our allowance for credit losses to be based on an estimate of all anticipated credit losses over the remaining expected life of all of the loans, as opposed to an estimate of incurred losses as of the balance sheet date. For additional information on CECL, see Note 1: Background and Basis of Presentation to our condensed consolidated financial statements.

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


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


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


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


•	Immaterial adjustments to the following:


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


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

Additional Information for Comparability

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

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

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

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


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


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


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

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

COVID-19 Pandemic Response and Impact

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

Outlook and Financial Results

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

Regulatory and Legislative

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

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

Loan Receivables

In our loan portfolio, we continue to lend to customers, but have tightened standards for new accounts and for growing existing accounts. Currently, we are providing support to our customers impacted by COVID-19 across all of our loan products, expanding payment plans notably through skip-a-pay programs, to help our customers during this period of economic difficulty. Skip-a-pay programs were intended to be a short-term option and we plan to end program enrollments in the near future. After that, we will continue to offer assistance to those who qualify on a customer-by-customer basis. We have materially increased our allowance for credit losses in anticipation of higher credit losses caused by further deterioration in the macroeconomic outlook. The reserve build for the quarter ended June 30, 2020 took into account our best estimate for the impact of programs put in place by federal and state governments and agencies to mitigate the economic impact of the pandemic. It is unclear whether the measures employed to date are complete or whether federal and state governments and agencies may take additional action that could impact our business. Refer to "— Loan Quality — Impact of COVID-19 on Loan Quality" for more details on the current period allowance for credit losses.

Capital and Liquidity

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

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

Payment Services

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

Fair Value and Impairments

With the uncertain nature of the pandemic's overall impact to the economy, we continue to assess the impact of COVID-19 with respect to our goodwill and intangible assets, investment securities and other long-term assets. During the second quarter of 2020, we identified a triggering event due to changes in the international travel and entertainment businesses that continue to persist and a declining revenue outlook for the foreseeable future resulting from COVID-19. As a result, we conducted interim impairment testing of our non-amortizable intangible assets in the Payment Services segment and recognized impairment charges totaling $59 million. For more information on the impact of COVID-19 on intangible assets, see Note 5: Intangible Assets to our condensed consolidated financial statements.

Business Continuity and Operations

We have informed employees that they may continue to work from home and will not be required to return to our physical locations until January 1, 2021, at the earliest. Notwithstanding the shift to work-from-home, our operations continue largely unaffected due to the successful implementation of certain of our business continuity plans. Operational changes necessitated by the rapid shift in employee location have not thus far had a material adverse effect on us or our

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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 our risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019 as well as "Item 1A — Risk Factors" in Part II of this quarterly report on Form 10-Q.

Regulatory Environment and Developments

The COVID-19 pandemic has dramatically impacted the U.S. and global economies. We are working with our customers to address their unique financial situations, while balancing safety and soundness requirements. We are in contact with our regulators, who have proactively encouraged banks to work with borrowers during this time of stress. Among other things, the federal banking agencies have taken the following actions to proactively address the economic disruptions caused by the COVID-19 outbreak and provide flexibility for banking organizations to work with impacted businesses and consumers:


•	Market Stabilization: The Federal Reserve reduced short-term interest rates to near zero and launched numerous programs and facilities, including the Term Asset-Backed Securities Loan Facility, to increase market liquidity and promote stability;


•	Capital & Liquidity Flexibility: Regulatory agencies issued statements urging banks to use their capital and liquidity buffers to continue lending during the crisis;


•	CECL: A joint agency interim final rule provided banks, such as Discover, with the option to delay CECL's impact on regulatory capital for two years, followed by three year phase-in of those impacts;


•	Flexibility to Work with Consumers: Joint agency guidance encouraged banks to work with borrowers and provided guidelines for prudent relief programs, and agencies worked with FASB to provide accounting-classification flexibility for certain short-term loan modifications;


•	Pandemic Planning: The Federal Financial Institutions Examination Council released updated guidance to remind banks of actions they should be taking to minimize potential adverse effects of a pandemic on business continuity; and


•	Supervisory Flexibility: Regulatory agencies have indicated willingness to work with institutions to provide flexibility and minimize burdens of supervisory activities, including extending deadlines for data collections.

In addition to the above regulatory actions, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020 to provide relief to U.S. businesses and consumers impacted by the COVID-19 crisis. The CARES Act includes approximately $2 trillion of financial assistance, principally through federal loan programs intended to provide relief to consumers who have suffered job losses and aid businesses that have experienced disruption as a result of the pandemic. Additionally, the CARES Act provided expanded unemployment benefits and direct payments to impacted consumers and offered relief for consumers through changes to credit reporting requirements and mandated forbearance on certain federally backed mortgages and student loans. Specific to financial institutions, the CARES Act provided the option for financial institutions, including Discover, to temporarily suspend certain accounting requirements related to troubled debt restructurings ("TDRs") and delay the effective date of CECL for the duration of the national emergency. See "— Banking — Capital Standards and Stress Testing" below for more information. It also authorized the Federal Deposit Insurance Corporation ("FDIC") to establish an emergency guarantee program, which could be used to temporarily increase deposit insurance limits. Additional legislative and regulatory action may be proposed and could include requirements that could significantly impact our business practices. The impact of these legislative and regulatory initiatives on us, the economy and the U.S. consumer will depend upon a wide variety of factors some of which are yet to be identified.

Banking

Capital Standards and Stress Testing

Discover is subject to supervisory stress tests every other year rather than annually and is required to submit annual capital plans to the Federal Reserve and subject to other core components of the enhanced prudential standards rules, such as risk management and risk committee requirements and liquidity risk management regulations. However, Discover is not required to submit company-run capital stress tests and is no longer subject to the liquidity coverage ratio.

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On June 25, 2020, we received results of the Federal Reserve’s supervisory stress tests and preliminary Stress Capital Buffer ("SCB") requirement. The notice indicated that Discover’s capital ratios remain above all required minimums under each of the supervisory scenarios and our preliminary SCB requirement was set at 3.5%, which is expected to be finalized in August and effective beginning October 1, 2020. In addition to the stress test and SCB results, the Federal Reserve also notified Discover that it and all other firms that participated in the 2020 Comprehensive Capital Analysis and Review exercise would be required to submit a revised capital plan that will be assessed by the Federal Reserve later this year under newly developed scenarios incorporating economic stresses reflecting the ongoing COVID-19 pandemic. In the interim, the Federal Reserve has capped covered firms’ capital distributions based on a formula that restricts most share repurchases and limits dividends based on average net income during the past four quarters. Consistent with regulatory expectations, our management also continues to conduct forward-looking sensitivity analysis and stress tests to assess the potential impact of economic changes resulting from the COVID-19 pandemic on capital planning and provides this information to our Board of Directors as well as our regulators.

LIBOR

On July 27, 2017, the UK Financial Conduct Authority 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. LIBOR is commonly used as a benchmark to determine interest rates for financial instruments, such as floating-rate asset-backed securities issued by Discover Card Execution Note Trust, and certain financial products, including some of our floating-rate student loans. A cross-functional team is overseeing and managing our transition away from the use of LIBOR. This team monitors developments associated with LIBOR alternatives, assesses evolving industry and marketplace norms and conventions for LIBOR indexed instruments, evaluates the impact that the inability to determine LIBOR after 2021 will have on us, and facilitates the operational changes associated with the use of alternative benchmark rates. On June 4, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued a Notice of Proposed Rulemaking (“NPR”) concerning the anticipated discontinuation of LIBOR. This NPR sets forth amendments to Regulation Z, the implementing regulation for the Truth in Lending Act, and includes proposed examples of replacement indices for LIBOR that meet Regulation Z standards for open- and closed-end products. Discover is monitoring the evolution of this NPR and will take into account the provisions of any related Final Rule in our efforts to transition away from the use of LIBOR.

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 preventing "unfair, deceptive or abusive acts or practices" and ensuring that consumers have access to fair, transparent and competitive financial products and services. The CFPB has rulemaking, supervision and enforcement powers with respect to federal consumer protection laws. 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 bi-annual review of the consumer credit card market. In response to the COVID-19 pandemic, federal banking regulators as well as the CFPB have encouraged banks to work with their borrowers and provided regulatory flexibility, given exam flexibility, delayed the Home Mortgage Disclosure Act and other data collections, and promoted other areas for relief. Similar to the banking regulators, we continue to be in regular contact with the CFPB as the COVID-19 pandemic evolves. Similarly, we are monitoring the activity in the states and are in contact with state officials, as necessary, to ensure we are aware of and in compliance with state requirements responding to COVID-19.

Data Security and Privacy

Policymakers at the federal and state levels remain focused on measures to enhance data security and data breach incident response requirements. Furthermore, regulations and legislation at various levels of government have been proposed and enacted to augment data privacy standards. For example, the California Consumer Privacy Act ("CCPA") creates a broad set of privacy rights and remedies modeled in part on the European Union's General Data Protection Regulation. The CCPA went into effect on January 1, 2020, and proposed regulations have yet to be finalized. California Attorney General Enforcement for CCPA began on July 1, 2020. The original proponent of the CCPA has launched a 2020 California ballot initiative with the goal of expanding the rights and remedies created by the CCPA, while protecting the new law from future legislative amendments. This initiative will appear on the November 2020 ballot. While it is too early to determine the full impact of these developments, they may result in the imposition of requirements on Discover and other providers of consumer financial services or networks that could adversely affect our businesses.

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Payment Networks

The Dodd-Frank Act contains several provisions impacting the debit card market, including network participation requirements and interchange fee limitations. The changing debit card environment, including competitor actions related to merchant and acquirer pricing and transaction routing strategies, has adversely affected, and is expected to continue to adversely affect, our PULSE network's business practices, network transaction volume, revenue and prospects for future growth. We continue to closely monitor competitor pricing and technology development strategies in order to assess their impact on our business and on competition in the marketplace. Following an inquiry by the U.S. Department of Justice into some of these competitor pricing strategies, PULSE filed a lawsuit against Visa in late 2014 with respect to these competitive concerns. The Court granted summary judgment in favor of Visa in August 2018. PULSE filed an appeal on January 17, 2019 and Visa filed their response to the appeal on April 5, 2019. The Fifth Circuit Court of Appeals held a hearing on the appeal on October 9, 2019 and will hold an additional hearing on the appeal in the coming months. Visa also faces ongoing merchant litigation as it relates to the underlying anticompetitive behavior that is the subject of PULSE's case against Visa. In addition, the Dodd-Frank Act's network participation requirements impact PULSE's ability to enter into exclusivity arrangements, which affects PULSE's current business practices and may materially adversely affect its network transaction volume and revenue.

For more information on how the regulatory and supervisory environment, ongoing enforcement actions and findings, and changes to laws and regulations could impact our strategies, the value of our assets, or otherwise adversely affect our business see "Risk Factors — Current Economic and Regulatory Environment" in our annual report on Form 10-K year ended December 31, 2019. For more information on recent matters affecting us, see Note 14: Litigation and Regulatory Matters to our condensed consolidated financial statements.

Segments

We manage our business activities in two segments, Direct Banking and Payment Services, based on the products and services provided. For a detailed description of the operations of each segment, as well as the allocation conventions used in 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 June 30,					For the Six Months Ended June 30,
	2020			2019		2020			2019
Direct Banking
Interest income
Credit card	$	2,173		$	2,396	$	4,589		$	4,758
Private student loans	182			203		387			408
Personal loans	231			241		485			478
Other	86			136		193			269
Total interest income	2,672			2,976		5,654			5,913
Interest expense	482			645		1,066			1,277
Net interest income	2,190			2,331		4,588			4,636
Provision for credit losses⁽¹⁾	2,046			787		3,853			1,596
Other income	354			436		720			808
Other expense	982			1,039		2,100			2,028
(Loss) income before income taxes	(484		)	941		(645		)	1,820
Payment Services
Net interest income	—			1		—			1
Provision for credit losses⁽¹⁾	—			—		—			—
Other income	118			84		242			170
Other expense	95			39		136			74
Income before income taxes	23			46		106			97
Total (loss) income before income taxes	$	(461	)	$	987	$	(539	)	$	1,917


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

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2020		2019		2020		2019
Network Transaction Volume
PULSE Network	$	52,859	$	47,389	$	102,033	$	94,495
Network Partners	7,280		5,950		14,260		11,613
Diners Club⁽¹⁾	4,339		8,472		12,076		16,750
Total Payment Services	64,478		61,811		128,369		122,858
Discover Network—Proprietary⁽²⁾	32,349		37,891		67,529		71,942
Total Volume	$	96,827	$	99,702	$	195,898	$	194,800
Transactions Processed on Networks
Discover Network	565		671		1,210		1,276
PULSE Network	1,209		1,183		2,398		2,315
Total	1,774		1,854		3,608		3,591
Credit Card Volume
Discover Card Volume⁽³⁾	$	33,105	$	39,935	$	70,579	$	76,321
Discover Card Sales Volume⁽⁴⁾	$	30,721	$	36,664	$	64,709	$	69,563


(1)	Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment.


(2)	Represents gross Discover card sales volume on the Discover Network.


(3)	Represents Discover card activity related to sales net of returns, balance transfers, cash advances and other activity.


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

Direct Banking

Our Direct Banking segment reported pretax losses of $484 million and $645 million, respectively, for the three and six months ended June 30, 2020 as compared to pretax income of $941 million and $1.8 billion, respectively, for the three and six months ended June 30, 2019.

Net interest income decreased for the three and six months ended June 30, 2020 as compared to the same periods in 2019 primarily driven by lower yields on credit card loans partially offset by lower funding costs. Interest income decreased during the three and six months ended June 30, 2020 as compared to the same periods in 2019 as a result of lower yields on credit card loans, which was the result of lower market rates. Interest expense decreased during the three and six months ended June 30, 2020 as compared to the same periods in 2019 due to lower funding costs and lower average market rates.

For the three and six months ended June 30, 2020, the provision for credit losses increased as compared to the same periods in 2019, which, in addition to the impact of life of loan reserving under CECL, primarily reflects a significant change in economic outlook due to 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 decreased for the three and six months ended June 30, 2020 as compared to the same periods in 2019, which was primarily due to a decrease in net discount and interchange revenue and loan fee income. The decrease in discount and interchange revenue was partially offset by a decrease in rewards costs, both of which were the result of lower sales volume due to the impacts of the COVID-19 pandemic. Loan fee income decreased due to lower sales volume and late fees. Sales volume was lower driven by the COVID-19 impacts. Late fees decreased as a result of lower delinquencies as we continue to work with our customers through the economic stresses from COVID-19.

Total other expense decreased for the three months ended June 30, 2020 as compared to the same period in 2019, which was primarily due to marketing and business development driven by COVID-19 related expense reductions in brand advertising for card. Total other expense increased for the six months ended June 30, 2020 as compared to the same period in 2019, which was primarily due to higher employee compensation and benefits driven by a larger headcount base and higher average salaries.

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Discover card sales volume was $30.7 billion and $64.7 billion, respectively, for the three and six months ended June 30, 2020, which was a decrease of 16.2% and 7.0%, respectively, as compared to the same periods in 2019. This volume decline was primarily driven by lower consumer spending as a result of COVID-19.

Payment Services

Our Payment Services segment reported pretax income of $23 million and $106 million, respectively, for the three and six months ended June 30, 2020 as compared to pretax income of $46 million and $97 million, respectively, for the same periods in 2019. The increase in segment pretax income was primarily due to gains on equity investment sales during each quarter. Other expense increased primarily due to a non-cash impairment charge on the Diners Club business of $59 million driven by changes in the international travel and entertainment businesses that continue to persist and a declining revenue outlook for the foreseeable future resulting from COVID-19.

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 changes in economic or market conditions, significant changes to the estimated amount from period to period are also possible. Management believes the current assumptions and other considerations used to estimate amounts reflected in our 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 certain cases, could have a material effect on our consolidated financial condition. Management has identified the estimates related to our allowance for credit losses on loan receivables, the evaluation of goodwill for potential impairment and the accrual of income taxes as critical accounting estimates. Discussion of critical accounting estimates related to the evaluation of goodwill for potential impairment and the accrual of income taxes are discussed in greater detail in our annual report on Form 10-K for the year ended December 31, 2019. That discussion can be found within "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 these critical accounting estimates related to the evaluation of goodwill for potential impairment and the accrual of income taxes from those discussed in our annual report on Form 10-K for the year ended December 31, 2019. Discussion of our critical accounting estimate related to our allowance for credit losses on loan receivables, which has been updated for adoption of the CECL approach for estimating losses on January 1, 2020, is discussed below. For more information on CECL adoption, see Note 1: Background and Basis of Presentation to our condensed consolidated financial statements.

Allowance for Credit Losses on Loan Receivables

We base our allowance for credit losses on several analyses that help us estimate credit losses anticipated over the remaining expected life of loan receivables as of the balance sheet date. In deriving this estimate, we consider the collectibility 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. Our estimation process includes models that predict customer losses based on risk characteristics and portfolio attributes, macroeconomic variables, and historical data and analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced to determine the allowance. The allowance for credit losses for each loan product type is based on: 1) a reasonable and supportable forecast period, 2) a reversion period and 3) a post-reversion period based on historical information covering the remaining life of the loan. For credit card loans, we use a modeling framework that includes the following components: 1) probability of default, 2) exposure at default and 3) loss given default, as well as estimated recoveries for estimating expected credit losses. For student loans and personal loans, we use vintage-based models that estimate expected credit losses net of recoveries over the life of the loans. The considerations in these models include past and current loan performance, loan growth and seasoning, risk management practices, account collection strategies, economic conditions, bankruptcy filings, policy changes and forecasting uncertainties. Given the same information, others may reach different reasonable estimates.

The key assumptions requiring significant judgment in the allowance for credit losses estimate on a quarterly basis include determination of the lengths of the reasonable and supportable forecast and reversion periods, as well as the macroeconomic variables selected for use in loss forecast models. The lengths of the reasonable and supportable forecast and reversion periods can vary and are subject to a quarterly assessment that considers the economic outlook and level of variability among macroeconomic forecasts. Generally, a straight-line method is used to revert from the reasonable and

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supportable forecast period to the post-reversion period, but in certain stressed scenarios, a weighted approach may be deemed more appropriate. The specific macroeconomic variables most significant to the loss forecast models may change over time, but generally include measures of consumer indebtedness, unemployment, personal income and housing-related metrics.

The overall economic environment directly impacts both the reasonable and supportable forecast and reversion periods, as well as the macroeconomic variables that are used in the loss forecast models. If management used different assumptions about the economic environment in estimating expected credit losses, the impact to the allowance for credit losses could have a material effect on our consolidated financial condition and results of operations. In addition, if we experience a rapidly changing economic environment, as experienced recently under the COVID-19 pandemic, the uncertainty around the credit loss forecasts may increase, both due to the uncertainty of the economic forecasts and the challenges our models may have in incorporating them. Although the estimation process is broader than any single macroeconomic variable, some variables have a more significant impact on the allowance for credit losses estimate. One example is a macroeconomic forecast reflecting a 25 basis point change in the Unemployment Rate variable, which could move the card allowance for credit losses estimate by approximately $190 million. See "— Loan Quality" and Note 3: Loan Receivables to our condensed consolidated financial statements for further details about our allowance for credit losses.

Earnings Summary

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

	For the Three Months Ended June 30,					2020 vs. 2019 (Decrease) Increase					For the Six Months Ended June 30,					2020 vs. 2019 (Decrease) Increase
	2020			2019		$			%		2020			2019		$			%
Interest income	$	2,672		$	2,977	$	(305	)	(10	)%	$	5,654		$	5,914	$	(260	)	(4	)%
Interest expense	482			645		(163		)	(25	)%	1,066			1,277		(211		)	(17	)%
Net interest income	2,190			2,332		(142		)	(6	)%	4,588			4,637		(49		)	(1	)%
Provision for credit losses⁽¹⁾	2,046			787		1,259			160	%	3,853			1,596		2,257			141	%
Net interest income after provision for credit losses	144			1,545		(1,401		)	(91	)%	735			3,041		(2,306		)	(76	)%
Other income	472			520		(48		)	(9	)%	962			978		(16		)	(2	)%
Other expense	1,077			1,078		(1		)	—	%	2,236			2,102		134			6	%
(Loss) income before income taxes	(461		)	987		(1,448		)	(147	)%	(539		)	1,917		(2,456		)	(128	)%
Income tax (benefit) expense	(93		)	234		(327		)	(140	)%	(110		)	438		(548		)	(125	)%
Net (loss) income	$	(368	)	$	753	$	(1,121	)	(149	)%	$	(429	)	$	1,479	$	(1,908	)	(129	)%


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

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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 long-term borrowings, including amounts owed to securitization investors. Net interest income is influenced by the following:


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


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


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


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


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


•	Changes in the interest rate environment, including the levels of interest rates and the relationships among interest rate indices, such as the prime rate, the Federal Funds rate, 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 June 30,
	2020							2019
	Average Balance			Yield/Rate		Interest		Average Balance			Yield/Rate		Interest
Assets
Interest-earning assets
Cash and cash equivalents	$	14,655		0.11	%	$	5	$	11,641		2.41	%	$	70
Restricted cash	226			0.25	%	—		888			2.32	%	5
Other short-term investments	440			0.15	%	—		1,000			2.66	%	7
Investment securities	10,586			2.12	%	55		6,265			2.52	%	39
Loan receivables⁽¹⁾
Credit card⁽²⁾	70,848			12.34	%	2,173		71,492			13.44	%	2,396
Private student loans	9,826			7.46	%	182		9,464			8.59	%	203
Personal loans	7,475			12.40	%	231		7,419			13.02	%	241
Other	1,622			6.49	%	26		983			6.83	%	16
Total loan receivables	89,771			11.70	%	2,612		89,358			12.82	%	2,856
Total interest-earning assets	115,678			9.29	%	2,672		109,152			10.94	%	2,977
Allowance for credit losses⁽³⁾	(6,927		)					(3,133		)
Other assets	5,717							4,539
Total assets	$	114,468						$	110,558
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits	$	33,993		2.46	%	208		$	33,576		2.56	%	214
Money market deposits⁽⁵⁾	7,717			1.22	%	24		6,973			2.22	%	39
Other interest-bearing savings deposits	33,532			1.30	%	108		27,875			2.13	%	148
Total interest-bearing deposits	75,242			1.81	%	340		68,424			2.35	%	401
Borrowings
Short-term borrowings	—			0.25	%	—		—			2.59	%	—
Securitized borrowings⁽⁴⁾⁽⁵⁾	12,960			1.24	%	39		15,179			3.01	%	114
Other long-term borrowings⁽⁴⁾	11,375			3.63	%	103		10,932			4.75	%	130
Total borrowings	24,335			2.36	%	142		26,111			3.74	%	244
Total interest-bearing liabilities	99,577			1.95	%	482		94,535			2.73	%	645
Other liabilities and stockholders' equity	14,891							16,023
Total liabilities and stockholders' equity	$	114,468						$	110,558
Net interest income						$	2,190						$	2,332
Net interest margin⁽⁶⁾				9.81	%						10.47	%
Net yield on interest-earning assets⁽⁷⁾				7.61	%						8.57	%
Interest rate spread⁽⁸⁾				7.34	%						8.21	%

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Average Balance Sheet Analysis (dollars in millions)

	For the Six Months Ended June 30,
	2020							2019
	Average Balance			Yield/Rate		Interest		Average Balance			Yield/Rate		Interest
Assets
Interest-earning assets
Cash and cash equivalents	$	11,002		0.49	%	$	27	$	12,843		2.44	%	$	155
Restricted cash	427			0.85	%	2		846			2.33	%	10
Other short-term investments	220			0.15	%	—		558			2.66	%	7
Investment securities	10,607			2.15	%	113		5,261			2.57	%	67
Loan receivables⁽¹⁾
Credit card⁽²⁾	73,092			12.63	%	4,589		71,428			13.43	%	4,758
Private student loans	9,909			7.85	%	387		9,559			8.61	%	408
Personal loans	7,589			12.84	%	485		7,444			12.94	%	478
Other	1,545			6.60	%	51		925			6.84	%	31
Total loan receivables	92,135			12.03	%	5,512		89,356			12.81	%	5,675
Total interest-earning assets	114,391			9.94	%	5,654		108,864			10.96	%	5,914
Allowance for credit losses⁽³⁾	(6,389		)					(3,086		)
Other assets	5,689							4,497
Total assets	$	113,691						$	110,275
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits	$	33,778		2.52	%	423		$	33,901		2.52	%	424
Money market deposits⁽⁵⁾	7,397			1.46	%	54		7,013			2.22	%	77
Other interest-bearing savings deposits	32,435			1.47	%	236		27,120			2.13	%	286
Total interest-bearing deposits	73,610			1.95	%	713		68,034			2.33	%	787
Borrowings
Short-term borrowings	—			1.51	%	—		—			2.59	%	—
Securitized borrowings⁽⁴⁾⁽⁵⁾	13,524			1.78	%	120		15,521			3.03	%	233
Other long-term borrowings⁽⁴⁾	11,582			4.05	%	233		10,822			4.78	%	257
Total borrowings	25,106			2.83	%	353		26,343			3.75	%	490
Total interest-bearing liabilities	98,716			2.17	%	1,066		94,377			2.73	%	1,277
Other liabilities and stockholders’ equity	14,975							15,898
Total liabilities and stockholders’ equity	$	113,691						$	110,275
Net interest income						$	4,588						$	4,637
Net interest margin⁽⁶⁾				10.01	%						10.47	%
Net yield on interest-earning assets⁽⁷⁾				8.07	%						8.59	%
Interest rate spread⁽⁸⁾				7.77	%						8.23	%


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


(2)	Interest income on credit card loans includes $76 million and $65 million of amortization of balance transfer fees for the three months ended June 30, 2020 and 2019, respectively, and $158 million and $130 million for the six months ended June 30, 2020 and 2019, respectively.


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


(4)	Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding.


(5)	Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding.


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


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


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

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Loan Quality

Impact of COVID-19 on Loan Quality

COVID-19 and its impact to the economy has had a significant effect on our sales volume and loan growth during the first half of 2020. Also, while we continue to lend to customers, we have tightened standards for new accounts and for growing existing accounts.

We continue to provide support to our customers impacted by COVID-19. In response to the pandemic, to complement the assistance already available through our existing programs, we expanded borrower relief offerings to also include skip-a-pay programs and other loan modifications. The accounts using these modifications are generally excluded from TDR status either because the concessions are insignificant or they qualify for exemption pursuant to the CARES Act or interagency guidance.

As of June 30, 2020, we have enrolled approximately 650 thousand customers and $5.2 billion in receivables in skip-a-pay programs in total. Of those customers and receivables, 88 thousand and $1.0 billion, respectively, were still enrolled at quarter-end. We have seen skip-a-pay enrollments in our card portfolio steadily decrease after peak enrollment during the first week of April. The utilization of skip-a-pay programs has had a favorable impact on reported credit performance because, pursuant to regulatory guidelines, accounts enrolled in the programs do not advance through delinquency cycles in the same time frame as would have occurred without the programs. Specifically, current accounts enrolled in the programs do not advance to delinquency, and delinquent accounts enrolled in the programs do not advance to the next delinquency cycle, or to charge-off. At June 30, 2020, our delinquency ratios have been favorably impacted by customer usage of the skip-a-pay programs and are lower than comparative periods as a result.

Additionally, due to relief provided by the CARES Act or interagency guidance, certain customer accounts entering loan modification programs during the pandemic were excluded from being reported as TDRs. As a result, fewer modifications were reported as TDRs at June 30, 2020 than otherwise would have been. The table below reflects both the new modifications reported as TDRs and the amount of new modifications excluded from TDR classification as a result of regulatory relief (dollars in millions):



	For the Six Months Ended June 30, 2020
	Accounts that entered a program and were classified as TDRs during the period			Accounts excluded from the TDR designation due to regulatory exemptions
	Number of Accounts	Balances		Number of Accounts	Balances
Credit card loans	120,702	$	800	64,408	$	502
Private student loans	1,780	$	33	1,363	$	25
Personal loans	3,880	$	51	168	$	3

Despite the lower delinquency and TDR trends resulting from the relief we are providing to our customers, we believe we have appropriately reflected the risk presented by the accounts using these programs as well as the worsening economic impact of the pandemic on our customers in the allowance for credit losses. The increases in the allowance for credit losses during the first half of 2020 are indicative of the deterioration in consumer credit we expect related to the pandemic. The year-to-date build in the allowance of $4.8 billion is largely comprised of card loans but includes increases across all loan products. Labor markets, historically indicative of trends in credit losses, have been significantly stressed by the pandemic with unemployment reaching unprecedented levels. The higher allowance for credit losses reflects our view of this economic impact on our customers. Refer to Note 3: Loan Receivables to our condensed consolidated financial statements for more details on modification programs, troubled debt restructurings, and the allowance for credit losses.

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

	June 30, 2020			December 31, 2019
Credit card loans	$	70,201		$	77,181
Other loans
Private student loans	9,730			9,653
Personal loans	7,316			7,687
Other	1,680			1,373
Total other loans	18,726			18,713
Total loan receivables	88,927			95,894
Allowance for credit losses⁽¹⁾	(8,184		)	(3,383		)
Net loan receivables	$	80,743		$	92,511


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

Provision and Allowance for Credit Losses

Provision for credit losses is the expense related to maintaining the allowance for credit losses at an appropriate level to absorb the estimate of credit losses anticipated over the remaining expected life of loan receivables at each period end date. In deriving the estimate of expected credit losses, we consider the collectibility 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 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, among other factors, our credit granting practices and the effectiveness of collection efforts;


•	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.

For more details on how we estimate the allowance for credit losses, refer to "— Critical Accounting Estimates — Allowance for Credit Losses on Loan Receivables" and Note 3: Loan Receivables to our condensed consolidated financial statements.

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

	For the Three Months Ended June 30, 2020
	Credit Card			Student Loans			Personal Loans			Other		Total
Balance at March 31, 2020	$	5,306		$	765		$	807		$	35	$	6,913
Additions
Provision for credit losses⁽¹⁾	1,873			49			114			2		2,038
Deductions
Charge-offs	(852		)	(20		)	(78		)	—		(950		)
Recoveries	164			5			14			—		183
Net charge-offs	(688		)	(15		)	(64		)	—		(767		)
Balance at June 30, 2020	$	6,491		$	799		$	857		$	37	$	8,184

	For the Three Months Ended June 30, 2019
	Credit Card			Student Loans			Personal Loans			Other		Total
Balance at March 31, 2019⁽²⁾	$	2,622		$	168		$	338		$	6	$	3,134
Additions
Provision for credit losses⁽²⁾	692			15			80			—		787
Deductions
Charge-offs	(789		)	(18		)	(91		)	—		(898		)
Recoveries	166			3			11			—		180
Net charge-offs⁽³⁾	(623		)	(15		)	(80		)	—		(718		)
Other⁽⁴⁾	—			(1		)	—			—		(1		)
Balance at June 30, 2019⁽²⁾	$	2,691		$	167		$	338		$	6	$	3,202

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

	For the Six Months Ended June 30, 2020
	Credit Card			Student Loans			Personal Loans			Other		Total
Balance at December 31, 2019⁽²⁾	$	2,883		$	148		$	348		$	4	$	3,383
Cumulative effect of ASU No. 2016-13 adoption⁽⁵⁾	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⁾	3,312			178			377			9		3,876
Deductions
Charge-offs	(1,721		)	(42		)	(162		)	—		(1,925		)
Recoveries	350			10			29			—		389
Net charge-offs	(1,371		)	(32		)	(133		)	—		(1,536		)
Balance at June 30, 2020	$	6,491		$	799		$	857		$	37	$	8,184

	For the Six Months Ended June 30, 2019
	Credit Card			Student Loans			Personal Loans			Other		Total
Balance at December 31, 2018⁽²⁾	$	2,528		$	169		$	338		$	6	$	3,041
Additions
Provision for credit losses⁽²⁾	1,402			30			164			—		1,596
Deductions
Charge-offs	(1,563		)	(37		)	(185		)	—		(1,785		)
Recoveries	324			7			21			—		352
Net charge-offs⁽³⁾	(1,239		)	(30		)	(164		)	—		(1,433		)
Other⁽⁴⁾	—			(2		)	—			—		(2		)
Balance at June 30, 2019⁽²⁾	$	2,691		$	167		$	338		$	6	$	3,202


(1)	Excludes an $8 million build and $23 million release of the liability for expected credit losses on unfunded commitments for the three months and six months ended June 30, 2020, respectively, as the liability is recorded in accrued expenses and other liabilities in our condensed consolidated statements of financial condition.


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


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


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


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

The allowance for credit losses was $8.2 billion at June 30, 2020, which reflects a $4.8 billion build over the amount of the allowance for credit losses at December 31, 2019. The allowance build across all loan products was due to (I) a $2.5 billion cumulative-effect adjustment for the adoption of CECL on January 1, 2020 and (II) a $2.3 billion build during the period that primarily reflects an economic outlook with updated assumptions about the impact of the COVID -19 pandemic. In estimating the allowance at June 30, 2020, we used a macroeconomic forecast that assumes a peak unemployment rate of 16%, recovering to just under 11% at the end of 2020 with slow recovery over the next few years, and an annualized real Gross Domestic Product decline of approximately 30% quarter-over-quarter or down approximately 10% on a year-over-year basis. The estimate also contemplated the impact of government stimulus programs and company-initiated loan modification programs on borrower payment behavior. The impact of COVID-19 on the economy has led to uncertainty in assumptions surrounding factors such as the length and depth of economic stresses and borrower behavior, which required significant management judgment in estimating the allowance for credit losses.

Company-initiated loan modification programs include those offered specifically in response to COVID-19 as well as existing programs offered to customers experiencing difficulty making their payments. In addition to skip-a-pay programs, we have other modification programs that customers have utilized during the period related to the pandemic. The accounts using these modifications are generally excluded from TDR status either because the concessions are insignificant or they qualify for exemption pursuant to the CARES Act or interagency guidance. All modifications are considered as part of the process for determining the allowance for credit losses.

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economic environment due to the COVID-19 pandemic. In the second quarter, the reasonable and supportable period was 18 months based on the view that the present macroeconomic conditions will last for a longer period than previously expected. For both quarters, the reversion period was 12 months. Since adoption of CECL, a straight-line method was used to revert to appropriate historical information. During the quarter ended June 30, 2020, the high degree of economic stress led us to apply a weighted reversion method for credit card loans that puts more emphasis on the loss forecast model rather than lower historical losses. At June 30, 2020, the reversion method remained straight-line for all other 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 and six months ended June 30, 2020, the provision for credit losses increased by $1.3 billion or 159%, and $2.3 billion or 143%, respectively, as compared to the same periods in 2019. The allowance build was determined under separate methodologies for each period, based on the timing of the adoption of ASU No. 2016-13 on January 1, 2020; however, the largest driver of the increase in provision between the two periods was the significant change in economic outlook due to the COVID-19 pandemic.

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 June 30,								For the Six Months Ended June 30,
	2020				2019				2020				2019
	$		%		$		%		$		%		$		%
Credit card loans	$	688	3.90	%	$	623	3.49	%	$	1,371	3.77	%	$	1,239	3.50	%
Private student loans⁽¹⁾	$	15	0.62	%	$	15	0.61	%	$	32	0.65	%	$	30	0.64	%
Personal loans	$	64	3.43	%	$	80	4.33	%	$	133	3.51	%	$	164	4.43	%


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

The net charge-off rate on our credit card loans increased for the three and six months ended June 30, 2020 when compared to the same periods in 2019 due to seasoning of recent years' loan growth. The net charge-off rate on our private student loans remained relatively flat for the three and six months ended June 30, 2020 when compared to the same periods in 2019. The net charge-off rate on our personal loans decreased for the three and six months ended June 30, 2020 when compared to the same periods in 2019 due to improved underwriting.

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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, loans that are not accruing interest regardless of delinquency, and loans restructured in TDR programs (dollars in millions):

	June 30, 2020				December 31, 2019
	$		%		$		%
Loans 30 or more days delinquent
Credit card loans	$	1,523	2.17	%	$	2,019	2.62	%
Private student loans⁽¹⁾	$	153	1.57	%	$	181	1.88	%
Personal loans	$	79	1.07	%	$	105	1.37	%

Loans 90 or more days delinquent
Credit card loans	$	846	1.21	%	$	1,020	1.32	%
Private student loans⁽¹⁾	$	40	0.41	%	$	45	0.47	%
Personal loans	$	27	0.36	%	$	31	0.40	%

Loans not accruing interest	$	253	0.26	%	$	266	0.28	%

Loans restructured in TDR programs
Credit card loans^(2)(3)(4)
Currently enrolled	$	1,787	2.55	%	$	2,108	2.73	%
No longer enrolled⁽⁵⁾	$	478	0.68	%	$	1,254	1.62	%
Total credit card loans	$	2,265	3.23	%	$	3,362	4.35	%
Private student loans⁽⁶⁾	$	296	3.04	%	$	269	2.79	%
Personal loans⁽⁷⁾	$	206	2.82	%	$	208	2.71	%


(1)	Includes PCD loans for all periods presented.

(2)

We estimate that interest income recognized on credit card loans restructured in TDR programs was $60 million and $82 million for the three months ended June 30, 2020 and 2019, respectively, and $131 million and $152 million for the six months ended June 30, 2020 and 2019, respectively. We do not separately track interest income on loans in TDR programs. This amount was estimated by applying an average interest rate to the average loans in the various TDR programs.

(3)

We estimate that the gross interest income that would have been recorded in accordance with the original terms of credit card loans restructured in TDR programs was $47 million and $50 million for the three months ended June 30, 2020 and 2019, respectively, and $101 million and $95 million for the six months ended June 30, 2020 and 2019, respectively. We do not separately track the amount of additional gross 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. This amount was estimated 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 $131 million and $184 million at June 30, 2020 and December 31, 2019, respectively, which are also included in loans 90 or more days delinquent.


(5)	Beginning in 2020, credit card accounts of borrowers that have previously participated in a temporary interest rate reduction program and that have both demonstrated financial stability and had their charging privileges reinstated at a market-based interest rate, are no longer included in the balance of TDRs.


(6)	Private student loans restructured in TDR programs include $8 million and $10 million at June 30, 2020 and December 31, 2019, respectively, which are also included in loans 90 or more days delinquent.


(7)	Personal loans restructured in TDR programs include $7 million at both June 30, 2020 and December 31, 2019, which are also included in loans 90 or more days delinquent.

The 30-day as well as 90-day delinquency rates for credit card loans at June 30, 2020 decreased compared to December 31, 2019 primarily due to the impact of skip-a-pay relief programs. The 30-day and 90-day delinquency rates for private student loans at June 30, 2020 decreased compared to December 31, 2019 primarily due to seasonality of the loan portfolio. The 30-day and 90-day delinquency rates for personal loans at June 30, 2020 decreased compared to December 31, 2019 as a result of improved underwriting.

The balance of credit card loans reported as TDRs decreased at June 30, 2020 as compared to December 31, 2019 primarily due to customer usage in programs subject to TDR exclusion in accordance with the CARES Act or interagency guidance. The balance of personal loans reported as TDRs was relatively flat at June 30, 2020 as compared to December 31, 2019. The balance of private student reported as TDRs increased at June 30, 2020 as compared to December 31, 2019 due to continued loan growth and improved awareness of programs available to assist borrowers having difficulties making payment obligations. We plan to continue to use TDR programs as we believe they are useful in assisting customers experiencing financial difficulties and allowing them to make timely payments. See Note 3: Loan Receivables to our condensed

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consolidated financial statements for further description of our use of TDR programs to provide relief to customers experiencing financial hardship.

Modified and Restructured Loans

For information regarding modified and restructured loans, see "— Delinquencies", "— Impact of COVID-19 on Loan Quality", "— COVID-19 Pandemic Response and Impact — Loan Receivables" 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 June 30,				2020 vs 2019 (Decrease) Increase					For the Six Months Ended June 30,				2020 vs. 2019 (Decrease) Increase
	2020		2019		$			%		2020		2019		$			%
Discount and interchange revenue, net⁽¹⁾	$	237	$	299	$	(62	)	(21	)%	$	453	$	530	$	(77	)	(15	)%
Protection products revenue	44		49		(5		)	(10	)%	91		98		(7		)	(7	)%
Loan fee income	85		102		(17		)	(17	)%	204		206		(2		)	(1	)%
Transaction processing revenue	49		48		1			2	%	93		94		(1		)	(1	)%
Gains on equity investments	43		—		43			—	%	79		—		79			—	%
Other income	14		22		(8		)	(36	)%	42		50		(8		)	(16	)%
Total other income	$	472	$	520	$	(48	)	(9	)%	$	962	$	978	$	(16	)	(2	)%


(1)	Net of rewards, including Cashback Bonus rewards, of $385 million and $460 million for the three months ended June 30, 2020 and 2019, respectively, and $863 million and $906 million for the six months ended June 30, 2020 and 2019, respectively.

Total other income decreased for the three and six months ended June 30, 2020 as compared to the same periods in 2019, primarily due to a decrease in net discount and interchange revenue and loan fee income, which were partially offset by an increase in gain on equity investments. The decrease in discount and interchange revenue was partially offset by a decrease in rewards costs, both of which were the result of lower sales volume due to the impacts of the COVID-19 pandemic. Loan fee income decreased due to lower sales volume and late fees. Sales volume was lower driven by the COVID-19 impacts. Late fees decreased as a result of lower delinquencies as we continue to work with our customers through the economic stresses from COVID-19. Gain on equity investments increased primarily from a sale during each quarter.

Other Expense

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

	For the Three Months Ended June 30,				2020 vs. 2019 Increase (Decrease)					For the Six Months Ended June 30,				2020 vs. 2019 Increase (Decrease)
	2020		2019		$			%		2020		2019		$			%
Employee compensation and benefits	$	452	$	427	$	25		6	%	$	919	$	852	$	67		8	%
Marketing and business development	129		224		(95		)	(42	)%	360		419		(59		)	(14	)%
Information processing and communications	117		101		16			16	%	231		200		31			16	%
Professional fees	181		183		(2		)	(1	)%	374		350		24			7	%
Premises and equipment	27		26		1			4	%	57		54		3			6	%
Other expense	171		117		54			46	%	295		227		68			30	%
Total other expense	$	1,077	$	1,078	$	(1	)	—	%	$	2,236	$	2,102	$	134		6	%

Total other expense was relatively flat for the three months ended June 30, 2020 as compared to the same period in 2019. Marketing costs decreased primarily driven by COVID-19 related expense reductions in brand advertising for card. This was offset by a non-cash impairment charge (included in Other expense), on the Diners Club business within the Payment Services segment, driven by changes in the international travel and entertainment businesses that continue to persist and a declining revenue outlook for the foreseeable future resulting from COVID-19, and higher employee compensation and benefits driven by a larger headcount base and higher average salaries.

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Total other expense increased for the six months ended June 30, 2020 as compared to the same period in 2019. The increase was primarily driven by the COVID-19 related non-cash impairment charge on the Diners Club business discussed above, employee compensation and benefits, and information processing and communications. Employee compensation and benefits increased as a result of a larger headcount base and higher average salaries. The increase in information processing and communications was due to investments in infrastructure. This was offset by a decrease in marketing costs due to COVID-19 related expense reductions in brand advertising for card.

Income Tax Expense

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
(Loss) income before income taxes	$	(461	)	$	987		$	(539	)	$	1,917
Income tax (benefit) expense	$	(93	)	$	234		$	(110	)	$	438
Effective income tax rate	20.2		%	23.8		%	20.4		%	22.9		%

Income tax expense decreased $327 million and $548 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods in 2019 due to pretax losses for the current periods. The effective tax rate for the three and six months ended June 30, 2020 is lower due to a lower projected pretax income for the full year. We calculate our provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year to pretax income or loss excluding unusual or infrequent occurring discrete items. We are projecting a lower pretax income for the full year, therefore the effective tax rate for the full year is lower from the historical annual effective tax rate.

Liquidity and Capital Resources

Impact of COVID-19 on Liquidity and Capital

We entered the COVID-19 pandemic with strong capital and liquidity positions sized to allow us to maintain normal operations during extended periods of financial market stress and disruptions to wholesale and retail funding sources. Our reserves of high-quality liquid assets and access to diverse funding channels allowed us to refrain from issuing debt in disrupted wholesale funding markets and avoid higher funding costs. As market conditions improved, we fortified our capital position in June by raising $500 million of Tier 1 capital in the form of perpetual preferred stock. Moreover, our direct-to-consumer and sweep deposit balances increased substantially during the second quarter as investors sought safe haven assets. Consequently, our store of liquid assets increased as the quarter progressed. We plan to maintain a prudent liquid asset buffer, particularly so long as heightened uncertainty around the macroeconomic and financial operating environment persists.

We remain well-capitalized with capital ratios in excess of regulatory minimums and took prudent actions to preserve capital when the macroeconomic and operating environment turned uncertain. Of note, we suspended our plans to purchase shares of our common stock and took actions to reduce our exposures to higher-risk segments of our credit portfolio. We have completed numerous stress tests to assess the impact of a severe economic downturn on our capital and liquidity and maintain ample amounts of both to ensure we remain well-capitalized and funded while continuing to serve our customers and extend special accommodations to those who need it.

Funding and Liquidity

We seek to maintain stable, diversified and cost-effective funding sources and a strong liquidity profile in order to fund our business and repay or refinance our maturing obligations under both 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, short term investments and investment securities, and borrowing capacity through private term asset-backed securitizations. In addition, we have unused borrowing capacity with the Federal Reserve discount window, which provides another source of contingent liquidity.

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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 certificates of deposit and checking accounts, while brokered deposits include certificates of deposit and sweep accounts. At June 30, 2020, we had $61.1 billion of direct-to-consumer deposits and $16.3 billion of brokered and other 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"), through which we issue DCENT DiscoverSeries notes in both public and private transactions. From time to time, we may add credit card receivables to these trusts to create sufficient funding capacity for future securitizations while managing seller's interest. We retain significant exposure to the performance of trust assets through holdings of the seller's interest and subordinated security classes of DCENT. At June 30, 2020, we had $12.5 billion of outstanding public asset-backed securities and $4.2 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 by a trust during a collection period, including interest collections, fees and interchange, exceeds the fees and expenses of the trust 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 the affected outstanding securitized borrowings using available collections received by the trust. For the three months ended June 30, 2020, the DiscoverSeries three-month rolling average excess spread was 12.27%. 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 a contractual minimum level of receivables in the trust in excess of the face value of outstanding investors' interests. This excess is referred to as the minimum seller's interest. The required minimum seller's interest in the pool of trust receivables, which is included in credit card loan receivables restricted for securitization investors, is set at 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 the trust 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 loan 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 is impacted by seasonality as higher 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 the trust, which would reduce our available borrowing capacity at the Federal Reserve discount window. As of June 30, 2020, there were $27.7 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization investors for the three and six months ended June 30, 2020. Alternatively, we could employ structured discounting, which was used effectively in 2009 to bolster excess spread and mitigate early amortization risk.

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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 June 30, 2020	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	$	12,622	$	3,479	$	7,503	$	1,640	$	—

The triple-A rating of DCENT Class A Notes issued to date has been based, in part, on an FDIC rule, which created a safe harbor that provides that the FDIC, as conservator or receiver, will not, using its power to disaffirm or repudiate contracts, seek to reclaim or recover assets transferred in connection with a securitization, or recharacterize them as assets of the insured depository institution, provided such transfer satisfies the conditions for sale accounting treatment under previous GAAP. Although the implementation of the Financial Accounting Standards Board 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. Other legislative and regulatory developments may, however, impact our ability and/or desire to issue asset-backed securities in the future.

Other Long-Term Borrowings—Student Loans

At June 30, 2020, $144 million of remaining principal balance was outstanding on securitized debt assumed as part of our acquisition of The Student Loan Corporation. Principal and interest payments on the underlying 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 June 30, 2020	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 2021-2031	$	341
Discover Bank fixed-rate senior bank notes, maturing 2021-2030	$	6,100
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 a corresponding ratings downgrade to below investment grade.

Short-Term Borrowings

As part of our regular funding strategy, we may from time to time borrow short-term funds in the federal funds market or the repurchase ("repo") market through repurchase agreements. Federal funds are short-term, unsecured loans between banks or other financial entities with a Federal Reserve account. Funds borrowed in the repo market are short-term, collateralized loans, usually secured with highly-rated investment securities such as U.S. Treasury bills or notes, or federal agency mortgage bonds or debentures. At June 30, 2020, there were no outstanding balances in the federal funds market or repurchase agreements.

Additional Funding Sources

Private Asset-Backed Securitizations

We have access to committed borrowing capacity through privately placed asset-backed securitizations. At June 30, 2020, we had total committed capacity of $6.0 billion, none of which was drawn. While we may utilize funding from these

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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. We also 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 testing purposes and seasonal funding needs.

Federal Reserve

Discover Bank has access to the Federal Reserve Bank of Philadelphia's discount window. As of June 30, 2020, Discover Bank had $32.8 billion of available borrowing capacity through the discount window based on the amount and type of assets pledged, primarily consumer loans. 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 investments 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. In order to anticipate funding needs under stress, we conduct liquidity stress tests to assess the impact of idiosyncratic, systemic and hybrid (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 collateral 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.

In light of the COVID-19 pandemic, rating agencies have cited their expectation that the banking industry will experience heightened loan delinquencies and charge-offs as the labor market weakens. During the second quarter, Moody’s, Standard and Poor’s, and Fitch Ratings affirmed our credit ratings; Standard and Poor’s and Fitch changed the outlook on our senior unsecured credit ratings from “stable” to “negative”, however, while Moody’s retains a “stable” outlook on our ratings. A rating outlook reflects an agency's opinion regarding the likely rating direction over the medium term—often a period of about a year—but also indicates the agency's belief that the issuer's credit profile is consistent with its current rating level at that point in time.

We also maintain agreements with certain of our derivative counterparties that contain provisions that require DFS and Discover Bank to maintain an investment grade credit rating from specified major credit rating agencies. At June 30, 2020, Discover Bank's credit rating met specified thresholds set by its counterparties. However, if its credit rating was to fall below investment grade, Discover Bank would be required to post additional collateral, which, as of June 30, 2020, would have been $20 million. DFS (Parent Company) had no outstanding derivatives as of June 30, 2020, and therefore, no collateral was required.

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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	Stable	Negative	Negative
Discover Bank
Senior unsecured debt	Baa2	BBB	BBB+
Outlook for Discover Bank senior unsecured debt	Stable	Negative	Negative
Subordinated debt	Baa3	BBB-	BBB
Discover Card Execution Note Trust
Class A⁽¹⁾	Aaa(sf)	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, may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

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 policy is approved by the Board of Directors with implementation responsibilities delegated to the Asset and Liability Management Committee (the "ALCO"). Additionally, we maintain a liquidity management framework document, which 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. Liquidity risk is centrally managed by the ALCO, which is chaired by our Treasurer and has cross-functional membership. 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 that is designed to be consistent with regulatory guidance. The EWIs include both idiosyncratic and systemic measures, and are monitored on a daily basis 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 in accordance with 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 and private securitizations with unused borrowing capacity. In addition, 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 be able 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.

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At June 30, 2020, our liquidity portfolio is comprised of highly liquid, unencumbered assets, including cash and cash equivalents, short term investments and investment securities. Cash and cash equivalents were primarily in the form of deposits with the Federal Reserve, Treasury bills, and government money market funds. Short term investments primarily included Treasury bills with contractual maturities greater than 90 days but less than one year at the time of acquisition. Investment securities primarily included debt obligations of the U.S. Treasury and residential mortgage-backed securities issued by U.S. government housing agencies or government-sponsored enterprises. 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 upon the size of our balance sheet as well as operational requirements, market conditions and interest rate risk management strategies. For instance, our liquidity portfolio grew materially during the second quarter as customer deposits increased and loan balances declined, reflecting consumers’ response to the COVID-19 pandemic.

At June 30, 2020, our liquidity portfolio and undrawn credit facilities were $65.7 billion, which was $9.4 billion higher than the balance at December 31, 2019. During the three and six months ended June 30, 2020, the average balance of our liquidity portfolio was $25.9 billion and $22.1 billion, respectively.



	June 30, 2020		December 31, 2019
	(dollars in millions)
Liquidity portfolio
Cash and cash equivalents⁽¹⁾	$	14,262	$	6,406
Other short-term investments	2,549		—
Investment securities⁽²⁾	10,042		10,202
Total liquidity portfolio	26,853		16,608
Private asset-backed securitizations⁽³⁾	6,000		5,500
Primary liquidity sources	32,853		22,108
Federal Reserve discount window⁽³⁾	32,830		34,220
Total liquidity portfolio and undrawn credit facilities	$	65,683	$	56,328


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


(2)	Excludes $159 million and $121 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of June 30, 2020 and December 31, 2019, respectively.


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

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 the growth and risks of our businesses 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 levels of capital. 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 position and 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 implementation of CECL, may require us to hold more capital or adversely impact our capital level. We consider the potential impacts of these reforms in managing our capital position.

DFS and Discover Bank are subject to regulatory capital requirements that became effective January 2015 under final rules issued by the Federal Reserve and the FDIC to implement the provisions under the Basel Committee's December 2010 framework ("Basel III rules"). 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. Under Basel III rules for regulatory capital, DFS and Discover Bank are classified as "Standardized Approach" entities, defined as U.S. banking

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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.

As of January 1, 2019, thresholds within the Basel III rules were fully phased in with the exception of certain transition provisions that were frozen pursuant to regulation issued in November 2017. Pursuant to a final rule issued in July 2019, the transition provisions that were previously frozen have been replaced with new permanent thresholds as discussed below. Additionally, on March 27, 2020, federal bank regulatory agencies announced an interim final rule that allows banks that have implemented CECL the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period. For purposes of calculating regulatory capital, we have elected to defer recognition of the estimated impact of CECL on regulatory capital for two years in accordance with the interim final rule; after that period of deferral, the estimated impact of CECL on regulatory capital will be phased in over a three-year period beginning in 2022. We estimate that electing this option raises our Common Equity Tier 1 ("CET1") capital ratios in 2020. 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 would impose limitations on our capital distributions if we do not maintain our capital ratios above stated regulatory minimum ratios based on the results of supervisory stress tests. We participated in the CCAR supervisory stress test this year and received our preliminary SCB of 3.5%, which primarily reflects the difference between our actual CET1 ratio as of the fourth quarter of 2019 and our projected minimum CET1 ratio based on the Federal Reserve’s models in its nine-quarter Severely Adverse stress scenario. The SCB is expected to become effective October 1, 2020 and we will receive a final SCB by August 31, 2020. Under this rule, we will be required to assess if our planned capital actions are consistent with the effective capital distributions limitations that will apply on a pro-forma basis throughout the planning horizon. See "— Regulatory Environment and Developments — Banking — Capital Standards and Stress Testing" for additional information.

The Basel III rules provide for certain threshold-based deductions from and adjustments to CET1 to the extent that any one such category or all such categories in the aggregate exceed certain percentages of CET1. In July 2019, federal banking regulators issued a final rule that, among other things, revised certain capital requirements for Standardized Approach banks by raising the 10% of CET1 deduction threshold for certain items to 25% and eliminating the 15% combined deduction threshold applying to these items. These changes became effective for all Standardized Approach banking institutions in April 2020.

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 transparency of capital requirements for banking organizations. We are required to make prescribed regulatory disclosures on a quarterly basis regarding our capital structure, capital adequacy, risk exposures and risk-weighted assets. The Pillar 3 disclosures are made publicly available on our website in a report called "Basel III Regulatory Capital Disclosures."

At June 30, 2020, DFS and Discover Bank met the requirements for "well-capitalized" status under Regulation Y and the prompt corrective action rules, respectively, exceeding the regulatory minimums to which they were subject under the applicable rules. Additionally, we are subject to regulatory requirements imposed by the Federal Reserve as part of its stress testing framework and CCAR program. Refer to "- Regulatory Environment and Developments" for more information.

We disclose tangible common equity, which represents common equity less goodwill and intangibles. Management believes that common stockholders' equity excluding goodwill and intangibles is a meaningful measure to investors of our true net asset value. As of June 30, 2020, tangible common equity is not formally defined by U.S. GAAP or codified in the federal banking regulations and, as such, is considered to be a non-GAAP financial measure. Other financial services companies may also disclose this measure and definitions may vary, so 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 U.S. GAAP financial measure) to tangible common equity (dollars in millions):

	June 30, 2020			December 31, 2019
Total common stockholders' equity⁽¹⁾	$	8,587		$	11,296
Less: goodwill	(255		)	(255		)
Less: intangible assets, net	(96		)	(155		)
Tangible common equity	$	8,236		$	10,886


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

For the period between July 1, 2019 and June 30, 2020, the Federal Reserve pre-approved capital distributions up to a maximum amount for each Category IV bank, including Discover. The Federal Reserve based these capital distribution limits on results from the 2018 supervisory stress test. Notwithstanding the pre-approval, we were still required to prepare in 2019 a capital plan to be approved by our Board of Directors and on April 6, 2020, we submitted to the Federal Reserve a new capital plan for the period July 1, 2020 to June 30, 2021, pursuant to the CCAR supervisory stress test. On June 25, 2020, we received the stress test results, which are discussed herein.

We recently declared a quarterly cash dividend on our common stock of $0.44 per share, payable on September 3, 2020 to holders of record on August 20, 2020, which is consistent with last quarter. In light of the current economic downturn, the Federal Reserve required all large banks participating in the CCAR supervisory stress test to cap common stock dividends at the average of a firm’s net income over the preceding four quarters. We also recently declared a semi-annual cash dividend on our preferred stock (Series C) of $2,750 per share, equal to $27.50 per depositary share, payable on October 30, 2020 to holders of record on October 15, 2020, which is consistent with the amount paid in the second quarter of 2020. On June 22, 2020, we opportunistically issued new perpetual preferred shares (Series D) with a liquidation amount of $500 million; these shares provide Tier 1 capital and we used the proceeds for general corporate purposes. The Series D preferred stock pays semi-annual dividends at a fixed annual rate of 6.125% until September 23, 2025, after which its dividend rate will reset every five years to a fixed annual rate equal to the 5-year Treasury rate plus 5.783%.

Our existing share repurchase program, which had $1.2 billion of remaining authorization expires on September 30, 2020. Having suspended share repurchases earlier this year in recognition of the pandemic-induced economic downturn, we repurchased no common stock during the three months ended June 30, 2020. We may reinstate our share repurchase program in the future, but the Federal Reserve has required all large banks participating in the CCAR supervisory stress test to suspend share repurchases for at least the third quarter. Thereafter, 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. Share repurchases under the program may be made through a variety of methods, including open market purchases, privately negotiated transactions or other purchases, including block trades, accelerated share repurchase transactions, or any combination of such methods.

The amount and size of any future dividends and share repurchases will depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors, such as the implementation of CECL. The declaration and payment of future dividends, as well as 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, and if full dividends have not been declared and paid on all outstanding shares of preferred stock in any dividend period, no dividend may be declared or paid or set aside for payment on our common stock. 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 to which our banking subsidiaries can provide funds to us through dividends, loans or otherwise. Further, current or future regulatory reforms may require us to hold more capital or adversely impact our capital level. 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

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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 June 30, 2020, which include deposits, long-term borrowings, operating lease obligations, interest payments on fixed-rate debt, purchase obligations and other liabilities were $104.7 billion. For a description of our contractual obligations, see our annual report on Form 10-K for the year ended December 31, 2019 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 June 30, 2020, our unused credit arrangements were approximately $214.0 billion. These arrangements, substantially all of which we can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification. In 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.


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 a variety of depositors and institutions in order to provide loans to our customers, as well as invest in other assets and our business. These loans 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, which may decrease 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-month period 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 upon 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 the assets that make up our liquidity portfolio. We have limitations on our ability to mitigate interest rate risk by adjusting rates on existing balances and competitive actions may limit our ability to increase the rates that we charge to customers for new loans. At June 30, 2020, the majority of our credit card and student loans charge variable rates. Assets with rates that are fixed at period end but which will mature, or otherwise contractually reset to a market-based indexed rate or other fixed rate prior to the end of the 12-month period, are considered to be rate sensitive. The latter category includes certain revolving credit card loans that may be

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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 that have a fixed interest rate but contractually will, or are 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, which for purposes of this analysis, 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-month period. 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 12-month period, or liabilities whose rates are fixed 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-month period, 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 to be made regarding market conditions, consumer behavior, and overall growth and composition of the balance sheet. The degree to which our deposit rates change when benchmark interest rates change—our deposit “beta”—is one of the more significant of these assumptions. Our ALCO members review this assumption periodically and, in light of additional historical evidence, recently adopted a lower assumed deposit beta. All else equal, a lower deposit beta increases our modeled NII sensitivity to an interest rate shock, such that we would describe our current short-term interest rate risk position as being modestly asset sensitive. We believe this position is prudent given that benchmark interest rates are currently very near zero. 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 versus long-term rates, balance sheet composition, competitor actions affecting pricing decisions in our loans and deposits, and strategic actions undertaken by management.

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 June 30, 2020					At December 31, 2019
Basis point change	$			%		$			%
+100	$	142		1.42	%	$	12		0.12	%
-100	$	(3	)	(0.03	)%	$	(13	)	(0.13	)%


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


•	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


•	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


•	FDIC: Federal Deposit Insurance Corporation


•	GAAP: Generally Accepted Accounting Principles


•	IRS: Internal Revenue Service


•	LIBOR: London Interbank Offered Rate


•	NPR: Notice of Proposed Rulemaking


•	OCI: Other Comprehensive Income


•	OIS: Overnight Index Swap


•	PCD: Purchased Credit-Deteriorated


•	PCI: Purchased Credit-Impaired


•	SCB: Stress Capital Buffer


•	TDR: Troubled Debt Restructuring


•	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

In light of recent developments relating to the coronavirus disease 2019 ("COVID-19") pandemic, we are supplementing our risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019. The following risk factor should be read in conjunction with the risk factors described in our annual report on Form 10-K.

The COVID-19 pandemic has and is expected to continue to have a material adverse effect on our business, results of operations and financial condition.

The COVID-19 pandemic has had an unprecedented impact on a global scale. As a result of the COVID-19 pandemic and the measures implemented to contain the pandemic, economic activity has declined both on a national and global level and unemployment has risen at a record pace. The depth and duration of this economic contraction is unknown and currently unpredictable. Federal and state governments and agencies have put in place programs to mitigate and respond to the impact of the pandemic. These programs are in their early stages and it is too early to tell how successful these measures will be. It is also unclear whether the measures employed to date are exhaustive, or whether federal and state governments and agencies may take additional action that could impact our business.

The impact of the COVID-19 pandemic and the resulting economic contraction has impacted and is expected to continue to adversely impact our financial results. As consumers grow increasingly uncertain about the economy, lose their jobs or are unable to find work due to the COVID-19 pandemic and the implementation of measures implemented to slow the spread of COVID-19, they may become increasingly unable or unwilling to repay their loans on time. The duration of the pandemic and the measures to contain it and the long-term negative economic impact in relation to increased unemployment could lead to increased customer delinquencies and charge-offs, which would cause an increase to our allowance for credit losses, which would adversely affect our profitability. We have put various programs in place to assist affected borrowers during the pandemic. The programs generally provide borrowers with flexibility to make monthly payments, including allowing customers to skip payments without penalty, or in certain cases, accrual of interest. The terms and conditions of the programs are subject to change and enrollment levels may fluctuate based on those changes as well as the depth and duration of the economic contraction. Our regulators are increasingly focused on how these programs are being implemented. If we are unable to effectively implement these programs, we could be subject to regulatory criticism and reputational harm. As the number of loans enrolled in these programs increases, our financial results will be adversely impacted in the short term due to forgone interest. The impact on the U.S. economy and the consumer credit environment may continue after the COVID-19 pandemic has subsided; the pace of recovery is uncertain and unpredictable. The resurgence of COVID-19 in areas where the pandemic previously appeared to have subsided or been contained only adds to the uncertainty and unpredictability of the pace of recovery. Additionally, in connection with the economic contraction due to COVID-19, we have decreased our marketing activities, which may adversely impact our ability to attract new customers and grow market share.

Given the nature of the crisis, our financial and economic models may be unable to accurately predict and respond to the impact of the economic contraction or lasting changes to consumer behaviors, which in turn may limit our ability to manage credit risk and avoid higher charge-off rates. Additionally, due to the nature and novelty of the crisis, our credit and economic models may not be able to adequately predict or forecast credit losses, sales, receivables or other financial metrics during and after the crisis, which could result in our reserves being too large or insufficient. For more information see the risk factor entitled "Our risk management framework and models for managing risks may not be effective in mitigating our risk of loss" in our annual report on Form 10-K year ended December 31, 2019.

As governments have put measures in place to contain the pandemic by requiring all non-essential businesses to close and/or their employees work from home and discouraging or prohibiting people generally from leaving their homes, our sales volume, credit card loan growth, interchange revenue and net-to-net volume have declined and may continue to do so. The economic contraction and associated slowdown in travel and transaction volume may have a material adverse impact on the financial condition of some of our Diners Club International ("Diners Club") franchises. In the past, we have extended financial support to franchises experiencing financial stress.

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Beginning March 13, 2020, we have transitioned nearly all of our employees and non-employee contractors to working from home. Previously, only a small portion of employees worked primarily from a location other than one of our offices. As we adapt to this new way of working, it may become less effective and as a result our ability to design and implement new products, services or features may be adversely impacted. Additionally, in the event that a meaningful portion of our call center agents become ill due to COVID-19 or otherwise are unable to work effectively, our ability to meet our internal measures for customer service may be adversely effected. The pandemic has required us and our third-party vendors to activate certain business continuity programs and make ongoing adjustments to operations. To the extent that these plans and back-up servicing and other strategies and adjustments are either not available, insufficient or cannot be implemented in whole or in part, we may be exposed to legal, regulatory, reputational, operational, information security or financial risk. For example, if we are unable to send our customers certain required statements or disclosures due to disruptions in staffing and personnel or our back-up servicing plans, we may be exposed to legal and regulatory scrutiny. Finally, as nearly all of our employees are working from home, we are increasingly reliant on a handful of vendors, including those we have no direct relationship with such as our employees' internet service providers, to maintain reliable high speed access to our internal network. Failure by such third-party providers would impact our operations. Efforts by us, our vendors and their vendors to continue to adapt operations to this new environment may introduce additional vulnerabilities to our operations and information security programs and systems in ways we have not previously contemplated or otherwise prepared for.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak and the economic recovery following the containment of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects have had and are expected to continue to have a material impact on our results of operations and heighten many of our known risks described in the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019.


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

Issuer Purchases of Equity Securities

The following table sets forth information regarding employee transactions that were made by us or on our behalf during the most recent quarter.

Period	Total Number of Shares Purchased	Average Price Paid Per Share
April 1 - 30, 2020
Employee transactions⁽¹⁾	1,379	$	30.53
May 1 - 31, 2020
Employee transactions⁽¹⁾	1,942	$	41.32
June 1 - 30, 2020
Employee transactions⁽¹⁾	2,111	$	51.65

Total
Employee transactions⁽¹⁾	5,432	$	42.60


(1)	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.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

None.

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Item 5.	Other Information

None.


Item 6.	Exhibits

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

Exhibit Index



Exhibit Number		Description

3.1		Restated Certificate of Incorporation of Discover Financial Services (filed as Exhibit 3.2 to Discover Financial Services’ Current Report on Form 8-K filed on May 21, 2019 and incorporated herein by reference thereto).

3.2		Certificate of Elimination of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Discover Financial Services (filed as Exhibit 3.2 to Discover Financial Services’ Quarterly Report on Form 10-Q filed on June 26, 2012 and incorporated herein by reference thereto).

3.3		Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 16, 2012 and incorporated herein by reference thereto).

3.4		Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on October 31, 2017 and incorporated herein by reference thereto).

3.5		Certificate of Elimination of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on December 4, 2017 and incorporated herein by reference thereto).

3.6		Certificate of Designations of Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock Series D (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).

4.1		Deposit Agreement, dated June 22, 2020 (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).

4.2		Form of certificate representing the Fixed Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (filed as Exhibit 4.2 to Discover Financial Services’ Current Report on Form 8-K filed on June 22, 2020 and incorporated herein by reference thereto).

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: July 27, 2020


1.	I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the "registrant");


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



/s/ ROGER C. HOCHSCHILD
Roger C. Hochschild
Chief Executive Officer and President



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


1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Document and Entity Information - shares	6 Months Ended
Document and Entity Information - shares	Jun. 30, 2020	Jul. 22, 2020
Document Information [Line Items]
Document type	10-Q
Document quarterly report	true
Document period end date	Jun. 30, 2020
Document transition report	false
Entity file number	001-33378
Entity registrant name	DISCOVER FINANCIAL SERVICES
Entity incorporation, state	DE
Entity tax identification number	36-2517428
Entity address, address line one	2500 Lake Cook Road
Entity address, city or town	Riverwoods
Entity address, state or province	IL
Entity address, postal zip code	60015
Entity phone number, city area code	224
Entity phone number, local phone number	405-0900
Title of 12(b) security	Common Stock, par value $0.01 per share
Trading symbol	DFS
Security exchange name	NYSE
Entity current reporting status	Yes
Entity interactive data current	Yes
Entity filer category	Large Accelerated Filer
Smaller reporting company	false
Emerging growth company	false
Entity shell company	false
Entity common stock, shares outstanding		306,421,150
Entity central index key	0001393612
Current fiscal year end date	--12-31
Document fiscal year focus	2020
Document fiscal period focus	Q2
Amendment flag	false

Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Net (loss) income	$ (368)	$ 753	$ (429)	$ 1,479
Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on available-for-sale investment securities, net of tax	(16)	71	240	102
Unrealized gains (losses) on cash flow hedges, net of tax	4	(18)	1	(30)
Unrealized pension and post-retirement plan gains, net of tax	0	0	0	1
Other comprehensive (loss) income	(12)	53	241	73
Comprehensive (loss) income	$ (380)	$ 806	$ (188)	$ 1,552

Condensed Consolidated Statements of Changes in Stockholders' Equity - USD ($) $ in Millions	Total	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive (Loss) Income [Member]	Treasury Stock [Member]	Series C Preferred Stock [Member] Retained Earnings [Member]
Preferred stock, shares outstanding, balance at beginning of period (in shares) at Dec. 31, 2018		6,000
Common stock, shares outstanding, balance at beginning of period (in shares) at Dec. 31, 2018			564,852,000
Stockholders' equity, balance at beginning of period at Dec. 31, 2018	$ 11,130	$ 563	$ 6	$ 4,130	$ 18,906	$ (156)	$ (12,319)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net (loss) income	1,479				1,479
Other comprehensive income	73					73
Purchases of treasury stock	(948)						(948)
Common stock issued under employee benefit plans (in shares)			51,000
Common stock issued under employee benefit plans	3		$ 0	3
Common stock issued and stock-based compensation expense (in shares)			1,116,000
Common stock issued and stock-based compensation expense	34		$ 0	34
Dividends — common stock	(262)				(262)
Dividends — preferred stock	(16)							$ (16)
Preferred stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2019		6,000
Common stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2019			566,019,000
Stockholders' equity, balance at end of period at Jun. 30, 2019	11,493	$ 563	$ 6	4,167	20,107	(83)	(13,267)
Preferred stock, shares outstanding, balance at beginning of period (in shares) at Mar. 31, 2019		6,000
Common stock, shares outstanding, balance at beginning of period (in shares) at Mar. 31, 2019			565,973,000
Stockholders' equity, balance at beginning of period at Mar. 31, 2019	11,259	$ 563	$ 6	4,148	19,484	(136)	(12,806)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net (loss) income	753				753
Other comprehensive income	53					53
Purchases of treasury stock	(461)						(461)
Common stock issued under employee benefit plans (in shares)			24,000
Common stock issued under employee benefit plans	1		$ 0	1
Common stock issued and stock-based compensation expense (in shares)			22,000
Common stock issued and stock-based compensation expense	18		$ 0	18
Dividends — common stock	(130)				(130)
Dividends — preferred stock	0
Preferred stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2019		6,000
Common stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2019			566,019,000
Stockholders' equity, balance at end of period at Jun. 30, 2019	$ 11,493	$ 563	$ 6	4,167	20,107	(83)	(13,267)
Preferred stock, shares outstanding, balance at beginning of period (in shares) at Dec. 31, 2019	5,700	6,000
Common stock, shares outstanding, balance at beginning of period (in shares) at Dec. 31, 2019			566,654,000
Stockholders' equity, balance at beginning of period at Dec. 31, 2019	$ 11,859	$ 563	$ 6	4,206	21,290	(119)	(14,087)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cumulative effect of ASU No. 2016-13 adoption	(1,902)				(1,902)
Net (loss) income	(429)				(429)
Other comprehensive income	241					241
Purchases of treasury stock	(343)						(343)
Common stock issued under employee benefit plans (in shares)			113,000
Common stock issued under employee benefit plans	4		$ 0	4
Common stock issued and stock-based compensation expense (in shares)			886,000
Common stock issued and stock-based compensation expense	6		$ 0	6
Stock Issued During Period, Shares, New Issues		5,000
Stock Issued During Period, Value, New Issues	493	$ 493
Dividends — common stock	(270)				(270)
Dividends — preferred stock	$ (16)							$ (16)
Preferred stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2020	10,700	11,000
Common stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2020			567,653,000
Stockholders' equity, balance at end of period at Jun. 30, 2020	$ 9,643	$ 1,056	$ 6	4,216	18,673	122	(14,430)
Preferred stock, shares outstanding, balance at beginning of period (in shares) at Mar. 31, 2020		6,000
Common stock, shares outstanding, balance at beginning of period (in shares) at Mar. 31, 2020			567,530,000
Stockholders' equity, balance at beginning of period at Mar. 31, 2020	9,665	$ 563	$ 6	4,217	19,175	134	(14,430)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net (loss) income	(368)				(368)
Other comprehensive income	(12)					(12)
Common stock issued under employee benefit plans (in shares)			49,000
Common stock issued under employee benefit plans	2		$ 0	2
Common stock issued and stock-based compensation expense (in shares)			74,000
Common stock issued and stock-based compensation expense	(3)		$ 0	(3)
Stock Issued During Period, Shares, New Issues		5,000
Stock Issued During Period, Value, New Issues	493	$ 493
Dividends — common stock	(134)				(134)
Dividends — preferred stock	$ 0
Preferred stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2020	10,700	11,000
Common stock, shares outstanding, balance at end of period (in shares) at Jun. 30, 2020			567,653,000
Stockholders' equity, balance at end of period at Jun. 30, 2020	$ 9,643	$ 1,056	$ 6	$ 4,216	$ 18,673	$ 122	$ (14,430)

Intangible Assets (Notes)	6 Months Ended
Intangible Assets (Notes)	Jun. 30, 2020
Intangible Assets [Abstract]
Intangible Assets Disclosure [Text Block]	Intangible Assets In connection with the preparation of the financial statements for this quarterly report on Form 10-Q, the Company identified a triggering event due to changes in the international travel and entertainment businesses that continue to persist and a declining revenue outlook for the foreseeable future resulting from COVID-19. As a result, the Company conducted an interim impairment test on its Diners Club trade names and international transaction processing rights non-amortizable intangible assets. 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 methodology used for annual impairment testing. As a result of this analysis, the Company made the determination that the trade names and international transaction processing rights were impaired and recognized a charge in its Payment Services segment of $36 million and $23 million, respectively. The impairment was recorded in other expense. The trade names have a remaining net book value of $92 million and the international transaction processing rights have no remaining net book value.

Preferred Stock (Notes)	6 Months Ended
Preferred Stock (Notes)	Jun. 30, 2020
Equity [Abstract]
Preferred Stock [Text Block]	Preferred Stock On June 22, 2020, the Company issued and sold 5,000 shares of 6.125% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series D (the “preferred stock”), with a par value of $0.01 per share. Each share of preferred stock has a liquidation preference of $1,000 and is represented by 100 depositary shares. Proceeds, net of underwriting discount and estimated expenses, received from the preferred stock issuance totaled approximately $493 million. The preferred stock is redeemable at the Company’s option, subject to regulatory approval, either (1) in whole or in part during the three-month period prior to, and including, each reset date (as defined in the certificate of designations for the preferred stock) or (2) in whole but not in part, at any time within 90 days following a regulatory capital event (as defined in the certificate of designations for the preferred stock), in each case at a redemption price equal to $1,000 per share of preferred stock plus declared and unpaid dividends. Any dividends declared on the preferred stock will be payable semi-annually in arrears at a rate of 6.125% per annum until September 23, 2025, after which the dividend rate will reset every five years to a fixed annual rate equal to the 5-year Treasury rate plus 5.783%. For more information on the Company's preferred stock, see Note 12: Common and Preferred Stock to the consolidated financial statements of the Company's annual report on Form 10-K for the year ended December 31, 2019.

Litigation and Regulatory Matters	6 Months Ended
Litigation and Regulatory Matters	Jun. 30, 2020
Loss Contingency [Abstract]
Litigation and Regulatory Matters	Litigation and Regulatory Matters In the normal course of business, from time to time, the Company has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The litigation process is not predictable and can lead to unexpected results. The Company contests liability and/or the amount of damages as appropriate in each pending matter. The Company has historically offered its customers an arbitration clause in its customer agreements. The arbitration clause allows the Company and its customers to quickly and economically resolve disputes. Additionally, the arbitration clause has in some instances limited the costs of, and the Company's exposure to, litigation. Future legal and regulatory challenges and prohibitions may cause the Company to discontinue its offering and use of such clauses. From time to time, the Company is involved in legal actions challenging its arbitration clause. Bills may be periodically introduced in Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses. The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company's business including, among other matters, consumer regulatory, accounting, tax and other operational matters, some of which may result in significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief, which could materially impact the Company's condensed consolidated financial statements, increase its cost of operations, or limit its ability to execute its business strategies and engage in certain business activities. Certain subsidiaries of the Company are subject to a consent order with the Consumer Financial Protection Bureau ("CFPB") regarding certain student loan servicing practices, as described below. Pursuant to powers granted under federal banking laws, regulatory agencies have broad and sweeping discretion, and may assess civil money penalties, require changes to certain business practices or require customer restitution at any time. In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matters present loss contingencies that are both probable and estimable. Litigation and regulatory settlement related expense was not material for the three and six months ended June 30, 2020 and 2019. There may be an exposure to loss in excess of any amounts accrued. The Company believes the estimate of the aggregate range of reasonably possible losses (meaning those losses the likelihood of which is more than remote but less than likely) in excess of the amounts that the Company has accrued for legal and regulatory proceedings is up to $165 million. This estimated range of reasonably possible losses is based upon currently available information for those proceedings in which the Company is involved, takes into account the Company's best estimate of such losses for those matters for which an estimate can be made, and does not represent the Company's maximum potential loss exposure. Various aspects of the legal proceedings underlying the estimated range will change from time to time and actual results may vary significantly from the estimate. The Company's estimated range above involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years and, in some cases, a wide range of business activities), unspecified damages and/or the novelty of the legal issues presented. The outcome of pending matters could be material to the Company's condensed consolidated financial condition, operating results and cash flows for a particular future period, depending on, among other things, the level of the Company's income for such period, and could adversely affect the Company's reputation. On July 22, 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 resolving the agency's investigation with respect to certain student loan servicing practices. The order required the Discover Subsidiaries to provide redress of approximately $16 million to consumers who may have been affected by the activities described in the order related to certain collection calls, overstatements of minimum payment due amounts in billing statements and provision of interest paid information to consumers, and provide regulatory disclosures with respect to loans acquired in default. In addition, the Discover Subsidiaries were required to pay a $2.5 million civil money penalty to the CFPB. As required by the consent order, on October 19, 2015, the Discover Subsidiaries submitted to the CFPB a redress plan and a compliance plan designed to ensure that the Discover Subsidiaries provide redress and otherwise comply with the terms of the order. The CFPB is currently investigating Discover Bank's compliance with the order and certain student loan servicing practices. Discover Bank is cooperating with the CFPB in connection with the investigation. Discover Bank is enhancing the compliance plan submitted to the CFPB in 2015. The investigation could lead to a supervisory action, which may result in legal fees, penalties, fines and remediation expenses, and could require Discover Bank to change certain business practices. On March 8, 2016, a class action lawsuit was filed against the Company, other credit card networks, other issuing banks, and EMVCo in the U.S. District Court for the Northern District of California (B&R Supermarket, Inc., d/b/a Milam's Market, et al. v. Visa, Inc. et al.) alleging a conspiracy by defendants to shift fraud liability to merchants with the migration to the EMV security standard and chip technology. Plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys' fees, costs and injunctive relief. In May 2017, the Court entered an order transferring the entire action to a federal court in New York that is presiding over certain related claims that are pending in the actions consolidated as MDL 1720. On March 11, 2018, the Court entered an order denying the plaintiffs' motion for class certification without prejudice to filing a renewed motion. Plaintiffs filed a renewed motion for class certification on July 16, 2018. Defendants filed their Opposition to Class Certification on March 15, 2019; a hearing date is yet to be scheduled. The Company is not in a position at this time to assess the likely outcome or its exposure, if any, with respect to this matter, but will seek to vigorously defend against all claims asserted by the plaintiffs.

Subsequent Events	6 Months Ended
Subsequent Events	Jun. 30, 2020
Subsequent Events [Abstract]
Subsequent Events	Subsequent Events The Company has evaluated events and transactions that have occurred subsequent to June 30, 2020 and determined that there were no subsequent events that would require recognition or disclosure in the condensed consolidated financial statements.

Background and Basis of Presentation (Policies)	6 Months Ended
Background and Basis of Presentation (Policies)	Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Basis of Presentation and Significant Accounting Policies	The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments necessary for fair presentation of results for the interim period. All such adjustments are of a normal, recurring nature.
Use of Estimates	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.

Investments (Narrative) (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
Investments (Narrative) (Details) - USD ($) $ in Millions	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Investment Holdings [Line Items]
Proceeds from sales of available-for-sale securities	$ 0	$ 0	$ 0	$ 0
Recognized gains (losses) on available-for-sale securities	0	$ 0	0	$ 0
Affordable housing project equity method investments	301		301		$ 298
Contingent liabilities related to affordable housing project equity method investments	47		47		59
Payment Services [Member]
Investment Holdings [Line Items]
Equity securities without readily determinable fair value	25		25		42
Other Assets [Member] \| Community Reinvestment Act [Member]
Investment Holdings [Line Items]
Equity method investments	335		335		336
Other Liabilities [Member] \| Community Reinvestment Act [Member]
Investment Holdings [Line Items]
Contingent liabilities related to equity method investments	$ 63		$ 63		$ 74

Credit Card and Student Loan Securitization Activities (Narrative) (Details) - Variable Interest Entity, Primary Beneficiary [Member]	6 Months Ended
	Jun. 30, 2020 classes trust
Student Loan Securitization Trusts [Member]
Variable Interest Entity [Line Items]
Number of trusts issuing securities	1
Number of trusts	2
Discover Card Execution Note Trust [Member] \| Credit Card Securitization Trusts [Member]
Variable Interest Entity [Line Items]
Number of classes of securities in debt structure (in classes) \| classes	4

Credit Card and Student Loan Securitization Activities (Schedule of Restricted Student Loan Securitized Assets) (Details) - USD ($) $ in Millions	Jun. 30, 2020	Dec. 31, 2019	Jun. 30, 2019
Variable Interest Entity [Line Items]
Restricted cash	$ 29	$ 40	$ 1,040
Loan receivables	88,927	95,894
Total assets	113,792	113,996
Variable Interest Entity, Primary Beneficiary [Member]
Variable Interest Entity [Line Items]
Restricted cash	29	40
Loan receivables	27,926	31,840
Variable Interest Entity, Primary Beneficiary [Member] \| Student Loan Securitization Trusts [Member]
Variable Interest Entity [Line Items]
Restricted cash	10	12
Loan receivables	274	292
Total assets	$ 284	$ 304

Intangible Assets (Details) - USD ($)	3 Months Ended
Intangible Assets (Details) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
Indefinite-lived Intangible Assets [Line Items]
Intangible assets, net	$ 96,000,000	$ 155,000,000
Trade Names [Member]
Indefinite-lived Intangible Assets [Line Items]
Indefinite-lived Intangible Assets Acquired	36,000,000
Intangible assets, net	92,000,000
International Transaction Processing Rights [Member]
Indefinite-lived Intangible Assets [Line Items]
Indefinite-lived Intangible Assets Acquired	23,000,000
Intangible assets, net	$ 0

Deposits (Narrative) (Details)	6 Months Ended
Deposits (Narrative) (Details)	Jun. 30, 2020 channels
Deposits [Abstract]
Deposits source channels (in number of channels)	2

Deposits (Schedule of Certificates of Deposit Maturities) (Details) $ in Millions	Jun. 30, 2020 USD ($)
Deposits [Abstract]
2020	$ 9,868
2021	13,767
2022	4,092
2023	2,148
2024	1,346
Thereafter	2,145
Total	$ 33,366

Long-Term Borrowings (Narrative) (Details) - Discover Card Master Trust I and Discover Card Execution Note Trust [Member] - Securitized Debt [Member] $ in Millions	Jun. 30, 2020 USD ($)
Debt Instrument [Line Items]
Total commitment of secured credit facilities	$ 6,000
Total used commitment of secured credit facilities	$ 0

Long-Term Borrowings (Schedule of Long-Term Borrowings Maturities) (Details) - USD ($) $ in Millions	Jun. 30, 2020	Dec. 31, 2019
Debt Disclosure [Abstract]
2020	$ 1,854
2021	4,246
2022	5,208
2023	3,421
2024	2,635
Thereafter	5,830
Total	$ 23,194	$ 25,701