FIND OUT ABOUT FINANCIAL SERVICES Management report and analysis of the financial position and operating results (Form 10-Q)

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The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this quarterly
report. This quarterly report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, which speak to our expected business and financial performance,
among other matters, contain words such as "believe," "expect," "anticipate,"
"intend," "plan," "aim," "will," "may," "should," "could," "would," "likely,"
"forecast," and similar expressions. Such statements are based on the current
beliefs and expectations of our management and are subject to significant risks
and uncertainties. Actual results may differ materially from those set forth in
the forward-looking statements. These forward-looking statements speak only as
of the date of this quarterly report and there is no undertaking to update or
revise them as more information becomes available.
The following factors, among others, could cause actual results to differ
materially from those set forth in the forward-looking statements: the effect of
the coronavirus disease 2019 ("COVID-19") pandemic and measures taken to
mitigate the pandemic, including their impact on our credit quality and business
operations as well as their impact on general economic and financial markets,
changes in economic variables, such as the availability of consumer credit, the
housing market, energy costs, the number and size of personal bankruptcy
filings, the rate of unemployment, the levels of consumer confidence and
consumer debt and investor sentiment; the impact of current, pending and future
legislation, regulation, supervisory guidance and regulatory and legal actions,
including, but not limited to, those related to financial regulatory reform,
consumer financial services practices, anti-corruption and funding, capital and
liquidity; the actions and initiatives of current and potential competitors; our
ability to manage our expenses; our ability to successfully achieve card
acceptance across our networks and maintain relationships with network
participants; our ability to sustain and grow our private student loan, personal
loan and home loan products; difficulty obtaining regulatory approval for,
financing, transitioning, integrating or managing the expenses of acquisitions
of or investments in new businesses, products or technologies; our ability to
manage our credit risk, market risk, liquidity risk, operational risk, legal and
compliance risk and strategic risk; the availability and cost of funding and
capital; access to deposit, securitization, equity, debt and credit markets; the
impact of rating agency actions; the level and volatility of equity prices,
commodity prices and interest rates, currency values, investments, other market
fluctuations and other market indices; losses in our investment portfolio;
limits on our ability to pay dividends and repurchase our common stock; limits
on our ability to receive payments from our subsidiaries; fraudulent activities
or material security breaches of key systems; our ability to remain
organizationally effective; our ability to increase or sustain Discover card
usage or attract new customers; our ability to maintain relationships with
merchants; the effect of political, economic and market conditions, geopolitical
events and unforeseen or catastrophic events; our ability to introduce new
products and services; our ability to manage our relationships with third-party
vendors; our ability to maintain current technology and integrate new and
acquired systems; our ability to collect amounts for disputed transactions from
merchants and merchant acquirers; our ability to attract and retain employees;
our ability to protect our reputation and our intellectual property; and new
lawsuits, investigations or similar matters or unanticipated developments
related to current matters. We routinely evaluate and may pursue acquisitions of
or investments in businesses, products, technologies, loan portfolios or
deposits, which may involve payment in cash or our debt or equity securities.
Additional factors that could cause our results to differ materially from those
described below can be found in this section of this quarterly report and in
"Risk Factors," "Business," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our annual report on Form 10-K
for the year ended December 31, 2020, which is filed with the Securities and
Exchange Commission ("SEC") and available at the SEC's internet site
(https://www.sec.gov).
Introduction and Overview
Discover Financial Services ("DFS") is a digital banking and payment services
company. We provide digital banking products and services and payment services
through our subsidiaries. We offer our customers credit card loans, private
student loans, personal loans, home loans and deposit products. We also operate
the Discover Network, the PULSE network ("PULSE") and Diners Club International
("Diners Club"), collectively known as the Discover Global Network. The Discover
Network processes transactions for Discover-branded credit and debit cards and
provides payment transaction processing and settlement services. PULSE operates
an electronic funds transfer network, providing financial institutions issuing
debit cards on the PULSE network with access to ATMs domestically and
internationally and merchant acceptance throughout the United States for debit
card transactions. Diners Club is a global payments network of licensees, which
are generally financial institutions, that issue Diners Club branded credit and
charge cards and/or provide card acceptance services.
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Our primary revenues consist of interest income earned on loan receivables and
fees earned from customers, financial institutions, merchants and issuers. The
primary expenses required to operate our business include funding costs
(interest expense), credit loss provisions, customer rewards and expenses
incurred to grow, manage and service our loan receivables and networks. Our
business activities are funded primarily through consumer deposits,
securitization of loan receivables and the issuance of unsecured debt.
COVID-19 Pandemic Response and Impact
The COVID-19 pandemic has continued to have a widespread and unprecedented
impact on a global scale. While the United States economy continues to recover
from a brief but severe recession triggered by the COVID-19 pandemic, its future
effects are uncertain and it may be difficult to assess or predict the extent of
the impacts of the pandemic on us as many factors are beyond our control and
knowledge. For a discussion of the risks we face with respect to the COVID-19
pandemic, the associated economic uncertainty, the steps taken to mitigate the
pandemic and the resulting economic contraction, see the risk factors disclosed
in our annual report on Form 10-K for the year ended December 31, 2020, under
"Risk Factors". This section includes a discussion of the significant areas of
potential impact on us of the COVID-19 pandemic and specific actions we are
taking or expect to take in this time of uncertainty.
Financial Results and Outlook
The United States economy continues to recover from the impacts of the COVID-19
pandemic. The easing of COVID-19 restrictions, economic expansion and government
stimulus have positively impacted credit performance and elevated payment rates.
We saw an increase in sales volume for the three and nine months ended September
30, 2021, compared to the same periods in 2020. Additionally, we had modest loan
growth during the three months ended September 30, 2021.
We also decreased our allowance for credit losses from December 31, 2020. Refer
to "- Loan Quality - Provision and Allowance for Credit Losses" for more details
on the current period allowance for credit losses.
Our outlook remains unchanged from what we disclosed in the second quarter of
2021. We anticipate modest loan growth in 2021 driven by positive sales trends
and new account growth. We expect net interest margin to remain generally flat
relative to the first quarter of 2021 through the remainder of 2021, with some
variability from quarter to quarter. We expect net charge-offs to be lower
year-over-year driven by continued stable credit performance. We remain
committed to disciplined expense management and will continue to make
investments for profitable long-term growth through increased marketing and
investments in core technology capabilities and efficiency improvements.
Regulatory and Legislative
Federal, state and local governments and independent banking agencies have taken
extraordinary measures to support the United States economy and mitigate the
impacts of the COVID-19 pandemic on the economy and society at large. These
policies have included regulatory relief and flexibility to financial
institutions, liquidity to capital markets and financial support to businesses
and consumers, including fiscal stimulus, payment forbearance, small business
lending programs, increased unemployment payments and other forms of assistance.
Lawmakers continue to offer additional proposals in an attempt to mitigate harm
to the economy and consumers. The effects of these programs are broad and very
complex and depend upon a wide variety of factors, some of which are yet to be
identified. Thus, the ultimate impact of these programs and policies on our
business, results of operations and financial condition is difficult to quantify
and may not be known for some time. For more information, see "- Regulatory
Environment and Developments" below.
Loan Receivables and Allowance for Credit Losses
At the onset of the pandemic, we continued to lend to customers but tightened
our standards for new accounts and for growing existing accounts across all
products in our loan portfolio. Additionally, we temporarily reduced our
customer acquisition and brand marketing in response to the significant economic
downturn at the onset of the COVID-19 pandemic. As a result of the strong credit
performance observed in the current year and positive economic outlook, we
returned most of our underwriting criteria to pre-pandemic standards during the
second quarter of 2021. Additionally, we increased our investments in credit
card and private student loan marketing and business development in the second
and third quarters of 2021 to support our loan growth initiatives.
In the third quarter of 2021, we decreased our allowance for credit losses in
anticipation of lower credit losses driven by improving macroeconomic forecasts
and continued stable credit performance. Our allowance for credit losses
includes the
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risk associated with all loans and considers the effects of all loan
modifications, including troubled debt restructurings ("TDRs") and loan
modifications exempt from the TDR designation under the Coronavirus Aid, Relief,
and Economic Security Act ("CARES Act"). As of September 30, 2021, the allowance
for credit losses took into account our best estimate for the impact of programs
put in place by federal and state governments and agencies to mitigate the
economic impact of the pandemic. It is unclear whether the measures employed to
date are complete or whether federal and state governments and agencies may take
additional actions that could impact our business. Refer to "- Loan Quality -
Impact of the COVID-19 Pandemic on the Loan Portfolio" for more details on the
current period allowance for credit losses.
Capital and Liquidity
We maintained liquid assets and capital levels in excess of historical norms as
of September 30, 2021 as consumer loan payment rates and deposit balances remain
above their pre-pandemic levels. We maintain good access to all of our diverse
funding channels. For example, we took advantage of the low-rate,
tight-credit-spread environment by issuing approximately $1.8 billion of credit
card asset-backed securities in September 2021.
We remain well-capitalized with capital ratios in excess of regulatory minimums
and took prudent actions to preserve and augment our capital when the
macroeconomic and operating environment turned uncertain last year. Our capital
levels allow us to capitalize on loan receivable growth as customers moderate
loan payment rates and continue to increase spending as the economy more fully
re-opens from the COVID-19 pandemic.
Payment Services
As governments across the world have taken steps to minimize the transmission of
COVID-19, the number of cross-border transactions processed on the Discover
Global Network has declined. Certain negatively impacted categories such as
travel may have an outsized impact on some of our Diners Club franchisees. The
impacts from the COVID-19 pandemic may result in lasting changes in consumer
payment behaviors, such as a shift from credit to debit, a decline in the use of
cash, increasing online sales and rapid adoption of contactless payment. As
economic uncertainty persists, these shifts may continue to result in changes to
the Payment Services segment's results of operations.
Fair Value and Impairments
With the uncertain nature of the pandemic's overall impact on the economy, we
continue to assess the effects of COVID-19 with respect to our goodwill and
intangible assets, investment securities and other long-term assets. See Note 5:
Intangible Assets to our condensed consolidated financial statements for more
information on the impact of the COVID-19 pandemic on intangible assets.
Business Continuity and Operations
We have re-opened some of our physical locations with appropriate health safety
measures and capacity limitations, including our corporate headquarters.
However, we have informed employees that they may continue to work from home and
will not be required to return to our physical locations prior to January 2022.
Notwithstanding the shift to work-from-home, we have been able to successfully
operate with no significant impact to our operations or service levels. As a
result, upon the return to our physical locations, we will offer flexible
work-from-home arrangements that will provide our employees the option to work
remotely on a more frequent basis than before the pandemic.
Operational changes necessitated by the rapid shift in employee location have
not thus far had a material adverse effect on us or our financial condition;
however, the shift has caused us to grow increasingly dependent on third-party
service providers, including those with which we have no relationship such as
our employees' internet service providers. For more information on the risks
associated with reliance on third-party service providers and the shift to work
from home, see the risk factors disclosed in our annual report on Form 10-K for
the year ended December 31, 2020, under "Risk Factors".
Regulatory Environment and Developments
As the United States and global economies attempt to normalize from the COVID-19
pandemic, the banking agencies continue to evaluate whether additional actions
are warranted to assist consumers, financial institutions and the overall
economy. On March 31, 2021, the Consumer Financial Protection Bureau ("CFPB")
announced it was rescinding several of its policy statements and withdrawing its
participation in several interagency policy statements issued in response to the
COVID-19 pandemic that had been intended to provide flexibility to financial
institutions. The CFPB stated that the
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rescissions "reflect the Bureau's commitment to consumer protection and the fact
that financial institutions have had a year to adapt their operations to the
difficulties posed by the pandemic."
In addition, the United States Congress has taken legislative action to address
the economic disruptions caused by the COVID-19 pandemic, including the March
2020 CARES Act and December 2020 Omnibus and COVID Relief and Response Act. Most
recently, the American Rescue Plan Act of 2021 ("ARPA"), enacted in March 2021,
contained additional stimulus payments, increased unemployment benefits and
increased small business funding under the Payment Protection Program. The ARPA
also significantly increased and expanded the Child Tax Credit for one year and
provides additional funding for rental assistance programs. These Congressional
efforts offered financial assistance and benefits to consumers and small
businesses. As the pandemic continues, additional legislative and regulatory
action may be proposed and could include provisions that significantly impact
our prospects and business practices. The impact of these legislative and
regulatory initiatives on our business, the economy and the United States
consumer will depend upon a wide variety of factors, some of which are yet to be
identified.
Banking
Capital Standards and Stress Testing
DFS is subject to mandatory supervisory stress tests every other year and is
required to submit annual capital plans to the Federal Reserve based on
forward-looking internal analysis of income and capital levels under expected
and stressful conditions. DFS is also subject to capital buffer requirements,
including the Stress Capital Buffer ("SCB"), which requires maintenance of
regulatory capital levels above a threshold established based on the results of
supervisory stress tests after accounting for planned dividend payments.
In June 2020, the Federal Reserve issued a notice informing DFS that it and all
other firms that participated in the 2020 Comprehensive Capital Analysis and
Review ("CCAR") exercise would be required to submit revised capital plans to be
assessed by the Federal Reserve under newly developed scenarios incorporating
economic stresses reflecting the ongoing COVID-19 pandemic. The Federal Reserve
notified all firms subject to CCAR that they would be subject to temporary
restrictions on capital distributions in the third and fourth quarter of 2020
that restricted most share repurchases and limited dividends based on a formula
that takes into account the firm's average net income over the preceding four
quarters.
On November 2, 2020, DFS submitted its revised capital plan as part of the CCAR
resubmission process, and the Federal Reserve publicly announced the results of
its analysis on December 18, 2020. The results indicate that DFS' regulatory
capital ratios remained above all minimum requirements under each of the stress
test scenarios. However, due to ongoing economic uncertainty, the Federal
Reserve extended the temporary restrictions on capital distributions, with
modifications, for all firms subject to the Federal Reserve's capital planning
rule through the second quarter of 2021. Following an announcement by the
Federal Reserve on June 24, 2021, these restrictions were lifted and, effective
June 30, 2021, DFS was authorized to make capital distributions that are
consistent with the Federal Reserve's capital rule, inclusive of DFS' final SCB
requirement of 3.5% that was previously announced by the Federal Reserve on
August 10, 2020, and that remained in effect until the conclusion of the 2021
CCAR process and the subsequent, related announcement of DFS' adjusted SCB
requirement.
On January 19, 2021, the Federal Reserve finalized regulatory amendments that
made targeted changes to the capital planning, regulatory reporting and SCB
requirements for firms subject to Category IV standards to be consistent with
the Federal Reserve's regulatory tailoring framework. The final rules generally
align to instructions the Federal Reserve previously provided to Category IV
firms regarding their respective capital plan submissions. The amended rules
also provide Category IV firms, including DFS, with the option to submit to
supervisory stress tests during off years if they wish for the Federal Reserve
to reset the stress test portion of their SCB requirement. In connection with
the final rulemaking, the Federal Reserve revised the scope of application of
its existing regulatory guidance for capital planning to align with the
tailoring framework. However, the timing and substance of any additional changes
to existing guidance or new guidance are uncertain.
On June 24, 2021, the Federal Reserve publicly announced the results of its
supervisory stress tests for the firms required to participate in the 2021 CCAR
process. In accordance with the capital plan rule amendments that were finalized
in January 2021, DFS elected not to participate in the 2021 supervisory stress
tests. Nevertheless, DFS was required to submit a capital plan based on a
forward-looking internal assessment of income and capital under baseline and
stressful conditions. This plan was submitted by DFS to the Federal Reserve on
April 5, 2021. The Federal Reserve thereafter used our 2021 capital plan
submission to assess its capital planning process and positions and, as of
August 5, 2021, announced DFS'
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adjusted SCB requirement of 3.6% to reflect DFS' planned common stock dividends.
This adjusted SCB is effective as of October 1, 2021.
London Interbank Offered Rate
On July 27, 2017, the UK Financial Conduct Authority ("FCA") announced that it
would no longer encourage or compel banks to continue to contribute quotes and
maintain the London Interbank Offered Rate ("LIBOR") after 2021. To support a
smooth transition away from LIBOR, the Federal Reserve and the Federal Reserve
Bank of New York convened the Alternative Reference Rates Committee ("ARRC"), a
group of private-market participants tasked with facilitating a successful
transition from U.S. dollar ("USD") LIBOR to a more robust reference rate. The
ARRC initially identified the Secured Overnight Financing Rate ("SOFR") as its
recommended alternative reference rate for USD LIBOR. The ARRC has also
established several priorities and milestones to support the use of SOFR and
SOFR-based indices, including developing contractual "fallback" language for
capital markets and consumer products; providing clarity on legal, tax,
accounting and regulatory matters; promoting broad outreach and education
efforts around the LIBOR transition; and recommending spread adjustments for
SOFR and SOFR-based indices, which will be of critical importance to market
participants once USD LIBOR settings cease in 2023.
With regard to recent LIBOR transition developments, on March 5, 2021, the FCA
announced the future cessation and loss of representativeness for all LIBOR
benchmark settings. While non-USD and several less frequently referenced USD
LIBOR settings will cease publication immediately after December 31, 2021,
commonly referenced USD LIBOR settings will cease publication immediately after
June 30, 2023; this future cessation event will trigger fallback provisions in
many financial contracts to convert their benchmark index from LIBOR to an
alternative rate, usually some form of SOFR. On July 29, 2021, the ARRC
announced its recommendation of forward-looking term rates based on SOFR as
additional alternative reference rate options.
We have a cross-functional team overseeing and managing our transition away from
the use of LIBOR. This team assesses evolving industry and marketplace norms and
conventions for LIBOR-indexed instruments, evaluates the impacts stemming from
the future cessation of LIBOR publication and oversees and takes actions to
transition our LIBOR exposures to alternative benchmark rates, usually SOFR. Our
existing LIBOR exposures are limited primarily to three
instruments-variable-rate student loans, interest rate swaps and capital markets
securities-and we have materially reduced our remaining exposures in all of
these instruments.
As of September 30, 2021, LIBOR-indexed variable-rate loans comprise
approximately 44% of our private student loan portfolio and approximately 5% of
our aggregate loan portfolio. These outstanding student loans indexed to LIBOR
will convert to a SOFR index in 2023 when 3-month USD LIBOR will no longer be
published. United States banking regulators have directed banks to cease
entering into new contracts that use USD LIBOR as a reference rate after
December 31, 2021. Therefore, beginning in November 2021, we will only originate
new variable-rate student loans indexed to term SOFR.
We ceased entering into new LIBOR-indexed interest rate derivatives in 2018 and
have since actively reduced LIBOR exposures in our derivatives portfolio. During
the third quarter of 2021, we terminated our last LIBOR-indexed interest rate
swap maturing after June 2023; our one remaining LIBOR-indexed interest rate
swap will mature in January 2022.
Most of our capital markets securities indexed to USD LIBOR are floating-rate
asset-backed securities. Beginning in 2018, we included fallback provisions in
all newly-issued securities that will facilitate an orderly transition from
LIBOR to SOFR once 1- and 3-month LIBOR cease to be published in 2023.
Approximately $1.5 billion of our capital markets securities that mature after
June 2023 with no fallback provisions would be covered under pending federal
legislation that would allow us to replace the LIBOR index with SOFR under a
safe-harbor provision. Approximately $800 million of our capital markets
securities contain fallback provisions that would not be covered under pending
federal legislation; however, shortly after the expected June 2023 USD LIBOR
cessation date, these securities will either mature or we may exercise our right
to call and redeem them.
We have prepared for the cessation of USD LIBOR by taking steps to avoid new
exposures and actively reduce our remaining exposures. We are on track to
complete before year-end 2021 any remaining transition work, including providing
our customers with information about the cessation of USD LIBOR and how it will
affect their contracts with us.
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Consumer Financial Services
The CFPB regulates consumer financial products and services and examines certain
providers of consumer financial products and services, including Discover. The
CFPB's authority includes rulemaking, supervisory and enforcement powers with
respect to federal consumer protection laws; preventing "unfair, deceptive or
abusive acts or practices" and ensuring that consumers have access to fair,
transparent and competitive financial products and services. Historically, the
CFPB's policy priorities focused on several financial products of the type we
offer (e.g., credit cards and other consumer lending products). In addition, the
CFPB is required by statute to undertake certain actions, including its biennial
review of the consumer credit card market. In December 2020, certain of our
subsidiaries entered into a consent order with the CFPB regarding identified
private student loan servicing practices. See Note 14: Litigation and Regulatory
Matters to our condensed consolidated financial statements for more information.
Former Federal Trade Commissioner Rohit Chopra was sworn in as the Director of
the CFPB on October 12, 2021. Under Mr. Chopra's leadership, the CFPB's
priorities are expected to focus on, among other things, vigorous enforcement of
existing consumer protection laws, with a particular focus on unfair, deceptive
and abusive acts and practices and fair lending, student lending and servicing,
fair lending, debt collection and credit reporting. These strategies and
priorities and any resulting regulatory developments, findings, potential
supervisory or enforcement actions and ratings could negatively impact business
strategies, limit or change our business practices, limit consumer product
offerings, invest more management time and resources in compliance efforts,
limit fees charged for services, limit our ability to implement certain
enhancements to product features and functionality or limit our ability to
obtain related required regulatory approvals. The additional expense, time and
resources needed to comply with ongoing or new regulatory requirements may
adversely impact the cost of and access to credit for consumers and results of
business operations.
Data Security and Privacy
Policymakers at the federal and state levels remain focused on enhancing data
security and data breach incident response requirements. Furthermore,
regulations and legislation at various levels of government have been proposed
and enacted to augment consumer data privacy standards. The California Consumer
Privacy Act ("CCPA") creates a broad set of privacy rights and remedies modeled
in part on the European Union's General Data Protection Regulation. The CCPA
went into effect on January 1, 2020, and the California Attorney General's final
regulations became effective on August 14, 2020, with enforcement beginning July
1, 2020. The California Privacy Rights Act ("CPRA"), a ballot measure led by the
original proponent of the CCPA, passed on November 3, 2020, and largely enters
into force on January 1, 2023. The CPRA replaces the CCPA to enhance consumer
privacy protections further and creates a new California Privacy Protection
Agency ("CPPA"). In September, the CPPA Board initiated the CPRA regulatory
phase by issuing a request for preliminary comments. While the CPRA retains an
exemption for information collected, processed, sold, or disclosed subject to
the Gramm-Leach-Bliley Act, we continue to evaluate the impact of the CPRA on
our businesses and other providers of consumer financial services.

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Segments
We manage our business activities in two segments, Digital Banking and Payment
Services, based on the products and services provided. For a detailed
description of each segment's operations and the allocation conventions used in
our business segment reporting, see Note 17: Segment Disclosures to our
condensed consolidated financial statements.
The following table presents segment data (dollars in millions):
                                                    For the Three Months Ended           For the Nine Months Ended
                                                           September 30,                       September 30,
                                                       2021              2020              2021              2020
Digital Banking
Interest income
Credit card loans                                  $   2,193          $ 2,171          $   6,452          $ 6,760
Private student loans                                    184              182                554              569
Personal loans                                           219              237                662              722
Other loans                                               30               27                 85               78
Other interest income                                     48               64                156              206
Total interest income                                  2,674            2,681              7,909            8,335
Interest expense                                         269              416                875            1,482
Net interest income                                    2,405            2,265              7,034            6,853
Provision for credit losses                              185              750                (45)           4,603
Other income                                             447              371              1,284            1,091
Other expense                                          1,151              969              3,290            3,069
Income before income taxes                             1,516              917              5,073              272
Payment Services

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

959 $ 5,703 $ 420


The following table presents information on transactions and transaction volume
(in millions):
                                                                   For the Three Months Ended               For the Nine Months Ended
                                                                          September 30,                           September 30,
                                                                     2021                2020                2021                2020
Network Transaction Volume
PULSE Network                                                   $    59,872          $  54,993          $   183,126          $ 157,026
Network Partners                                                     10,377              8,917               29,474             23,177
Diners Club(1)                                                        6,547              5,839               18,570             17,915
Total Payment Services                                               76,796             69,749              231,170            198,118
Discover Network-Proprietary(2)                                      49,360             38,699              135,763            106,228
Total Network Transaction Volume                                $   126,156

$ 108,448 $ 366,933 $ 304,346
Transactions processed on Discover Network

                                                        868                679                2,345              1,889
PULSE Network                                                         1,415              1,270                4,124              3,668
Total Transactions Processed on Networks                              2,283              1,949                6,469              5,557
Credit Card Volume
Discover Card Volume(3)                                         $    50,389          $  39,783          $   138,772          $ 110,362
Discover Card Sales Volume(4)                                   $    47,613          $  37,134          $   130,817          $ 101,843


(1)Diners Club volume is derived from data provided by licensees for Diners Club
branded cards issued outside North America and is subject to subsequent revision
or amendment.
(2)Represents gross Discover card sales volume on the Discover Network.
(3)Represents Discover card activity related to sales net of returns, balance
transfers, cash advances and other activities.
(4)Represents Discover card activity related to sales net of returns.
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Digital Banking
Our Digital Banking segment reported pretax income of $1.5 billion and $5.1
billion, respectively, for the three and nine months ended September 30, 2021,
as compared to a pretax income of $917 million and $272 million, respectively,
for the three and nine months ended September 30, 2020.
Net interest income increased for the three months ended September 30, 2021, as
compared to the same period in 2020, primarily driven by lower funding costs.
Interest income remained flat during the three months ended September 30, 2021,
as compared to the same period in 2020, due to favorable interest charge-offs
offset by a lower card revolve rate. Interest expense decreased during the three
months ended September 30, 2021, as compared to the same period in 2020, due to
lower average market rates, a lower funding base, lower pricing on deposits and
higher coupon maturities.
Net interest income increased for the nine months ended September 30, 2021, as
compared to the same period in 2020, primarily driven by lower funding costs,
partially offset by a lower average level of outstanding loan receivables and
lower yields on loans. Interest income decreased during the nine months ended
September 30, 2021, as compared to the same period in 2020. This decrease was
primarily due to a lower average level of card loan receivables, driven by
higher payment rates, as well as lower yields on loans due to the lower market
rates. Interest expense decreased during the nine months ended September 30,
2021, as compared to the same period in 2020 due to lower average market rates,
a lower funding base, lower pricing on deposits and higher coupon maturities.
For the three and nine months ended September 30, 2021, the overall portfolio
provision for credit losses decreased as compared to the same periods in 2020,
primarily due to reserve releases in the current periods versus reserve builds
in the prior periods and lower net charge-offs. The overall reserve release
during the three months ended September 30, 2021, was primarily driven by
improvements in the macroeconomic forecast and continued stable credit
performance, partially offset by modest credit card loan receivables growth and
seasonality in private student loan originations during the periods. The reserve
build during the three months ended September 30, 2020, was driven by a seasonal
increase in private student loan originations during the period. The reserve
release during the nine months ended September 30, 2021, was primarily driven by
improvements in the macroeconomic forecast, continued stable credit performance
and a reduction in loan receivables outstanding during the period. The reserve
build during the nine months ended September 30, 2020, was primarily driven by
the unfavorable change in economic outlook resulting from the COVID-19 pandemic.
For a detailed discussion on provision for credit losses, see "- Loan Quality -
Provision and Allowance for Credit Losses."
Total other income increased for the three and nine months ended September 30,
2021, as compared to the same periods in 2020, which was primarily due to an
increase in discount and interchange revenue. The increase in discount and
interchange revenue was partially offset by an increase in rewards costs, both
of which were the result of higher sales volume during the period.
Total other expense increased for the three months ended September 30, 2021, as
compared to the same period in 2020, primarily due to increases in marketing and
business development, other expense and professional fees. Marketing and
business development increased due to accelerated growth investments primarily
in card. The increase in other expense was driven by a legal accrual. The
professional fees increase was driven primarily by an increase in recovery fees.
Total other expense increased for the nine months ended September 30, 2021, as
compared to the same period in 2020, primarily due to increases in employee
compensation and benefits, other expense, professional fees and marketing and
business development. Employee compensation and benefits increased as a result
of higher bonus accruals and higher average salaries, partially offset by lower
headcount. The increase in other expense was driven by a legal accrual. The
professional fees increase was driven primarily by an increase in recovery fees.
Marketing and business development increased due to accelerated growth
investments primarily in card.
Discover card sales volume was $47.6 billion and $130.8 billion, respectively,
for the three and nine months ended September 30, 2021, which was an increase of
28.2% and 28.4%, respectively, as compared to the same periods in 2020. This
volume growth was primarily driven by higher consumer spending across all
spending categories, reflecting the easing of COVID-19 restrictions and
continued economic expansion.
Payment Services
Our Payment Services segment reported pretax loss of $114 million and pretax
income of $630 million, respectively, for the three and nine months ended
September 30, 2021, as compared to pretax income of $42 million and $148 million
for the same periods in 2020. The decrease in segment pretax income for the
three months ended September 30, 2021, was driven
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by unrealized losses on equity investments. Unrealized losses on equity
investments are the result of changes in the fair value of our investments in
payment services entities that have actively traded stock. The increase in
segment pretax income for the nine months ended September 30, 2021, was due to
unrealized gains on equity investments. Unrealized gains on equity investments
are the result of investments in payment services entities that are carried at
fair value because the shares are actively traded. This increase was partially
offset by a decrease in realized gains on the sale of equity investments during
the prior period.
Critical Accounting Estimates
In preparing our condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States ("GAAP"),
management must make judgments and use estimates and assumptions about the
effects of matters that are uncertain. For estimates that involve a high degree
of judgment and subjectivity, it is possible that different estimates could
reasonably be derived for the same period. For estimates that are particularly
sensitive to economic or market conditions changes, significant changes to the
estimated amount from period to period are also possible. Management believes
the current assumptions and other considerations used to estimate amounts
reflected in our condensed consolidated financial statements are appropriate.
However, if actual experience differs from the assumptions and other
considerations used in estimating amounts in our condensed consolidated
financial statements, the resulting changes could have a material effect on our
consolidated results of operations and, in some instances, could have a material
effect on our consolidated financial condition. Management has identified the
estimate related to our allowance for credit losses as a critical accounting
estimate. The critical accounting estimate related to the allowance for credit
losses is discussed in greater detail in our annual report on Form 10-K for the
year ended December 31, 2020, under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Estimates."
There have not been any material changes in the methods used to formulate this
critical accounting estimate from those discussed in our annual report on Form
10-K for the year ended December 31, 2020.
Earnings Summary
The following table outlines changes in our condensed consolidated statements of
income (dollars in millions):
                                 For the Three Months Ended                  2021 vs. 2020                   For the Nine Months Ended                  2021 vs. 2020
                                        September 30,                     (Decrease) Increase                      September 30,                     (Decrease) Increase
                                    2021              2020                $                   %                2021              2020                $                  %
Interest income                 $   2,674          $ 2,681          $        (7)                  NM       $   7,909          $ 8,335          $      (426)              (5) %
Interest expense                      269              416                 (147)              (35) %             875            1,482                 (607)             (41) %
Net interest income                 2,405            2,265                  140                 6  %           7,034            6,853                  181                3  %
Provision for credit losses           185              750                 (565)              (75) %             (45)           4,603               (4,648)            (101) %
Net interest income after
provision for credit losses         2,220            1,515                  705                47  %           7,079            2,250                4,829              215  %
Other income                          372              449                  (77)              (17) %           2,117            1,411                  706               50  %
Other expense                       1,190            1,005                  185                18  %           3,493            3,241                  252                8  %
Income before income taxes          1,402              959                  443                46  %           5,703              420                5,283                  NM
Income tax expense                    311              188                  123                65  %           1,321               78                1,243                  NM
Net income                      $   1,091          $   771          $       320                42  %       $   4,382          $   342          $     4,040                  NM


Net Interest Income
The table that follows this section has been provided to supplement the
discussion below and provide further analysis of net interest income and net
interest margin. Net interest income represents the difference between interest
income earned on our interest-earning assets and the interest expense incurred
to finance those assets. We analyze net interest income in total by calculating
net interest margin (net interest income as a percentage of average total loan
receivables) and net yield on interest-earning assets (net interest income as a
percentage of average total interest-earning assets). We also separately
consider the impact of the level of loan receivables and the related interest
yield and the impact of the cost of funds related to each of our funding
sources, along with the income generated by our liquidity portfolio, on net
interest income.
Our interest-earning assets consist of: (i) cash and cash equivalents primarily
related to amounts on deposit with the Federal Reserve Bank of Philadelphia,
(ii) restricted cash, (iii) other short-term investments, (iv) investment
securities and (v) loan receivables. Our interest-bearing liabilities consist
primarily of deposits, both direct-to-consumer and brokered, and
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long-term borrowings, including amounts owed to securitization investors. The
following factors influence net interest income:
â€¢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;
â€¢The credit performance of our loans, particularly with regard to charge-offs of
finance charges, which reduces interest income;
â€¢The terms of long-term borrowings and certificates of deposit upon initial
offering, including maturity and interest rate;
â€¢The interest rates necessary to attract and maintain direct-to-consumer
deposits;
â€¢The level and composition of other interest-earning assets, including our
liquidity portfolio and interest-bearing liabilities;
â€¢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
â€¢The effectiveness of interest rate swaps in our interest rate risk management
program.
  Net interest income increased for the three months ended September 30, 2021,
as compared to the same period in 2020, primarily driven by lower funding costs.
Interest income remained flat during the three months ended September 30, 2021,
as compared to the same period in 2020, due to favorable interest charge-offs
offset by a lower card revolve rate. Interest expense decreased during the three
months ended September 30, 2021, as compared to the same period in 2020, due to
lower average market rates, a lower funding base, lower pricing on deposits and
higher coupon maturities.
Net interest income increased for the nine months ended September 30, 2021, as
compared to the same period in 2020, primarily driven by lower funding costs,
partially offset by a lower average level of outstanding loan receivables and
lower yields on loans. Interest income decreased during the nine months ended
September 30, 2021, as compared to the same period in 2020. This decrease was
primarily due to a lower average level of card loan receivables, driven by
higher payment rates, as well as lower yields on loans due to the lower market
rates. Interest expense decreased during the nine months ended September 30,
2021, as compared to the same period in 2020 due to lower average market rates,
a lower funding base, lower pricing on deposits and higher coupon maturities.

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Average Balance Sheet Analysis
(dollars in millions)
                                                                                      For the Three Months Ended September 30,
                                                                        2021                                                               2020
                                                                                                                    Average
                                             Average Balance              Yield/Rate            Interest            Balance              Yield/Rate            Interest
Assets
Interest-earning assets
Cash and cash equivalents                  $     12,192                          0.16  %       $      3          $   12,552                     0.12  %       $      4
Restricted cash                                     571                          0.03  %                NM              775                     0.09  %                NM
Other short-term investments                                 NM                  0.10  %                NM            4,529                     0.15  %              2
Investment securities                             8,431                          2.09  %             45              10,760                     2.13  %             58
Loan receivables(1)
Credit card loans(2)                             69,416

    12.53  %          2,193              69,643                    12.40  %

         2,171
Private student loans                             9,932                          7.36  %            184               9,790                     7.40  %            182
Personal loans                                    6,900                         12.61  %            219               7,255                    13.03  %            237
Other loans                                       2,108                          5.41  %             30               1,734                     6.25  %             27
Total loan receivables                           88,356

    11.79  %          2,626              88,422                    11.78  %

2,617

Total interest-earning assets                   109,550                          9.68  %          2,674             117,038                     9.11  %          2,681
Allowance for credit losses                      (7,020)                                                             (8,183)
Other assets                                      6,430                                                               5,981
Total assets                               $    108,960                                                          $  114,836
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits                              $     22,804                          1.76  %            101          $   32,063                     2.33  %            188
Money market deposits(3)                          8,108                          0.53  %             11               8,104                     0.94  %             19
Other interest-bearing savings deposits          41,059                          0.42  %             44              36,655                     0.87  %             80
Total interest-bearing deposits                  71,971                          0.86  %            156              76,822                     1.49  %

           287
Borrowings
Short-term borrowings                                 6                          0.24  %                NM              350                     3.10  %              3
Securitized borrowings(4)(5)                      8,292                          1.10  %             22              12,115                     1.04  %             31
Other long-term borrowings(5)(6)                  9,550                          3.78  %             91              10,426                     3.60  %             95
Total borrowings                                 17,848                          2.53  %            113              22,891                     2.23  %            129
Total interest-bearing liabilities               89,819                          1.19  %            269              99,713                     1.66  %            416
Other liabilities and stockholders' equity       19,141                                                              15,123
Total liabilities and stockholders' equity $    108,960                                                          $  114,836
Net interest income                                                                            $  2,405                                                       $  2,265
Net interest margin(7)                                                          10.80  %                                                       10.19  %
Net yield on interest-earning assets(8)                                          8.71  %                                                        7.70  %
Interest rate spread(9)                                                          8.49  %                                                        7.45  %


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Contents

                                                                                     For the Nine Months Ended September 30,
                                                                        2021                                                             2020
                                                 Average                                                          Average
                                                 Balance                 Yield/Rate            Interest           Balance              Yield/Rate            Interest
Assets
Interest-earning assets
Cash and cash equivalents                  $     15,725                         0.12  %       $     14          $  11,522                     0.36  %       $     31
Restricted cash                                     536                         0.03  %                NM             544                     0.48  %              2
Other short-term investments                        235                         0.12  %                NM           1,667                     0.15  %              2
Investment securities                             9,125                         2.08  %            142             10,658                     2.14  %            171
Loan receivables(1)
Credit card loans(2)                             68,522                        12.59  %          6,452             71,934                    12.55  %          6,760
Private student loans                            10,044                         7.38  %            554              9,869                     7.70  %            569
Personal loans                                    6,953                        12.73  %            662              7,477                    12.90  %            722
Other loans                                       2,002                         5.64  %             85              1,609                     6.48  %             78
Total loan receivables                           87,521                        11.84  %          7,753             90,889                    11.95  %          8,129
Total interest-earning assets                   113,142                         9.35  %          7,909            115,280                     9.66  %          8,335
Allowance for credit losses                      (7,521)                                                           (6,991)
Other assets                                      6,189                                                             5,787
Total assets                               $    111,810                                                         $ 114,076
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits                              $     24,856                         1.90  %            354          $  33,202                     2.46  %            611
Money market deposits(3)                          8,151                         0.53  %             32              7,635                     1.28  %             73
Other interest-bearing savings deposits          40,760                         0.43  %            133             33,852                     1.25  %

316

Total interest-bearing deposits                  73,767                         0.94  %            519             74,689                     1.79  %          1,000
Borrowings
Short-term borrowings                                 3                         0.21  %                NM             118                     3.10  %              3
Securitized borrowings(4)(5)                      9,798                         1.05  %             77             13,051                     1.55  %            152
Other long-term borrowings(5)(6)                 10,037                         3.72  %            279             11,193                     3.91  %            327
Total borrowings                                 19,838                         2.40  %            356             24,362                     2.64  %            482
Total interest-bearing liabilities               93,605                         1.25  %            875             99,051                     2.00  %

1,482

Other liabilities and stockholders' equity       18,205                                                            15,025
Total liabilities and stockholders' equity $    111,810                                                         $ 114,076
Net interest income                                                                           $  7,034                                                      $  6,853
Net interest margin(7)                                                         10.74  %                                                      10.07  %
Net yield on interest-earning assets(8)                                         8.31  %                                                       7.94  %
Interest rate spread(9)                                                         8.10  %                                                       7.66  %


(1)Average balances of loan receivables and yield calculations include
non-accruing loans. If the non-accruing loan balances were excluded, there would
not be a material impact on the amounts reported above.
(2)Interest income on credit card loans includes $73 million and $70 million of
amortization of balance transfer fees for the three months ended September 30,
2021 and 2020, respectively, and $217 million and $227 million for the nine
months ended September 30, 2021 and 2020, respectively.
(3)Includes the impact of interest rate swap agreements used to change a portion
of floating-rate funding to fixed-rate funding for the three and nine months
ended September 30, 2020.
(4)Includes the impact of one terminated derivative formerly designated as a
cash flow hedge for the three and nine months ended September 30, 2021 and 2020.
(5)Includes the impact of interest rate swap agreements used to change a portion
of fixed-rate funding to floating-rate funding for the three and nine months
ended September 30, 2021 and 2020.
(6)Includes the impact of one terminated derivative formerly designated as a
fair value hedge for the three and nine months ended September 30, 2021.
(7)Net interest margin represents net interest income as a percentage of average
total loan receivables.
(8)Net yield on interest-earning assets represents net interest income as a
percentage of average total interest-earning assets.
(9)Interest rate spread represents the difference between the rate on total
interest-earning assets and total interest-bearing liabilities.
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Loan Quality
Impact of the COVID-19 Pandemic on the Loan Portfolio
The COVID-19 pandemic and its impact on the economy have significantly affected
our sales volume and credit card loan growth. We tightened standards for new
accounts and for growing existing accounts across all products and reduced our
marketing and customer acquisition expenditures at the onset of the pandemic.
Due to the strong economic recovery from the COVID-19 pandemic-induced
recession, we returned most of our underwriting criteria to pre-pandemic
standards and resumed our investment in marketing and business development
during the second quarter of 2021. This change in our credit underwriting, in
addition to changes in consumer spending behavior, increased marketing and the
re-opening of the United States economy upon expiration of COVID-19
restrictions, contributed to an increase in sales volume for the three and nine
months ended September 30, 2021, when compared to the same periods in 2020. Our
outstanding loan receivables as of September 30, 2021, decreased when compared
to December 31, 2020, due to elevated payment rates resulting from the several
rounds of government stimulus and associated improvement in household cash
flows. The decrease in outstanding loan receivables was partially offset by the
robust credit card sales trends and seasonality in private student loan
originations during the nine months ended September 30, 2021.
At the onset of the COVID-19 pandemic, we expanded borrower relief offerings to
include Skip-a-Pay (payment deferral) ("SaP") and other loan modification
programs, complementing the assistance already available through our existing
loan modification programs. On August 31, 2020, we ceased offering enrollments
in the SaP and other loan modification programs specifically developed in
response to the COVID-19 pandemic. The accounts using these modifications as a
result of the COVID-19 pandemic were evaluated for potential exclusion from the
TDR designation either due to the insignificance of the concession or because
they qualified for an exemption pursuant to the CARES Act. The SaP programs
provided only an insignificant delay in payment on the enrolled accounts or
loans and therefore those deferrals were not classified as TDRs.
Section 4013 of the CARES Act provides certain financial institutions with the
option to suspend the application of accounting and reporting guidance for TDRs
for a limited period of time for loan modifications made to address the effects
of the COVID-19 pandemic. Section 541 of the Omnibus and COVID Relief and
Response Act extended the TDR accounting and reporting relief provided by the
CARES Act through the earlier of January 1, 2022, or the date that is 60 days
after the termination of the presidentially-declared national emergency. We
elected to apply the option to suspend the application of accounting and
reporting guidance for TDRs as provided under Section 4013 of the CARES Act and
as subsequently extended. As such, the number of accounts and corresponding
balances designated as a TDR for the three and nine months ended September 30,
2021 and 2020, have been favorably impacted by the exclusion of certain
modifications from the TDR designation pursuant to these exemptions and are
expected to remain lower than they otherwise would have been. The payment status
of modified accounts excluded from the TDR designation pursuant to the CARES Act
is reflected in our delinquency reporting.
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The table below reflects the number and balance of both new loan modifications
reported as TDRs and new loan modifications excluded from the TDR designation
pursuant to the CARES Act (dollars in millions)(1):
                                                                                             Accounts that entered a loan
                                                   Accounts that entered a loan              modification program and were
                                                  modification program and were             exempt from the TDR designation
                                               classified as TDRs during

the period in accordance with the CARES law (1)

                                                   Number of                                  Number of
                                                   Accounts              Balances             Accounts             Balances
For the Three Months Ended September 30, 2021
Credit card loans                                      13,964          $      86                  27,925          $    200
Private student loans                                     102          $       2                   2,325          $     46
Personal loans                                            888          $      10                     239          $      3

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

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

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


(1)SaP programs were not considered TDRs and therefore are not included in
accounts excluded from the TDR designation by the CARES Act.
(2)Certain prior period amounts have been reclassified to conform to the current
period presentation.
(3)As the TDR exemption pursuant to the CARES Act took effect in March 2020, the
nine months ended September 30, 2021, is not comparable to the same period in
2020.
The number and balance of new credit card and personal loan modifications,
including the combined total of those identified as TDRs and those exempt from
the TDR designation, decreased during the three and nine months ended September
30, 2021, when compared to the same periods in 2020. The decrease in both
periods is primarily due to the impacts of several rounds of government stimulus
and disaster relief programs, which reduced the need for our customers to enroll
in a loan modification program. The number and balance of loan modifications
across all products, including the combined total of those identified as TDRs
and those exempt from the TDR designation, during the three and nine months
ended September 30, 2020, were favorably impacted by the utilization of SaP
programs in lieu of traditional loan modification programs. Additionally,
enrollments in personal loan modification programs were favorably impacted by
tighter underwriting standards that were implemented in early 2020.
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The following table provides the number of accounts that exited a temporary loan
modification program that were exempt from the TDR designation pursuant to the
CARES Act and corresponding outstanding balances along with the amount of the
outstanding balances that were delinquent (30 or more days past due) upon
exiting the temporary loan modification program (dollars in millions)(1):

Three months ended September 30, 2021

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

Nine months ended September 30, 2021

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


(1)As the TDR exemption pursuant to the CARES Act took effect in March 2020, the
nine months ended September 30, 2021, is not comparable to the same period in
2020. The number of accounts that exited a temporary loan modification program
that were exempt from the TDR designation pursuant to the CARES Act and
corresponding outstanding balances were not meaningful for the three and nine
months ended September 30, 2020.
(2)Includes balances charged off at the end of the month the account exited the
temporary loan modification program. The balances charged off were not
meaningful for the three and nine months ended September 30, 2021 and 2020.
(3)The private student loan and personal loan balances that were delinquent upon
exiting a temporary loan modification program were not meaningful for the three
and nine months ended September 30, 2021 and 2020.
Our estimate of expected loss reflected in our allowance for credit losses
includes the risk associated with all loans. We consider the effects of all loan
modifications, including TDRs, loan modifications exempt from the TDR
designation pursuant to the CARES Act and SaP programs. We believe we have
appropriately reflected the risk of the accounts using these programs and the
economic impact of the COVID-19 pandemic on our customers in the allowance for
credit losses. Refer to Note 3: Loan Receivables to our condensed consolidated
financial statements for more details on modification programs, TDRs and the
allowance for credit losses.
Loan receivables consist of the following (dollars in millions):
                                September 30,
                                     2021           December 31, 2020
Credit card loans              $       70,320      $           71,472
Other loans
Private student loans                  10,184                   9,954
Personal loans                          6,890                   7,177
Other loans                             2,148                   1,846
Total other loans                      19,222                  18,977
Total loan receivables                 89,542                  90,449
Allowance for credit losses            (6,861)                 (8,226)
Net loan receivables           $       82,681      $           82,223


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Provision and Allowance for Credit Losses
Provision for credit losses is the expense related to maintaining the allowance
for credit losses at an appropriate level to absorb the estimate of credit
losses anticipated over the remaining expected life of loan receivables at each
period end date. In deriving the estimate of expected credit loss, we consider
the collectability of principal, interest and fees associated with our loan
receivables. We also consider expected recoveries of amounts that were either
previously charged off or are expected to be charged off. Establishing the
estimate for expected credit losses requires significant management judgment.
The factors that influence the provision for credit losses include:
â€¢Increases or decreases in outstanding loan balances, including:
â€¢Changes in consumer spending, payment and credit utilization behaviors;
â€¢The level of originations and maturities; and
â€¢Changes in the overall mix of accounts and products within the portfolio;
â€¢The credit quality of the loan portfolio, which reflects our credit granting
practices and the effectiveness of collection efforts, among other factors;
â€¢The impact of general economic conditions on the consumer, including national
and regional conditions, unemployment levels, bankruptcy trends and interest
rate movements;
â€¢The level and direction of historical losses; and
â€¢Regulatory changes or new regulatory guidance.
Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Estimates" in our annual report on
Form 10-K for the year ended December 31, 2020, and Note 3: Loan Receivables to
our condensed consolidated financial statements for more details on how we
estimate the allowance for credit losses.
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The following tables provide changes in our allowance for credit losses (dollars
in millions):

For the three months ended September 30, 2021

                                              Credit Card

Private

                                                 Loans            Student Loans          Personal Loans           Other Loans           Total Loans
Balance at June 30, 2021                    $      5,409          $       828          $           745          $         44          $      7,026

Additions

Provision for credit losses(1)                       178                   46                      (64)                    -                   160
Deductions
Charge-offs                                         (495)                 (23)                     (38)                    -                  (556)
Recoveries                                           206                    6                       19                     -                   231
Net charge-offs                                     (289)                 (17)                     (19)                    -                  (325)

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

For the three months ended September 30, 2020

                                              Credit Card

Private

                                                 Loans            Student Loans          Personal Loans           Other Loans           Total Loans
Balance at June 30, 2020                    $      6,491          $       799          $           857          $         37          $      8,184

Additions

Provision for credit losses(1)                       604                   55                       49                     2                   710
Deductions
Charge-offs                                         (759)                 (20)                     (62)                   (1)                 (842)
Recoveries                                           155                    6                       13                     -                   174
Net charge-offs                                     (604)                 (14)                     (49)                   (1)                 (668)

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

For the nine months ended September 30, 2021

                                              Credit Card

Private

                                                 Loans            Student Loans          Personal Loans           Other Loans           Total Loans
Balance at December 31, 2020                $      6,491          $       840          $           857          $         38          $      8,226

Additions

Provision for credit losses(1)                       (18)                  61                      (96)                    6                   (47)
Deductions
Charge-offs                                       (1,778)                 (63)                    (150)                    -                (1,991)
Recoveries                                           603                   19                       51                     -                   673
Net charge-offs                                   (1,175)                 (44)                     (99)                    -                (1,318)

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

For the nine months ended September 30, 2020

                                              Credit Card

Private

                                                 Loans            Student Loans          Personal Loans           Other Loans           Total Loans
Balance at December 31, 2019(2)             $      2,883          $       148          $           348          $          4          $      3,383
Cumulative effect of ASU No. 2016-13
adoption(3)                                        1,667                  505                      265                    24                 2,461
Balance at January 1, 2020                         4,550                  653                      613                    28                 5,844

Additions

Provision for credit losses(2)                     3,916                  233                      426                    11                 4,586
Deductions
Charge-offs                                       (2,480)                 (62)                    (224)                   (1)               (2,767)
Recoveries                                           505                   16                       42                     -                   563
Net charge-offs                                   (1,975)                 (46)                    (182)                   (1)               (2,204)

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


(1)Excludes a $25 million and $40 million reclassification of the liability for
expected credit losses on unfunded commitments for the three months ended
September 30, 2021 and 2020, respectively, and $2 million and $17 million for
the nine months ended September 30, 2021 and 2020, respectively, as the
liability is recorded in accrued expenses and other liabilities in our condensed
consolidated statements of financial condition.
(2)Prior to the adoption of Accounting Standards Update ("ASU") No. 2016-13 on
January 1, 2020, credit losses were estimated using the incurred loss approach.
(3)Represents the adjustment to the allowance for credit losses due to the
adoption of ASU No. 2016-13 on January 1, 2020.
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The allowance for credit losses was approximately $6.9 billion at September 30,
2021, which reflects a $165 million release from the amount of the allowance for
credit losses at June 30, 2021 and a $1.4 billion release from the amount of the
allowance for credit losses at December 31, 2020.
The release in the allowance for credit losses between September 30, 2021 and
June 30, 2021, was primarily driven by improving macroeconomic forecasts and
continued stable credit performance, partially offset by modest loan growth
during the period. The modest growth in loan receivables during the three months
ended September 30, 2021, was driven by the robust credit card sales trends as
COVID-19 restrictions continue to ease and the United States economy continues
to more fully reopen. Additionally, credit card sales from new accounts and
seasonality in private student loan originations contributed to an increase in
ending outstanding loan receivables. The loan receivables growth was partially
offset by elevated payment rates resulting from the several rounds of government
stimulus and associated improvement in household cash flows.
The release in the allowance for credit losses between September 30, 2021 and
December 31, 2020, was primarily driven by improvements in the macroeconomic
forecast and continued stable credit performance. The release was also partially
driven by a moderate reduction in loan receivables outstanding during the
period. The decrease in outstanding loan receivables, particularly credit card
and personal loan receivables, and the stable credit performance, were driven by
elevated payment rates resulting from the several rounds of government stimulus
and associated improvement in household cash flows. The decrease in outstanding
loan receivables was partially offset by the robust credit card sales trends
during the period and seasonality in private student loan originations in the
third quarter of 2021.
In estimating the allowance at September 30, 2021, we used a macroeconomic
forecast that projected (i) a peak unemployment rate of 6.1%, decreasing to 5.5%
and 4.0% through the end of 2021 and 2022, respectively; and (ii) a 6.4% and
3.5% annualized growth in the real gross domestic product for 2021 and 2022,
respectively. Labor market conditions, which historically have been an important
determinant of credit loss trends, continue to improve despite the spread of the
COVID-19 delta variant. However, the unemployment rate and initial and
continuing jobless claims remain moderately elevated relative to pre-pandemic
levels. In estimating expected credit losses, we considered the uncertainties
associated with borrower behavior, payment trends and credit performance
subsequent to the expiration of government stimulus programs, such as the CARES
Act and ARPA, and disaster relief programs, such as foreclosure moratoriums and
federal student loan and mortgage payment forbearance. During the third quarter
of 2021, several disaster relief programs expired or were rescinded entirely. As
the government's response to the pandemic wanes, there is uncertainty regarding
the sustainability of the recent credit quality trends in our loan receivables
portfolio. Accordingly, the estimation of the allowance for credit losses has
required significant management judgment.
The forecast period we deemed reasonable and supportable was 18 months for all
periods presented except March 31, 2020, where the forecast period was 12 months
due to the uncertainty caused by the rapidly changing economic environment
experienced at the onset of the COVID-19 pandemic. The 18-month reasonable and
supportable forecast period was deemed appropriate based on the observed
economic phase transition from recovery to expansion and the associated
stabilization of macroeconomic forecasts. For all periods presented, we
determined that a reversion period of 12 months was appropriate for similar
reasons. Due to the uncertainties associated with borrower behavior resulting
from government stimulus and disaster relief programs, we applied a weighted
reversion method to provide a more reasonable transition to historical losses
for all loan products for all periods presented with the following exceptions:
at March 31, 2020 and December 31, 2019, we applied a straight-line method for
all loan products. At June 30, 2020, we applied a weighted reversion method for
credit card loans and a straight-line method for all other loan products.
The provision for credit losses is the amount of expense realized after
considering the level of net charge-offs in the period and the required amount
of allowance for credit losses at the balance sheet date. For the three months
ended September 30, 2021, the provision for credit losses decreased by $550
million, or 77%, compared to the same period in 2020. For the nine months ended
September 30, 2021, the provision for credit losses decreased by $4.6 billion,
or 101%, compared to the same period in 2020. The decrease in both periods was
primarily due to reserve releases in the current periods versus reserve builds
in the prior periods and lower net charge-offs. The reserve releases during the
three and nine months ended September 30, 2021, were primarily driven by
favorable change in the macroeconomic outlook related to the economic impacts of
the COVID-19 pandemic-induced recession and continued stable credit performance.
The reserve builds during the three and nine months ended September 30, 2020,
were primarily due to the unfavorable change in economic outlook resulting from
the COVID-19 pandemic.
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Net Charge-offs
Our net charge-offs include the principal amount of losses charged off less
principal recoveries and exclude charged-off and recovered interest and fees and
fraud losses. Charged-off and recovered interest and fees are recorded in
interest income and loan fee income, respectively, which is effectively a
reclassification of the provision for credit losses, while fraud losses are
recorded in other expense.
The following table presents amounts and rates of net charge-offs of key loan
products (dollars in millions):
                                         For the Three Months Ended September 30,                             For the Nine Months Ended September 30,
                                           2021                             2020                              2021                               2020
                                    $                %               $               %                 $                 %                $                %
Credit card loans              $    289             1.65  %       $ 604             3.45  %       $   1,175             2.29  %       $ 1,975             3.67  %
Private student loans          $     17             0.68  %       $  14             0.58  %       $      44             0.58  %       $    46             0.63  %
Personal loans                 $     19             1.11  %       $  49             2.69  %       $      99             1.91  %       $   182             3.24  %


The decreases in net charge-offs and the net charge-off rates for credit card
and personal loans for the three and nine months ended September 30, 2021, when
compared to the same periods in 2020, were primarily due to the impacts of
government stimulus and disaster relief programs and to a lesser extent improved
collection and recovery strategies. Additionally, the net charge-offs and the
net charge-off rate of personal loans for three and nine months ended September
30, 2021, were favorably impacted by tighter underwriting standards that were
implemented in early 2020. The net charge-offs and net charge-off rate for
private student loans remained relatively flat for the three and nine months
ended September 30, 2021, when compared to the same periods in 2020, due to the
impacts of government stimulus and disaster relief programs.
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Delinquencies
Delinquencies are an indicator of credit quality at a point in time. A loan
balance is considered delinquent when contractual payments on the loan become 30
days past due.
The following table presents the amounts and delinquency rates of key loan
products that are 30 and 90 days or more delinquent, loan receivables that are
not accruing interest regardless of delinquency and loans restructured in TDR
programs (dollars in millions):
                                                               September 30, 2021                     December 31, 2020
                                                              $                  %                  $                  %
Loans 30 or more days delinquent
Credit card loans                                        $   1,040               1.48  %       $   1,478               2.07  %
Private student loans                                    $     158               1.55  %       $     138               1.39  %
Personal loans                                           $      49               0.71  %       $      78               1.08  %

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

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

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


(1)Credit card loans that were 90 or more days delinquent at September 30, 2021
and December 31, 2020, included $58 million and $44 million, respectively, in
modified loans exempt from the TDR designation under the CARES Act. Within
private student and personal loans that were 90 or more days delinquent at
September 30, 2021 and December 31, 2020, the respective amounts associated with
modifications exempt from the TDR designation under the CARES Act were
immaterial.
(2)We estimate that interest income recognized on credit card loans restructured
in TDR programs was $24 million and $50 million for the three months ended
September 30, 2021 and 2020, respectively, and $84 million and $181 million for
the nine months ended September 30, 2021 and 2020, respectively. We do not
separately track interest income on loans in TDR programs. We estimate this
amount by applying an average interest rate to the average loans in the various
TDR programs.
(3)We estimate that the incremental interest income that would have been
recorded in accordance with the original terms of credit card loans restructured
in TDR programs was $34 million and $43 million for the three months ended
September 30, 2021 and 2020, respectively, and $106 million and $144 million for
the nine months ended September 30, 2021 and 2020, respectively. We do not
separately track the amount of incremental interest income that would have been
recorded if the loans in TDR programs had not been restructured and interest had
instead been recorded in accordance with the original terms. We estimate this
amount by applying the difference between the average interest rate earned on
non-modified loans and the average interest rate earned on loans in the TDR
programs to the average loans in the TDR programs.
(4)Credit card loans restructured in TDR programs include $44 million and $94
million at September 30, 2021 and December 31, 2020, respectively, which are
also included in loans 90 or more days delinquent.
(5)Private student loans restructured in TDR programs include $8 million and $6
million at September 30, 2021 and December 31, 2020, respectively, which are
also included in loans 90 or more days delinquent.
(6)Personal loans restructured in TDR programs include $4 million and $6 million
at September 30, 2021 and December 31, 2020, respectively, which are also
included in loans 90 or more days delinquent.
The 30-day and 90-day delinquency rates in the table above include all loans,
including TDRs, modified loans exempt from TDR status and prior modifications
that are no longer required to be reported as TDRs. The 30-day and 90-day
delinquency rates for credit card and personal loans at September 30, 2021,
decreased compared to December 31, 2020, primarily due to the impacts of
government stimulus and disaster relief programs. Additionally, the 30-day and
90-day delinquency rates for personal loans were favorably impacted by tighter
underwriting standards that were implemented in early 2020. The 30-day and
90-day delinquency rate for private student loans at September 30, 2021,
increased compared to December 31, 2020, as the impacts of government stimulus
and disaster relief programs began to wane. The increase in the 30-day and
90-day delinquency rate for private student loans was partially offset by an
increase in outstanding private student loan receivables resulting from
seasonality in originations.
The balance of private student and credit card loans reported as TDRs decreased
at September 30, 2021, compared to December 31, 2020, primarily due to the
exclusion of accounts qualifying for the exemption from the TDR designation
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pursuant to the CARES Act and elevated payment rates resulting from the several
rounds of government stimulus and associated improvement in household cash
flows.
The balance of personal loans reported as TDRs decreased at September 30, 2021,
compared to December 31, 2020, due to elevated payment rates resulting from the
several rounds of government stimulus and associated improvement in household
cash flows. Additionally, enrollments in personal loan modification programs
were favorably impacted by tighter underwriting standards that were implemented
in early 2020, resulting in a lower balance of personal loans entering into our
loan modification programs. To provide additional clarity with respect to credit
card loans classified as TDRs, the table above presents loans that are currently
enrolled in modification programs separately from loans that have exited those
programs but retain that classification.
The following table provides the balance of loan receivables restructured
through a temporary loan modification program that were exempt from the TDR
designation pursuant to the CARES Act (dollars in millions):
                               September 30, 2021                  December 31, 2020
                                 $                 %                $                 %
Credit card loans       $           1,541        2.19  %    $          1,351        1.89  %
Private student loans   $             218        2.14  %    $            101        1.01  %
Personal loans          $              54        0.78  %    $             73        1.02  %


We believe loan modification programs are useful in assisting customers
experiencing financial difficulties and help to prevent defaults. We plan to
continue to use loan modification programs as a means to provide relief to
customers experiencing financial difficulties. See Note 3: Loan Receivables to
our condensed consolidated financial statements for additional description of
our use of loan modification programs to provide relief to customers
experiencing financial hardship.
Modified and Restructured Loans
For information regarding modified and restructured loans, see "- Loan Quality -
Delinquencies", "- Loan Quality - Impact of the COVID-19 Pandemic on the Loan
Portfolio", "- COVID-19 Pandemic Response and Impact - Loan Receivables and
Allowance for Credit Losses" and Note 3: Loan Receivables to our condensed
consolidated financial statements.
Other Income
The following table presents the components of other income (dollars in
millions):
                                  For the Three Months Ended                2021 vs 2020                  For the Nine Months Ended                  2021 vs. 2020
                                        September 30,                   Increase (Decrease)                     September 30,                     Increase (Decrease)
                                     2021             2020               $                  %               2021              2020                $                  %
Discount and interchange revenue,
net(1)                            $    299          $ 238          $        61              26  %       $     879          $   691          $       188               27  %
Protection products revenue             43             44                   (1)             (2) %             129              135                   (6)              (4) %
Loan fee income                        121            100                   21              21  %             333              304                   29               10  %
Transaction processing revenue          58             50                    8              16  %             167              143                   24               17  %
Unrealized (losses) gains on
equity investments                    (167)             -                 (167)            100  %             562                -                  562              100  %
Realized gains on equity
investments                              -              -                    -               -  %               -               79                  (79)            (100) %
Other income                            18             17                    1               6  %              47               59                  (12)             (20) %
Total other income                $    372          $ 449          $       (77)            (17) %       $   2,117          $ 1,411          $       706               50  %


(1)Net of rewards, including Cashback Bonus rewards, of $689 million and $514
million for the three months ended September 30, 2021 and 2020, respectively,
and $1.8 billion and $1.4 billion for the nine months ended September 30, 2021
and 2020, respectively.
Total other income decreased for the three months ended September 30, 2021, as
compared to the same period in 2020, primarily due to unrealized losses on
equity investments offset by an increase in net discount and interchange revenue
and loan fee income. Unrealized losses on equity investments are the result of
changes in the fair value of our investments in payment services entities that
have actively traded stock. The increase in net discount and interchange revenue
was partially
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offset by an increase in rewards costs, both of which were the result of higher
sales volume. Loan fee income increased due to lower late fee charge offs.
Total other income increased for the nine months ended September 30, 2021, as
compared to the same period in 2020, primarily due to unrealized gains on equity
investments and an increase in net discount and interchange revenue. Unrealized
gains on equity investments are the result of investments in payment services
entities that are carried at fair value because the shares are actively traded.
The increase in discount and interchange revenue was partially offset by an
increase in rewards costs, both of which were the result of higher sales volume.
The increase in total other income was partially offset by a decrease in
realized gains on the sale of equity investments during the prior period.
Other Expense
The following table represents the components of other expense (dollars in
millions):
                                      For the Three Months Ended                  2021 vs. 2020                  For the Nine Months Ended                  2021 vs. 2020
                                             September 30,                     Increase (Decrease)                     September 30,                     Increase (Decrease)
                                         2021              2020                $                  %                2021              2020                $                  %

Employee compensation and benefits $ 483 $ 471 $

      12                3  %       $   1,487          $ 1,390          $        97                7  %
Marketing and business development         210              140                   70               50  %             539              500                   39                8  %
Information processing and
communications                             121              111                   10                9  %             375              342                   33               10  %
Professional fees                          198              151                   47               31  %             567              525                   42                8  %
Premises and equipment                      23               26                   (3)             (12) %              69               83                  (14)             (17) %
Other expense                              155              106                   49               46  %             456              401                   55               14  %
Total other expense                  $   1,190          $ 1,005          $       185               18  %       $   3,493          $ 3,241          $       252                8  %


Total other expense increased for the three months ended September 30, 2021, as
compared to the same period in 2020, primarily due to increases in marketing and
business development, other expense and professional fees. Marketing and
business development increased due to accelerated growth investments primarily
in card. The increase in other expense was driven by a legal accrual. The
professional fees increase was driven primarily by an increase in recovery fees.
Total other expense increased for the nine months ended September 30, 2021, as
compared to the same period in 2020, primarily due to increases in employee
compensation and benefits, other expense, professional fees and marketing and
business development. Employee compensation and benefits increased as a result
of higher bonus accruals and higher average salaries, partially offset by lower
headcount. The increase in other expense was driven by a legal accrual. The
professional fees increase was driven primarily by an increase in recovery fees.
Marketing and business development increased due to accelerated growth
investments primarily in card.
Income Tax Expense
The following table presents the calculation of the effective income tax rate
(dollars in millions):
                                                     For the Three Months Ended             For the Nine Months Ended
                                                            September 30,                         September 30,
                                                        2021               2020               2021               2020
Income before income taxes                         $   1,402            $   959          $   5,703            $   420
Income tax expense                                 $     311            $   188          $   1,321            $    78
Effective income tax rate                               22.2    %          19.6  %            23.2    %          18.6  %


Income tax expense increased $123 million and $1.2 billion for the three and
nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. The increase in income tax expense was primarily driven by an
increase in pretax income. The effective tax rate increased for the three and
nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020, primarily due to tax credits having a lower rate benefit on
higher pretax income.
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Liquidity and Capital Resources
Impact of the COVID-19 Pandemic on Liquidity and Capital
The United States economy has made substantial progress recovering from a brief
but severe recession caused by responses to the COVID-19 pandemic, with measures
of aggregate output and income expanding for multiple quarters and surpassing
their pre-pandemic levels. While the unemployment rate has fallen substantially
from its pandemic peak, the labor market has not fully recovered from the
recession. Nonfarm payroll employment and labor force participation rates,
important indicators in the Federal Reserve's monetary policy considerations,
remain below pre-pandemic levels. However, job openings have reached record
highs, suggesting that the labor market recovery will continue.
We remain well-capitalized with capital ratios in excess of regulatory minimums
and our own internal targets. Consequently, we resumed our common stock
repurchase program during the first quarter of 2021. However, we maintain ample
capital to finance loan receivable growth as and when customers moderate loan
payment rates and continue to increase spending as the economy continues to more
fully reopen from the COVID-19 pandemic.
Our level of liquid assets remains in excess of historical norms as of
September 30, 2021 as consumer loan payment rates and deposit balances remain
above their pre-pandemic levels. Although these factors have curtailed our need
for wholesale funding, we maintain good access to all of our diverse funding
channels. Credit spreads have tightened materially this year, nearing record-low
levels as of September 30, 2021. We took advantage of the low-rate,
tight-credit-spread environment by issuing approximately $1.8 billion of credit
card asset-backed securities in September 2021.
Funding and Liquidity
We seek to maintain stable, diversified and cost-effective funding sources and a
strong liquidity profile to fund our business and repay or refinance our
maturing obligations under normal operating conditions and periods of economic
or financial stress. In managing our liquidity risk, we seek to maintain a
prudent liability maturity profile and ready access to an ample store of primary
and contingent liquidity sources. Our primary funding sources include
direct-to-consumer and brokered deposits, public term asset-backed
securitizations and other short-term and long-term borrowings. Our primary
liquidity sources include a liquidity portfolio comprised of highly liquid,
unencumbered assets, including cash and cash equivalents and investment
securities, as well as secured borrowing capacity through private term
asset-backed securitizations and Federal Home Loan Bank ("FHLB") advances. In
addition, we have unused borrowing capacity with the Federal Reserve discount
window, which provides another source of contingent liquidity.
Funding Sources
Deposits
We offer deposit products to customers through two channels: (i) through direct
marketing, internet origination and affinity relationships ("direct-to-consumer
deposits"); and (ii) indirectly through contractual arrangements with securities
brokerage firms ("brokered deposits"). Direct-to-consumer deposits include
online savings accounts, certificates of deposit, money market accounts, IRA
savings accounts, IRA certificates of deposit and checking/debit accounts.
Brokered deposits include certificates of deposit and sweep accounts. In
December 2020, the Federal Deposit Insurance Corporation ("FDIC") issued the
final rule on revisions to its regulations on brokered deposits. Under the
FDIC's final rule, our regulatory reporting must reflect changes to the
categorization of deposits beginning January 1, 2022. We are evaluating those
changes. In accordance with the final rule, certain retail deposit products such
as affinity deposits and deposits generated through certain sweep deposit
relationships may no longer be categorized as brokered for regulatory reporting
purposes in the future. At September 30, 2021, we had $62.0 billion of
direct-to-consumer deposits and $10.6 billion of brokered deposits.
Credit Card Securitization Financing
We securitize credit card receivables as a source of funding. We access the
asset-backed securitization market using the Discover Card Master Trust I
("DCMT") and the Discover Card Execution Note Trust ("DCENT"). In connection
with our securitization transactions, credit card receivables are transferred to
DCMT. DCMT has issued a certificate representing the beneficial interest in its
credit card receivables to DCENT. We issue DCENT DiscoverSeries notes in public
and private transactions, which are collateralized by the beneficial interest
certificate held by DCENT. From time to time, we may add credit card receivables
to DCMT to create sufficient funding capacity for future securitizations while
managing seller's interest. We retain significant exposure to the performance of
the securitized credit card receivables through holdings of the seller's
interest and subordinated classes of DCENT DiscoverSeries notes. At
September 30, 2021, we had $8.9 billion of
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outstanding public asset-backed securities and $4.0 billion of outstanding
subordinated asset-backed securities that had been issued to our wholly-owned
subsidiaries.
The securitization structures include certain features designed to protect
investors. The primary feature relates to the availability and adequacy of cash
flows in the securitized pool of receivables to meet contractual requirements,
the insufficiency of which triggers early repayment of the securities. We refer
to this as "economic early amortization," which is based on excess spread
levels. Excess spread is the amount by which income received with respect to the
securitized credit card receivables during a collection period including
interest collections, fees and interchange, exceeds the fees and expenses of
DCENT during such collection period, including interest expense, servicing fees
and charged-off receivables. In the event of an economic early amortization,
which would occur if the excess spread fell below 0% on a three-month rolling
average basis, we would be required to repay all outstanding securitized
borrowings using available collections received with respect to the securitized
credit card receivables. For the three months ended September 30, 2021, the
DiscoverSeries three-month rolling average excess spread was 14.92%. The period
of ultimate repayment would be determined by the amount and timing of
collections received.
Through our wholly-owned indirect subsidiary, Discover Funding LLC, we are
required to maintain an interest in a contractual minimum level of receivables
in DCMT in excess of the face value of outstanding investors' interests. This
minimum interest is referred to as the minimum seller's interest. The required
minimum seller's interest in the pool of trust receivables is approximately 7%
in excess of the total investors' interests, which includes interests held by
third parties as well as those interests held by us. If the level of receivables
in DCMT were to fall below the required minimum, we would be required to add
receivables from the unrestricted pool of receivables, which would increase the
amount of credit card receivables restricted for securitization investors. A
decline in the amount of the excess seller's interest could occur if balance
repayments and charge offs exceeded new lending on the securitized accounts or
as a result of changes in total outstanding investors' interests. Seller's
interest exhibits seasonality as higher receivable balance repayments tend to
occur in the first calendar year quarter. If we could not add enough receivables
to satisfy the minimum seller's interest requirement, an early amortization (or
repayment) of investors' interests would be triggered.
An early amortization event would impair our liquidity and may require us to
utilize our available non-securitization-related contingent liquidity or rely on
alternative funding sources, which may or may not be available at the time. We
have several strategies we can deploy to prevent an early amortization event.
For instance, we could add additional receivables to DCMT, which would reduce
our available borrowing capacity at the Federal Reserve discount window. As of
September 30, 2021, there were $24.5 billion of credit card receivables in the
trust and no accounts were added to those restricted for securitization
investors for the three and nine months ended September 30, 2021. Alternatively,
we could employ structured discounting, which was used effectively in 2009 to
bolster excess spread and mitigate early amortization risk.
The following table summarizes expected contractual maturities of the investors'
interests in credit card securitizations, excluding those that have been issued
to our wholly-owned subsidiaries (dollars in millions):
                                                                                    One Year            Four Years
                                                               Less Than             Through              Through            After Five
At September 30, 2021                         Total            One Year            Three Years          Five Years             Years
Scheduled maturities of long-term
borrowings - owed to credit card
securitization investors                    $ 8,954          $    2,560

$ 5,796 $ 598 $ –


The "AAA(sf)" and "Aaa(sf)" ratings of the DCENT DiscoverSeries Class A Notes
issued to date have been based, in part, on an FDIC rule, which created a safe
harbor that provides that the FDIC, as conservator or receiver, will not use its
power to disaffirm or repudiate contracts, seek to reclaim or recover assets
transferred in connection with a securitization, or recharacterize assets
transferred in connection with a securitization as assets of the insured
depository institution, provided such transfer satisfies the conditions for sale
accounting treatment under previous GAAP. Although the implementation of
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
Topic 860, Transfers and Servicing, no longer qualified certain transfers of
assets for sale accounting treatment, the FDIC approved a final rule that
preserved the safe-harbor treatment applicable to revolving trusts and master
trusts, including DCMT, so long as those trusts would have satisfied the
original FDIC safe harbor if evaluated under GAAP pertaining to transfers of
financial assets in effect prior to December 2009. However, other legislative
and regulatory developments may impact our ability or desire to issue
asset-backed securities in the future.
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Federal Home Loan Bank Advances
Discover Bank is a member bank of the FHLB of Chicago, one of 11 FHLBs that,
along with the Office of Finance, compose the FHLB System. The FHLBs are
government-sponsored enterprises of the United States of America ("U.S. GSEs")
chartered to improve the availability of funds to support home ownership. As
such, senior debt obligations of the FHLBs feature the same credit ratings as
United States Treasury securities and are considered high-quality liquid assets
for bank regulatory purposes. Consequently, the FHLBs benefit from consistent
capital market access during nearly all macroeconomic and financial market
conditions and low funding costs, which they pass on to their member banks when
they borrow advances. Thus, we consider FHLB advances a stable and reliable
funding source for Discover Bank for short-term contingent liquidity and
long-term asset-liability management.
As a member of the FHLB of Chicago, Discover Bank has access to short- and
long-term advance structures with maturities ranging from overnight to 30 years.
At September 30, 2021, we had approximately $1.3 billion of borrowing capacity
through the FHLB of Chicago based on the amount and type of assets pledged. As
of September 30, 2021, there were no borrowings outstanding with the FHLB of
Chicago. Under certain stressed conditions, we could pledge our liquidity
portfolio securities and borrow against them at a modest reduction to their
value.
Other Long-Term Borrowings-Private Student Loans
At September 30, 2021, $110 million of principal was outstanding on securitized
debt assumed as part of our acquisition of The Student Loan Corporation.
Principal and interest payments on the underlying private student loans will
reduce the balance of these secured borrowings over time.
Other Long-Term Borrowings-Corporate and Bank Debt
The following table provides a summary of Discover Financial Services (Parent
Company) and Discover Bank outstanding fixed-rate debt (dollars in millions):
                                                                              Principal Amount
At September 30, 2021                                                            Outstanding

Discover financial services (Parent company) senior fixed rate bonds, maturity 2022-2027

$ 3,422
Discover financial services (Parent company) fixed rate retail notes, maturity 2022-2031

                                                            $          168
Discover Bank fixed-rate senior bank notes, maturing 2023-2030                $        5,350
Discover Bank fixed-rate subordinated bank notes, maturing 2028

$ 500


Certain Discover Financial Services senior notes require us to offer to
repurchase the notes at a price equal to 101% of their aggregate principal
amount plus accrued and unpaid interest in the event of a change of control
involving us and corresponding ratings downgrade below investment grade.
Short-Term Borrowings
As part of our regular funding strategy, we may, from time to time, borrow
short-term funds in the federal funds market or the repurchase ("repo") market
through repurchase agreements. Federal funds are short-term, unsecured loans
between banks or other financial entities with a Federal Reserve account. Funds
borrowed in the repo market are short-term, collateralized loans, usually
secured with highly-rated investment securities such as United States Treasury
bills or notes, or mortgage bonds or debentures issued by government agencies or
U.S. GSEs. At September 30, 2021, there were no outstanding balances in the
federal funds market or under repurchase agreements. Additionally, the FHLB of
Chicago offers short-term advance structures that we may use for short-term
liquidity needs. At September 30, 2021, there were no outstanding short-term
advances from the FHLB.
Additional Funding Sources
Private Asset-Backed Securitizations
We have access to committed borrowing capacity through privately placed
asset-backed securitizations. While we may utilize funding from these private
securitizations from time to time for normal business operations, their
committed nature also makes them a reliable contingency funding source.
Therefore, we reserve some undrawn capacity, informed by our liquidity stress
test results, for potential contingency funding needs. At September 30, 2021, we
had a total committed
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capacity of $4.0 billion, none of which was drawn. We seek to ensure the
stability and reliability of these securitizations by staggering their maturity
dates, renewing them approximately one year prior to their scheduled maturity
dates and periodically drawing them for operational tests and seasonal funding
needs.
Federal Reserve
Discover Bank has access to the Federal Reserve Bank of Philadelphia's discount
window. As of September 30, 2021, Discover Bank had $32.7 billion of available
borrowing capacity through the discount window based on the amount and type of
assets pledged, primarily consumer loans. As of September 30, 2021, we have no
borrowings outstanding under the discount window and reserve this capacity as a
source of contingent liquidity.
Funding Uses
Our primary uses of funds include the extensions of loans and credit, primarily
through Discover Bank; the purchase of investment securities for our liquidity
portfolio; working capital; and debt and capital service. We assess funding uses
and liquidity needs under stressed and normal operating conditions, considering
primary uses of funding, such as on-balance sheet loans and contingent uses of
funding, such as the need to post additional collateral for derivatives
positions. To anticipate funding needs under stress, we conduct liquidity stress
tests to assess the impact of idiosyncratic, systemic and hybrid (i.e.,
idiosyncratic and systemic) scenarios with varying levels of liquidity risk
reflecting a range of stress severity.
Credit Ratings
Our borrowing costs and capacity in certain funding markets, including those for
securitizations and unsecured senior and subordinated debt, may be affected by
the credit ratings of DFS, Discover Bank and the securitization trusts.
Downgrades in these credit ratings could result in higher interest expense on
our unsecured debt and asset securitizations, as well as higher credit
enhancement requirements for both our public and private asset securitizations.
In addition to increased funding costs, deterioration in credit ratings could
reduce our borrowing capacity in the unsecured debt and asset securitization
capital markets.
When the COVID-19 pandemic emerged in 2020, rating agencies cited their
expectation that the banking industry would experience heightened loan
delinquencies and charge offs from deterioration in the labor market. During the
second quarter of 2020, Moody's, Standard and Poor's and Fitch Ratings affirmed
our credit ratings. Standard and Poor's and Fitch changed the outlook on DFS'
and Discover Bank's senior unsecured credit ratings from "stable" to "negative"
while Moody's retained a "stable" outlook on the credit ratings of each. On
March 25, 2021, Standard and Poor's upgraded the outlook on DFS' and Discover
Bank's senior unsecured debt from "negative" to "stable," recognizing
better-than-expected operating performance in 2020 and our strong loss-absorbing
capacity. For similar reasons, on May 3, 2021, Fitch Ratings also affirmed the
credit ratings on DFS' and Discover Bank's senior unsecured debt and revised its
outlook on those ratings from "negative" to "stable." Moreover, on May 27, 2021,
Moody's affirmed its credit ratings for DFS and Discover Bank while upgrading
its outlook on those ratings from "stable" to "positive." On July 12, 2021,
Moody's upgraded Discover Bank's long-term subordinate debt rating to "Baa2"
from "Baa3", driven by revisions to their Advanced Loss Given Failure analysis.
The table below reflects our current credit ratings and outlooks.
                                                          Moody's Investors                                        Fitch
                                                               Service              Standard & Poor's             Ratings
Discover Financial Services
Senior unsecured debt                                                  Baa3                        BBB-                  BBB+
Outlook for Discover Financial Services senior unsecured
debt                                                               Positive                      Stable                Stable
Discover Bank
Senior unsecured debt                                                  Baa2                         BBB                  BBB+
Outlook for Discover Bank senior unsecured debt                    Positive                      Stable                Stable
Subordinated debt                                                      Baa2                        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 and may
be subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any other rating.
A credit
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rating outlook reflects an agency's opinion regarding the likely rating
direction over the medium term, often a period of about a year, and indicates
the agency's belief that the issuer's credit profile is consistent with its
current rating level at that point in time.
Liquidity
We seek to ensure that we have adequate liquidity to sustain business
operations, fund asset growth and satisfy debt obligations under stressed and
normal operating conditions. In addition to the funding sources discussed in the
previous section, we also maintain highly liquid, unencumbered assets in our
liquidity portfolio that we expect to be able to convert to cash quickly and
with little loss of value using either the repo market or outright sales.
We maintain a liquidity risk and funding management policy, which outlines the
overall framework and general principles we follow in managing liquidity risk
across our business. The Board of Directors approves the policy and the Asset
and Liability Management Committee (the "ALCO") is responsible for its
implementation. Additionally, we maintain a liquidity management framework
document that outlines the general strategies, objectives and principles we
utilize to manage our liquidity position and the various liquidity risks
inherent in our business model. We seek to balance the trade-offs between
maintaining too much liquidity, which may be costly, with having too little
liquidity, which could cause financial distress. The ALCO, chaired by our
Treasurer with cross-functional membership, centrally manages liquidity risk.
The ALCO monitors the liquidity risk profiles of DFS and Discover Bank and
oversees any actions Corporate Treasury may take to ensure that we maintain
ready access to our funding sources and sufficient liquidity to meet current and
projected needs. In addition, the ALCO and our Board of Directors regularly
review our compliance with our liquidity limits at DFS and Discover Bank, which
are established in accordance with the liquidity risk appetite set by our Board
of Directors.
We employ a variety of metrics to monitor and manage liquidity. We utilize early
warning indicators ("EWIs") to detect emerging liquidity stress events and a
reporting and escalation process designed to be consistent with regulatory
guidance. The EWIs include both idiosyncratic and systemic measures and are
monitored daily and reported to the ALCO regularly. A warning from one or more
of these indicators triggers prompt review and decision-making by our senior
management team and, in certain instances, may lead to the convening of a
senior-level response team and activation of our contingency funding plan.
In addition, we conduct liquidity stress tests regularly and ensure contingency
funding is in place to address potential liquidity shortfalls. We evaluate a
range of stress scenarios that are designed according to regulatory
requirements, including idiosyncratic, systemic and a combination of such events
that could impact funding sources and our ability to meet liquidity needs. These
scenarios measure the projected liquidity position at DFS and Discover Bank
across a range of time horizons by comparing estimated contingency funding needs
to available contingent liquidity.
Our primary contingent liquidity sources include our liquidity portfolio
securities, which we could sell, repo or borrow against, and private
securitizations with unused borrowing capacity. In addition, we could borrow
FHLB advances by pledging securities to the FHLB of Chicago. Moreover, we have
unused borrowing capacity with the Federal Reserve discount window, which
provides an additional source of contingent liquidity. We seek to maintain
sufficient liquidity to satisfy all maturing obligations and fund business
operations for at least 12 months in a severe stress environment. In such an
environment, we may also take actions to curtail the size of our balance sheet,
which would reduce the need for funding and liquidity.
At September 30, 2021, our liquidity portfolio is comprised of highly liquid,
unencumbered assets, including cash and cash equivalents and investment
securities. Cash and cash equivalents were primarily deposits with the Federal
Reserve and United States Treasury bills. Investment securities primarily
included debt obligations of the United States Treasury and U.S. GSEs and
residential mortgage-backed securities ("RMBS") issued by United States
government agencies or U.S. GSEs. These investments are considered highly liquid
and we expect to have the ability to raise cash by selling them, utilizing
repurchase agreements or pledging certain of these investments to access secured
funding. The size and composition of our liquidity portfolio may fluctuate based
on the size of our balance sheet as well as operational requirements, market
conditions and interest rate risk management policies. For instance, our
liquidity portfolio grew during 2020 as our customer deposits increased and our
loan balances declined, reflecting consumers' response to the COVID-19 pandemic.
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At September 30, 2021, our liquidity portfolio and undrawn credit facilities
were $58.0 billion, which is $5.3 billion lower than the balance at December 31,
2020. Our liquidity portfolio and undrawn credit facilities shrunk in the third
quarter of 2021 due to the redemption or maturity of some of our outstanding
retail notes, senior bank notes, and securitized debt and lower aggregate
direct-to-consumer deposit balances resulting from reduced marketing and lower
deposit pricing. During the three and nine months ended September 30, 2021, the
average balance of our liquidity portfolio was $20.9 billion and $25.3 billion,
respectively. Our liquidity portfolio and undrawn facilities consist of the
following (dollars in millions):
                                                                       September 30,           December 31,
                                                                           2021                    2020
Liquidity portfolio
Cash and cash equivalents(1)                                         $       11,984          $      12,675
Other short-term investments                                                      -                  2,200
Investment securities(2)                                                      7,962                  9,536
Total liquidity portfolio                                                    19,946                 24,411
Private asset-backed securitizations(3)                                       4,000                  6,000
Federal Home Loan Bank of Chicago                                             1,341                      -
Primary liquidity sources                                                    25,287                 30,411
Federal Reserve discount window(3)                                           32,719                 32,930
Total liquidity portfolio and undrawn credit facilities              $

58,006 $ 63,341


(1)Cash in the process of settlement and restricted cash are excluded from cash
and cash equivalents for liquidity purposes.
(2)Excludes $56 million and $117 million of United States Treasury securities
that have been pledged as swap collateral in lieu of cash as of September 30,
2021 and December 31, 2020, respectively.
(3)See "- Additional Funding Sources" for additional information.
Bank Holding Company Liquidity
The primary uses of funds at the unconsolidated DFS level include debt service
obligations (interest payments and return of principal) and capital service and
management activities, including dividend payments on capital instruments and
the periodic repurchase of shares of our common stock. Our primary sources of
funds at the bank holding company level include the proceeds from the issuance
of unsecured debt and capital securities, as well as dividends from our
subsidiaries, notably Discover Bank. Under periods of idiosyncratic or systemic
stress, the bank holding company could lose or experience impaired access to the
capital markets. In addition, our regulators have the discretion to restrict
dividend payments from Discover Bank to the bank holding company.
We utilize a measure referred to as "Number of Months of Pre-Funding" to
determine the length of time DFS can meet upcoming funding obligations,
including common and preferred stock dividend payments and debt service
obligations using existing cash resources. In managing this metric, we structure
our debt maturity schedule to manage prudently the amount of debt maturing
within a short period. See Note 7: Long-Term Borrowings to our condensed
consolidated financial statements for further information regarding our debt.
Capital
Our primary sources of capital are the earnings generated by our businesses and
the proceeds from issuances of capital securities. We seek to manage capital to
a level and composition sufficient to support our businesses' growth and risks
and to meet regulatory requirements, rating agency targets and debt investor
expectations. Within these constraints, we are focused on deploying capital in a
manner that provides attractive returns to our stockholders. The level,
composition and utilization of capital are influenced by changes in the economic
environment, strategic initiatives and legislative and regulatory developments.
Under regulatory capital requirements adopted by the Federal Reserve and the
FDIC, DFS, along with Discover Bank, must maintain minimum capital levels.
Failure to meet minimum capital requirements can result in the initiation of
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could limit our business activities and have a direct
material effect on our financial condition and operating results. We must meet
specific capital requirements that involve quantitative measures of assets,
liabilities and certain off-balance sheet items, as calculated under regulatory
guidance and regulations. Current or future legislative or regulatory reforms,
such as the adoption of the Current Expected Credit Loss ("CECL") accounting
model, may require us to hold more capital or adversely impact our capital
level. We consider the potential impacts of these reforms in managing our
capital position.
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DFS and Discover Bank are subject to regulatory capital rules issued by the
Federal Reserve and the FDIC, respectively, under the Basel Committee's December
2010 framework ("Basel III rules"). Under the Basel III rules, DFS and Discover
Bank are classified as "standardized approach" entities as they are United
States banking organizations with consolidated total assets over $50 billion but
not exceeding $250 billion and consolidated total on-balance sheet foreign
exposures less than $10 billion. The Basel III rules require DFS and Discover
Bank to maintain minimum risk-based capital and leverage ratios and define what
constitutes capital for purposes of calculating those ratios.
On March 27, 2020, federal bank regulatory agencies announced an interim and now
final rule that allows banks that have implemented the CECL accounting model to
delay the estimated impact of CECL on regulatory capital for two years, followed
by a three-year transition period. For purposes of calculating regulatory
capital, we have elected to defer recognition of the estimated impact of CECL on
regulatory capital for two years in accordance with the final rule; after that
period of deferral, the estimated impact of CECL on regulatory capital will be
phased in over three years, beginning in 2022. We estimate that electing this
option raised our Common Equity Tier 1 ("CET1") capital ratios in 2020 and 2021.
For additional information regarding the risk-based capital and leverage ratios,
see Note 12: Capital Adequacy to our condensed consolidated financial
statements.
On March 4, 2020, the Federal Reserve announced the SCB final rule, which
imposes limitations on DFS' capital distributions if we do not maintain our
capital ratios above stated regulatory minimum ratios based on the results of
supervisory stress tests. Under this rule, DFS is required to assess whether our
planned capital actions are consistent with the effective capital distribution
limitations that will apply on a pro-forma basis throughout the planning
horizon. The SCB reflects the difference between DFS' actual CET1 ratio at the
beginning of the forecast and the projected minimum CET1 ratio based on the
Federal Reserve's models in its nine-quarter severely adverse stress scenario,
plus the impact to capital of four quarters of planned common stock dividend
distributions. The Federal Reserve sets and adjusts firms' respective SCB
requirements based on the results of supervisory stress tests conducted as part
of the Federal Reserve's annual CCAR. On August 5, 2021, the Federal Reserve
notified DFS of its adjusted SCB requirement based on the 2021 CCAR exercise;
DFS' SCB, effective October 1, 2021, is 3.6%, a slight increase from our SCB in
effect for the preceding year, which was 3.5%. DFS is required to submit an
annual capital plan as part of the Federal Reserve's capital stress test
process. DFS was not subject to the supervisory stress test (also referred to as
CCAR) in 2021, but will be in 2022. DFS' required 2021 capital plan submission
employed a forward-looking internal assessment of income and capital under
baseline and stressful conditions. The 2021 capital plan was submitted to the
Federal Reserve on April 5, 2021 and covered the January 1, 2021 to March 31,
2023 forecast horizon. See "- Regulatory Environment and Developments - Banking
- Capital Standards and Stress Testing" for additional information. At
September 30, 2021, DFS and Discover Bank met the requirements for
"well-capitalized" status under the Federal Reserve's Regulation Y and the
prompt corrective action rules and corresponding FDIC requirements,
respectively, exceeding the regulatory minimums to which they were subject under
the applicable rules.
Basel III rules also require disclosures relating to market discipline. This
series of disclosures is commonly referred to as "Pillar 3." The objective is to
increase the transparency of capital requirements for banking organizations. We
are required to make prescribed regulatory disclosures quarterly regarding our
capital structure, capital adequacy, risk exposures and risk-weighted assets. We
make the Pillar 3 disclosures publicly available on our website in a report
called "Basel III Regulatory Capital Disclosures."
We disclose tangible common equity, which represents common equity less goodwill
and intangibles. Management believes that common stockholders' equity excluding
goodwill and intangibles is meaningful to investors as a measure of our true net
asset value. At September 30, 2021, tangible common equity is considered to be a
non-GAAP financial measure as it is not formally defined by GAAP or codified in
the federal banking regulations. Other financial services companies may also
disclose this measure and definitions may vary. We advise users of this
information to exercise caution in comparing this measure for different
companies.
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Table of Contents The following table provides a reconciliation of Total Common Equity (a GAAP Financial Measure) to Tangible Equity (in millions of dollars):

                                        September 30,       December 31,
                                             2021               2020

Total equity (1) $ 12,207 $ 9,828
Minus: goodwill

                                   (255)              (255)
Less: intangible assets, net                       (1)               (95)
Tangible common equity                 $       11,951      $       9,478


(1)Total common stockholders' equity is calculated as total stockholders' equity
less preferred stock.
Our Board of Directors declared common stock dividends during 2021 and 2020 as
follows:
Declaration Date            Record Date             Payment Date         Dividend per Share
2021
October 19, 2021           November 24, 2021       December 09, 2021    $             0.50
July 20, 2021                August 19, 2021      September 02, 2021    $             0.50
April 20, 2021                  May 20, 2021           June 03, 2021    $             0.44
January 19, 2021           February 18, 2021          March 04, 2021    $             0.44

2020
October 20, 2020           November 19, 2020       December 03, 2020    $             0.44
July 21, 2020                August 20, 2020      September 03, 2020    $             0.44
April 21, 2020                  May 21, 2020           June 04, 2020    $             0.44
January 21, 2020           February 20, 2020          March 05, 2020    $             0.44


In light of the pandemic-induced economic downturn in 2020, the Federal Reserve
required all large banks participating in the CCAR supervisory stress test to
cap common stock dividends at the lower of the prior quarter's dividend or the
average of a firm's net income over the preceding four quarters. The Federal
Reserve lifted this restriction as of July 1, 2021. As a result, our Board of
Directors declared a common stock dividend of $0.50 per share on July 20, 2021,
an increase of $0.06 per share from the previous rate of $0.44 per common share.
See "- Regulatory Environment and Developments - Banking - Capital Standards and
Stress Testing" for additional information.
Our Board of Directors declared Series C preferred stock dividends during 2021
and 2020 as follows:
                                                                                                                        Dividend per
Declaration Date                                                 Record Date                 Payment Date             Depositary Share
2021
July 20, 2021                                                    October 15, 2021             November 01, 2021       $        27.50
January 19, 2021                                                   April 15, 2021                April 30, 2021       $        27.50

2020
July 21, 2020                                                    October 15, 2020              October 30, 2020       $        27.50
January 21, 2020                                                   April 15, 2020                April 30, 2020       $        27.50


Our Board of Directors declared Series D preferred stock dividends during 2021
as follows:
                                                                                                                           Dividend per
Declaration Date                                                   Record Date                  Payment Date             Depositary Share
2021
July 20, 2021                                                     September 08, 2021            September 23, 2021       $        30.63
January 19, 2021(1)                                                   March 08, 2021                March 23, 2021       $        46.11

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

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In light of the improved macroeconomic conditions and our strong financial
results, our Board of Directors approved a new share repurchase program in July
2021. The new program authorizes up to $2.4 billion of share repurchases through
March 31, 2022. This share repurchase authorization replaces our prior $1.1
billion share repurchase program, which was scheduled to expire on December 31,
2021. Our decision to repurchase additional shares of common stock will depend
on our financial results, prevailing and expected economic conditions, potential
regulatory limitations and other considerations. We use various methods to
repurchase shares under the program, including open market purchases, privately
negotiated transactions or other purchases, including block trades, accelerated
share repurchase transactions, or any combination of such methods. During the
three months ended September 30, 2021, we repurchased approximately 6.5 million
shares for approximately $813 million. During the nine months ended September
30, 2021, we repurchased 12.4 million shares for approximately $1.5 billion.
The amount and size of any future dividends and share repurchases will depend on
our results of operations, financial condition, capital levels, cash
requirements, future prospects and other factors. The declaration and payment of
future dividends and the amount thereof are subject to the discretion of our
Board of Directors. Holders of our shares of common stock are subject to the
prior dividend rights of holders of our preferred stock or the depositary shares
representing such preferred stock outstanding. No dividend may be declared or
paid or set aside for payment on our common stock if full dividends have not
been declared and paid on all outstanding shares of preferred stock in any
dividend period. In addition, as noted above, banking laws and regulations and
our banking regulators may limit our ability to pay dividends and make share
repurchases, including limitations on the extent our banking subsidiary
(Discover Bank) can provide funds to us through dividends, loans or otherwise.
Further, current or future regulatory reforms may require us to hold more
capital or could adversely impact our capital level. As a result, there can be
no assurance that we will declare and pay any dividends or repurchase any shares
of our common stock in the future.
Certain Off-Balance Sheet Arrangements
Guarantees
Guarantees are contracts or indemnification agreements that contingently require
us to make payments to a guaranteed party based on changes in an underlying
asset, liability, or equity security of a guaranteed party, rate or index. Also
included in guarantees are contracts that contingently require the guarantor to
make payments to a guaranteed party based on another entity's failure to perform
under an agreement. Our guarantees relate to transactions processed on the
Discover Network and certain transactions processed by PULSE and Diners Club.
See Note 13: Commitments, Contingencies and Guarantees to our condensed
consolidated financial statements for further discussion regarding our
guarantees.
Contractual Obligations and Contingent Liabilities and Commitments
In the normal course of business, we enter into various contractual obligations
that may require future cash payments. Contractual obligations at September 30,
2021, including deposits, long-term borrowings, operating lease obligations,
interest payments on fixed-rate debt, purchase obligations and other
liabilities, were $94.4 billion. For a description of our contractual
obligations, see our annual report on Form 10-K for the year ended December 31,
2020, under "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Contractual Obligations and Contingent Liabilities and
Commitments."
We extend credit for consumer loans, primarily arising from agreements with
customers for unused lines of credit on certain credit cards and certain other
loan products, provided there is no violation of conditions established in the
related agreement. At September 30, 2021, our unused credit arrangements were
approximately $220.1 billion. We can terminate substantially all of these
arrangements at any time and therefore the arrangements do not necessarily
represent future cash requirements. The arrangements are periodically reviewed
based on account usage, customer creditworthiness and loan qualification. In
addition, in the ordinary course of business, we guarantee payment on behalf of
subsidiaries relating to contractual obligations with external parties. The
activities of the subsidiaries covered by any such guarantees are included in
our condensed consolidated financial statements.
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