Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to 
                    
Commission File Number 001-33378
DISCOVER FINANCIAL SERVICES
(Exact name of registrant as specified in its charter) 
Delaware
 
36-2517428
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2500 Lake Cook Road,
Riverwoods, Illinois 60015
 
(224) 405-0900
(Address of principal executive offices, including zip code)
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)    
Smaller reporting company  o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of July 27, 2018, there were 342,658,270 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
 


DISCOVER FINANCIAL SERVICES
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018
TABLE OF CONTENTS
 
 
 
 
 
Except as otherwise indicated or unless the context otherwise requires, “Discover Financial Services,” “Discover,” “DFS,” “we,” “us,” “our,” and “the Company” refer to Discover Financial Services and its subsidiaries.
We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to: Discover®, PULSE®, Cashback Bonus®, Discover Cashback Checking®, Discover it®, Freeze ItSM, College Covered®, and Diners Club International®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.

Table of Contents

Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Financial Condition
 
June 30,
2018
 
December 31,
2017
 
(unaudited)
(dollars in millions,
except share amounts)
Assets
 
 
 
Cash and cash equivalents
$
15,289

 
$
13,306

Restricted cash
630

 
81

Investment securities (includes $1,296 and $1,395 at fair value at June 30, 2018 and December 31, 2017, respectively)
1,522

 
1,568

Loan receivables
 
 
 
Loan receivables
84,789

 
84,248

Allowance for loan losses
(2,828
)
 
(2,621
)
Net loan receivables
81,961

 
81,627

Premises and equipment, net
874

 
825

Goodwill
255

 
255

Intangible assets, net
162

 
163

Other assets
2,058

 
2,262

Total assets
$
102,751

 
$
100,087

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Interest-bearing deposit accounts
$
61,068

 
$
58,165

Non-interest bearing deposit accounts
615

 
599

Total deposits
61,683

 
58,764

Long-term borrowings
26,252

 
26,326

Accrued expenses and other liabilities
3,927

 
4,105

Total liabilities
91,862

 
89,195

Commitments, contingencies and guarantees (Notes 8, 11 and 12)

 

Stockholders’ Equity:
 
 
 
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 564,557,895 and 563,497,702 shares issued at June 30, 2018 and December 31, 2017, respectively
6

 
6

Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 5,700 shares issued and outstanding and aggregate liquidation preference of $570 at June 30, 2018 and December 31, 2017
563

 
563

Additional paid-in capital
4,089

 
4,042

Retained earnings
17,787

 
16,687

Accumulated other comprehensive loss
(162
)
 
(152
)
Treasury stock, at cost; 220,657,224 and 205,577,507 shares at June 30, 2018 and December 31, 2017, respectively
(11,394
)
 
(10,254
)
Total stockholders’ equity
10,889

 
10,892

Total liabilities and stockholders’ equity
$
102,751

 
$
100,087

 
 
 
 

The table below presents the carrying amounts of certain assets and liabilities of Discover Financial Services’ consolidated variable interest entities ("VIEs"), which are included in the condensed consolidated statements of financial condition above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated VIEs. The liabilities in the table below include third-party liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts for which creditors have recourse to the general credit of Discover Financial Services.
 
June 30,
2018
 
December 31,
2017
 
(unaudited)
(dollars in millions)
Assets
 
 
 
Restricted cash
$
630

 
$
81

Loan receivables
$
30,151

 
$
31,781

Allowance for loan losses allocated to securitized loan receivables
$
(1,020
)
 
$
(998
)
Other assets
$
6

 
$
5

Liabilities
 
 
 
Long-term borrowings
$
16,365

 
$
16,536

Accrued expenses and other liabilities
$
17

 
$
16

 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
1

Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Income
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 (unaudited)
(dollars in millions, except per share amounts)
Interest income
 
 
 
 
 
 
 
Credit card loans
$
2,139

 
$
1,916

 
$
4,229

 
$
3,792

Other loans
421

 
379

 
838

 
746

Investment securities
6

 
7

 
13

 
14

Other interest income
70

 
36

 
125

 
64

Total interest income
2,636

 
2,338

 
5,205

 
4,616

Interest expense
 
 
 
 
 
 
 
Deposits
287

 
199

 
549

 
390

Long-term borrowings
220

 
201

 
427

 
396

Total interest expense
507

 
400

 
976

 
786

Net interest income
2,129

 
1,938

 
4,229

 
3,830

Provision for loan losses
742

 
640

 
1,493

 
1,226

Net interest income after provision for loan losses
1,387

 
1,298

 
2,736

 
2,604

Other income
 
 
 
 
 
 
 
Discount and interchange revenue, net
263

 
278

 
517

 
511

Protection products revenue
50

 
56

 
103

 
114

Loan fee income
95

 
83

 
191

 
172

Transaction processing revenue
42

 
42

 
85

 
81

Other income
24

 
22

 
53

 
50

Total other income
474

 
481

 
949

 
928

Other expense
 
 
 
 
 
 
 
Employee compensation and benefits
400

 
367

 
805

 
730

Marketing and business development
224

 
192

 
409

 
360

Information processing and communications
86

 
77

 
168

 
157

Professional fees
161

 
156

 
316

 
303

Premises and equipment
24

 
23

 
50

 
48

Other expense
89

 
97

 
204

 
199

Total other expense
984

 
912

 
1,952

 
1,797

Income before income tax expense
877

 
867

 
1,733

 
1,735

Income tax expense
208

 
321

 
398

 
625

Net income
$
669

 
$
546

 
$
1,335

 
$
1,110

Net income allocated to common stockholders
$
663

 
$
532

 
$
1,309

 
$
1,083

Basic earnings per common share
$
1.91

 
$
1.41

 
$
3.73

 
$
2.83

Diluted earnings per common share
$
1.91

 
$
1.40

 
$
3.72

 
$
2.83

Dividends declared per common share
$
0.35

 
$
0.30

 
$
0.70

 
$
0.60

 
 
 
 
 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
2

Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Comprehensive Income
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 (unaudited)
(dollars in millions)
Net income
$
669

 
$
546

 
$
1,335

 
$
1,110

Other comprehensive income, net of taxes
 
 
 
 
 
 
 
Unrealized (loss) gain on available-for-sale investment securities, net of tax
(1
)
 
—

 
(8
)
 
1

Unrealized gain on cash flow hedges, net of tax
7

 
5

 
26

 
10

Unrealized pension and post-retirement plan gain, net of tax
—

 
—

 
1

 
—

Other comprehensive income
6

 
5

 
19

 
11

Comprehensive income
$
675

 
$
551

 
$
1,354

 
$
1,121

 
 
 
 
 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
3

Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury
Stock
 
Total
Stockholders’
Equity
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(unaudited)
(dollars in millions, shares in thousands)
Balance at December 31, 2016
575

 
$
560

 
562,414

 
$
5

 
$
3,962

 
$
15,130

 
$
(161
)
 
$
(8,173
)
 
$
11,323

Net income
—

 
—

 
—

 
—

 
—

 
1,110

 
—

 
—

 
1,110

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
11

 
—

 
11

Purchases of treasury stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(970
)
 
(970
)
Common stock issued under employee benefit plans
—

 
—

 
40

 
—

 
3

 
—

 
—

 
—

 
3

Common stock issued and stock-based compensation expense
—

 
—

 
988

 
1

 
32

 
—

 
—

 
—

 
33

Dividends — common stock
—

 
—

 
—

 
—

 
—

 
(232
)
 
—

 
—

 
(232
)
Dividends — preferred stock
—

 
—

 
—

 
—

 
—

 
(19
)
 
—

 
—

 
(19
)
Balance at June 30, 2017
575

 
$
560

 
563,442

 
$
6

 
$
3,997

 
$
15,989

 
$
(150
)
 
$
(9,143
)
 
$
11,259

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
6

 
$
563

 
563,498

 
$
6

 
$
4,042

 
$
16,687

 
$
(152
)
 
$
(10,254
)
 
$
10,892

Cumulative effect of ASU No. 2018-02 adoption
—

 
—

 
—

 
—

 
—

 
29

 
(29
)
 
—

 
—

Net income
—

 
—

 
—

 
—

 
—

 
1,335

 
—

 
—

 
1,335

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
19

 
—

 
19

Purchases of treasury stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,140
)
 
(1,140
)
Common stock issued under employee benefit plans
—

 
—

 
45

 
—

 
3

 
—

 
—

 
—

 
3

Common stock issued and stock-based compensation expense
—

 
—

 
1,015

 
—

 
44

 
—

 
—

 
—

 
44

Dividends — common stock
—

 
—

 
—

 
—

 
—

 
(248
)
 
—

 
—

 
(248
)
Dividends — preferred stock
—

 
—

 
—

 
—

 
—

 
(16
)
 
—

 
—

 
(16
)
Balance at June 30, 2018
6

 
$
563

 
564,558

 
$
6

 
$
4,089

 
$
17,787

 
$
(162
)
 
$
(11,394
)
 
$
10,889

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
4

Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Cash Flows
 
For the Six Months Ended June 30,
 
2018
 
2017
 
(unaudited)
(dollars in millions)
Cash flows from operating activities
 
 
 
Net income
$
1,335

 
$
1,110

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Provision for loan losses
1,493

 
1,226

Deferred income taxes
(137
)
 
(46
)
Depreciation and amortization
216

 
188

Amortization of deferred revenues and accretion of accretable yield on acquired loans
(198
)
 
(195
)
Net loss on investments and other assets
22

 
27

Other, net
44

 
33

Changes in assets and liabilities:
 
 
 
Decrease in other assets
190

 
3

Decrease in accrued expenses and other liabilities
(141
)
 
(314
)
Net cash provided by operating activities
2,824

 
2,032

 
 
 
 
Cash flows from investing activities
 
 
 
Maturities of available-for-sale investment securities
86

 
104

Maturities of held-to-maturity investment securities
9

 
7

Purchases of held-to-maturity investment securities
(62
)
 
(36
)
Net principal disbursed on loans originated for investment
(1,639
)
 
(1,550
)
Proceeds from returns of investment
—

 
14

Purchases of other investments
(5
)
 
(23
)
Purchases of premises and equipment
(118
)
 
(103
)
Net cash used for investing activities
(1,729
)
 
(1,587
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
2,184

 
2,952

Maturities and repayment of securitized debt
(2,337
)
 
(2,651
)
Proceeds from issuance of other long-term borrowings
844

 
1,050

Maturities and repayment of other long-term borrowings
(753
)
 
(401
)
Proceeds from issuance of common stock
3

 
2

Purchases of treasury stock
(1,140
)
 
(970
)
Net increase in deposits
2,900

 
858

Dividends paid on common and preferred stock
(264
)
 
(251
)
Net cash provided by financing activities
1,437

 
589

Net increase in cash, cash equivalents and restricted cash
2,532

 
1,034

Cash, cash equivalents and restricted cash, at beginning of period
13,387

 
12,009

Cash, cash equivalents and restricted cash, at end of period
$
15,919

 
$
13,043

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
15,289

 
$
12,950

Restricted cash
630

 
93

Cash, cash equivalents and restricted cash, at end of period
$
15,919

 
$
13,043

 
 
 
 


See Notes to the Condensed Consolidated Financial Statements.
5

Table of Contents

Notes to the Condensed Consolidated Financial Statements
(unaudited)
1.
Background and Basis of Presentation
Description of Business
Discover Financial Services (“DFS” or the “Company”) is a direct banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 as well as a financial holding company under the Gramm-Leach-Bliley Act and therefore is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company provides direct banking products and services and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home equity loans and deposit products. The Company also operates the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”). The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as point-of-sale terminals at retail locations throughout the U.S. for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded charge cards and/or provide card acceptance services.
The Company’s business activities are managed in two segments, Direct Banking and Payment Services, based on the products and services provided. For a detailed description of the operations of each segment, as well as the allocation conventions used in business segment reporting, see Note 15: Segment Disclosures.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments which are necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with the Company’s 2017 audited consolidated financial statements filed with the Company’s annual report on Form 10-K for the year ended December 31, 2017.
Recently Issued Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU permits, but does not require, issuers to reclassify into retained earnings any tax effects that are stranded in accumulated other comprehensive income (“AOCI”) as a result of the change in the statutory federal tax rate enacted by the Tax Cuts and Jobs Act of 2017 (“TCJA”). Tax effects that are stranded in AOCI for other reasons, such as prior changes in tax law or changes in a valuation allowance, may not be reclassified directly through retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company early adopted the ASU as of April 1, 2018, resulting in a reclassification from AOCI to retained earnings that did not have a material impact to the Company's financial statements. See Note 7: Accumulated Other Comprehensive Income for additional details on the impact of adopting of this standard. The Company's policy is to adjust the tax effects of a component of AOCI in the same period in which the item is sold or otherwise derecognized, or when the carrying value of the item is remeasured.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of this ASU is to simplify the test for goodwill impairment by eliminating Step 2 of the current impairment test. Under the current rules, if the reporting unit’s carrying value exceeds its fair value (Step 1), goodwill impairment is measured as the difference between the carrying value of goodwill and its implied fair value. To compute the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure

6
Table of Contents

that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new standard, the Company will perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU apply to the Company’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU apply on a prospective basis. All of the Company’s recorded goodwill is associated with its PULSE debit business. This ASU has no impact on cash flows, and its adoption is not expected to have any impact on the Company’s condensed consolidated financial condition or results of operations because the estimated fair value of the PULSE reporting unit is well in excess of its carrying value. The Company did not early adopt this standard, but is still evaluating whether it will prior to the 2020 effective date.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss model with the current expected credit loss ("CECL") approach. For loans carried at amortized cost, the allowance for loan losses will be based on management’s current estimate of all expected credit losses over the remaining contractual term of the loans. Upon the origination of a loan, the Company will have to record its estimate of all expected credit losses on that loan through an immediate charge to earnings. Updates to that estimate each period will be recorded through provision expense. The CECL estimate is to be based on historical experience, current conditions and reasonable and supportable forecasts. No specific method for estimating credit loss is mandated, permitting companies to use judgment in selecting the approach that is most appropriate in their circumstances.
The CECL approach is expected to affect the Company’s allowance for loan losses as a result of: (1) encompassing expected losses, not simply those deemed to be already incurred, (2) extending the loss estimate period over the entire life of the loan, and (3) reclassification of the credit loss component of the purchased credit-impaired ("PCI") loan portfolio out of loan carrying value and into the allowance for loan losses. All loans carried at amortized cost, including PCI loans and loans modified in a troubled debt restructuring ("TDR") will be measured under the CECL approach. Existing specialized measurement guidance for PCI loans, which the ASU refers to as purchased credit-deteriorated ("PCD"), and TDRs will be eliminated, although certain separate disclosure guidance will be retained. Measurement of credit impairment of available-for-sale debt securities will generally remain unchanged under the new rules, but any such impairment will be recorded through an allowance, rather than a direct write-down of the security.
The ASU is effective beginning January 1, 2020, with early adoption permitted no sooner than January 1, 2019. Management is not considering early adoption at this time. On the date of adoption, the allowance for loan losses will be adjusted to the CECL estimate for loans held at that date with an offsetting adjustment to retained earnings. Additionally, the carrying value of PCD loans will be increased through an offsetting addition to the allowance for loan losses for the CECL estimate on those loans. The CECL allowance will be re-evaluated in subsequent periods and adjusted through provision expense as needed. The Company is actively engaged in cross-functional implementation efforts and planning for loss modeling requirements consistent with lifetime expected loss estimates. The Company has also been involved in efforts to identify and resolve various implementation issues specific to the application of the standard to credit card receivables. Adoption of the standard has the potential to materially impact stockholders' equity and regulatory capital as well as the Company's financial condition and results of operations. The extent of the impact upon adoption will likely depend on the characteristics of the Company's loan portfolio and economic conditions at that date, as well as forecasted conditions thereafter.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance will require lessees to capitalize most leases on their balance sheet whereas under current GAAP only capital leases are recognized on the lessee’s balance sheet. Leases which today are identified as capital leases will generally be identified as financing leases under the new guidance but otherwise their accounting treatment will remain relatively unchanged. Leases identified today as operating leases will generally remain in that category under the new standard, but both a right-of-use asset and a liability for remaining lease payments will now be required to be recognized on the balance sheet for this type of lease. The manner in which expenses associated with all leases are reported on the income statement will remain mostly unchanged. Lessor accounting also remains substantially unchanged by the new standard. The new guidance will become effective for the Company on January 1, 2019, and management does not expect it to have a material impact on the condensed consolidated financial statements.

7
Table of Contents

2.
Investments
The Company’s investment securities consist of the following (dollars in millions):
 
June 30,
2018
 
December 31,
2017
U.S. Treasury securities(1)
$
674

 
$
672

States and political subdivisions of states
—

 
1

Residential mortgage-backed securities - Agency(2)
848

 
895

Total investment securities
$
1,522

 
$
1,568

 
 
 
 
(1)
Includes $32 million and $48 million of U.S. Treasury securities pledged as swap collateral as of June 30, 2018 and December 31, 2017, respectively.
(2)
Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in millions):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
At June 30, 2018
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
675

 
$
—

 
$
(1
)
 
$
674

Residential mortgage-backed securities - Agency
639

 
—

 
(17
)
 
622

Total available-for-sale investment securities
$
1,314

 
$
—

 
$
(18
)
 
$
1,296

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency(3)
$
226

 
$
—

 
$
(4
)
 
$
222

Total held-to-maturity investment securities
$
226

 
$
—

 
$
(4
)
 
$
222

 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
675

 
$
—

 
$
(3
)
 
$
672

Residential mortgage-backed securities - Agency
728

 
1

 
(6
)
 
723

Total available-for-sale investment securities
$
1,403

 
$
1

 
$
(9
)
 
$
1,395

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
States and political subdivisions of states
$
1

 
$
—

 
$
—

 
$
1

Residential mortgage-backed securities - Agency(3) 
172

 
1

 
(1
)
 
172

Total held-to-maturity investment securities
$
173

 
$
1

 
$
(1
)
 
$
173

 
 
 
 
 
 
 
 
(1)
Available-for-sale investment securities are reported at fair value.
(2)
Held-to-maturity investment securities are reported at amortized cost.
(3)
Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.

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Table of Contents

The following table provides information about investment securities with aggregate gross unrealized losses and the length of time that individual investment securities have been in a continuous unrealized loss position (dollars in millions):
 
Number of Securities in a Loss Position
 
Less than 12 months
 
More than 12 months
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
At June 30, 2018
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
1

 
$
—

 
$
—

 
$
674

 
$
(1
)
Residential mortgage-backed securities - Agency
31

 
$
509

 
$
(12
)
 
$
113

 
$
(5
)
Held-to-Maturity Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
85

 
$
126

 
$
(2
)
 
$
52

 
$
(2
)
 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
1

 
$
—

 
$
—

 
$
672

 
$
(3
)
Residential mortgage-backed securities - Agency
27

 
$
457

 
$
(3
)
 
$
132

 
$
(3
)
Held-to-Maturity Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
45

 
$
56

 
$
—

 
$
38

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
There were no losses related to other-than-temporary impairments and no proceeds from sales or recognized gains and losses on available-for-sale securities during the three and six months ended June 30, 2018 and 2017. See Note 7: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three and six months ended June 30, 2018 and 2017.
Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the following table (dollars in millions):
 
One Year
or
Less
 
After One
Year
Through
Five Years
 
After Five
Years
Through
Ten Years
 
After Ten
Years
 
Total
At June 30, 2018
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities—Amortized Cost
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
675

 
$
—

 
$
—

 
$
—

 
$
675

Residential mortgage-backed securities - Agency(1)
—

 
90

 
498

 
51

 
639

Total available-for-sale investment securities
$
675

 
$
90

 
$
498

 
$
51

 
$
1,314

Held-to-Maturity Investment Securities—Amortized Cost
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency(1)
$
—

 
$
—

 
$
—

 
$
226

 
$
226

Total held-to-maturity investment securities
$
—

 
$
—

 
$
—

 
$
226

 
$
226

Available-for-Sale Investment Securities—Fair Values
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
674

 
$
—

 
$
—

 
$
—

 
$
674

Residential mortgage-backed securities - Agency(1)
—

 
88

 
484

 
50

 
622

Total available-for-sale investment securities
$
674

 
$
88

 
$
484

 
$
50

 
$
1,296

Held-to-Maturity Investment Securities—Fair Values
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency(1)
$
—

 
$
—

 
$
—

 
$
222

 
$
222

Total held-to-maturity investment securities
$
—

 
$
—

 
$
—

 
$
222

 
$
222

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

9
Table of Contents

Other Investments
As a part of the Company's community reinvestment initiatives, the Company has made equity investments in certain limited partnerships and limited liability companies that finance the construction and rehabilitation of affordable rental housing, as well as stimulate economic development in low to moderate income communities. These investments are accounted for using the equity method of accounting and are recorded within other assets. The related commitment for future investments is recorded in accrued expenses and other liabilities within the condensed consolidated statements of financial condition. The portion of each investment's operating results allocable to the Company reduces the carrying value of the investments and is recorded in other expense within the condensed consolidated statements of income. The Company further reduces the carrying value of the investments by recognizing any amounts that are in excess of future net tax benefits in other expense. The Company earns a return primarily through the receipt of tax credits allocated to the affordable housing projects and the community revitalization projects. These investments are not consolidated as the Company does not have a controlling financial interest in the entities. As of June 30, 2018 and December 31, 2017, the Company had outstanding investments in these entities of $275 million and $297 million, respectively, and related contingent liabilities of $63 million and $66 million, respectively. Of the above outstanding equity investments, the Company had $271 million and $288 million of investments related to affordable housing projects as of June 30, 2018 and December 31, 2017, respectively, which had $63 million and $66 million related contingent liabilities, respectively.
3.
Loan Receivables
The Company has three loan portfolio segments: credit card loans, other loans and PCI loans.
The Company's classes of receivables within the three portfolio segments are depicted in the following table (dollars in millions):
 
June 30,
2018
 
December 31,
2017
Loan receivables
 
 
 
Credit card loans(1)
$
67,812

 
$
67,291

Other loans
 
 
 
Personal loans
7,304

 
7,374

Private student loans
7,260

 
7,076

Other
571

 
423

Total other loans
15,135

 
14,873

PCI loans(2)
1,842

 
2,084

Total loan receivables
84,789

 
84,248

Allowance for loan losses
(2,828
)
 
(2,621
)
Net loan receivables
$
81,961

 
$
81,627

 
 
 
 
(1)
Amounts include carrying values of $21.1 billion and $21.2 billion in underlying investors’ interest in trust debt at June 30, 2018 and December 31, 2017, respectively, and $8.4 billion and $9.9 billion in seller's interest at June 30, 2018 and December 31, 2017, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.
(2)
Amounts include carrying values of $669 million and $762 million in loans pledged as collateral against the notes issued from the Student Loan Corporation ("SLC") securitization trusts at June 30, 2018 and December 31, 2017, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.

10
Table of Contents

Credit Quality Indicators
The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for loan losses.
Information related to the delinquent and non-accruing loans in the Company’s loan portfolio is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading “— Purchased Credit-Impaired Loans” (dollars in millions):
  
30-89 Days
Delinquent
 
90 or
More Days
Delinquent
 
Total Past
Due
 
90 or
More Days
Delinquent
and
Accruing
 
Total
Non-accruing(1)
At June 30, 2018
 
 
 
 
 
 
 
 
 
Credit card loans(2)
$
723

 
$
743

 
$
1,466

 
$
681

 
$
204

Other loans
 
 
 
 


 
 
 
 
Personal loans(3)
74

 
30

 
104

 
29

 
11

Private student loans (excluding PCI)(4)
106

 
46

 
152

 
45

 
10

Other
1

 
2

 
3

 
—

 
19

Total other loans (excluding PCI)
181

 
78

 
259

 
74

 
40

Total loan receivables (excluding PCI)
$
904

 
$
821

 
$
1,725

 
$
755

 
$
244

 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
Credit card loans(2)
$
781

 
$
751

 
$
1,532

 
$
693

 
$
203

Other loans
 
 
 
 


 
 
 
 
Personal loans(3)
73

 
30

 
103

 
28

 
10

Private student loans (excluding PCI)(4)
134

 
33

 
167

 
33

 
2

Other
3

 
1

 
4

 
—

 
18

Total other loans (excluding PCI)
210

 
64

 
274

 
61

 
30

Total loan receivables (excluding PCI)
$
991

 
$
815

 
$
1,806

 
$
754

 
$
233

 
 
 
 
 
 
 
 
 
 
 
(1)
The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of non-accruing credit card loans was $10 million and $9 million for the three months ended June 30, 2018 and 2017, respectively, and $19 million and $17 million for the six months ended June 30, 2018 and 2017, respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. This amount was estimated based on customers' current balances and most recent interest rates.
(2)
Credit card loans that are 90 or more days delinquent and accruing interest include $85 million and $72 million of loans accounted for as TDRs at June 30, 2018 and December 31, 2017, respectively.
(3)
Personal loans that are 90 or more days delinquent and accruing interest include $5 million of loans accounted for as TDRs at June 30, 2018 and December 31, 2017.
(4)
Private student loans that are 90 or more days delinquent and accruing interest include $7 million and $5 million of loans accounted for as TDRs at June 30, 2018 and December 31, 2017, respectively.


11
Table of Contents

Information related to the net charge-offs in the Company's loan portfolio is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions):
 
For the Three Months Ended June 30,
 
2018
 
2017
  
Net
Charge-offs
 
Net 
Charge-off
Rate(1)
 
Net
Charge-offs
 
Net 
Charge-off
Rate(1)
Credit card loans
$
555

 
3.34
%
 
$
445

 
2.94
%
Other loans
 
 
 
 
 
 
 
Personal loans
72

 
3.97
%
 
54

 
3.18
%
Private student loans (excluding PCI)
21

 
1.16
%
 
20

 
1.15
%
Other
1

 
0.34
%
 
1

 
0.30
%
Total other loans
94

 
2.48
%
 
75

 
2.14
%
Net charge-offs (excluding PCI)
$
649

 
3.18
%
 
$
520

 
2.79
%
Net charge-offs (including PCI)
$
649

 
3.11
%
 
$
520

 
2.71
%
 
 
 
 
 
 
 
For the Six Months Ended June 30,
 
2018
 
2017
  
Net
Charge-off
Dollars
 
Net 
Charge-off
Rate(1)
 
Net
Charge-off
Dollars
 
Net 
Charge-off
Rate(1)
Credit card loans
$
1,095

 
3.33
%
 
$
867

 
2.89
%
Other loans
 
 
 
 
 
 
 
Personal loans
145

 
4.00
%
 
105

 
3.17
%
Private student loans (excluding PCI)
43

 
1.17
%
 
34

 
0.99
%
Other
1

 
0.23
%
 
3

 
1.79
%
Total other loans
189

 
2.50
%
 
142

 
2.08
%
Net charge-offs (excluding PCI)
$
1,284

 
3.18
%
 
$
1,009

 
2.74
%
Net charge-offs (including PCI)
$
1,284

 
3.10
%
 
$
1,009

 
2.65
%
 
 
 
 
 
 
 
 
(1)
Net charge-off rate represents net charge-off dollars (annualized) divided by average loans for the reporting period.
As part of credit risk management activities, on an ongoing basis, the Company reviews information related to the performance of a customer’s account with the Company as well as information from credit bureaus, such as FICO or other credit scores, relating to the customer’s broader credit performance. FICO scores are generally obtained at origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that a significant portion of delinquent accounts have FICO scores below 660.
The following table provides the most recent FICO scores available for the Company’s customers as a percentage of each class of loan receivables:
 
Credit Risk Profile
by FICO Score
 
660 and 
Above
 
Less than 660
or No Score
At June 30, 2018
 
 
 
Credit card loans
82
%
 
18
%
Personal loans
95
%
 
5
%
Private student loans (excluding PCI)(1)
94
%
 
6
%
 
 
 
 
At December 31, 2017
 
 
 
Credit card loans
82
%
 
18
%
Personal loans
95
%
 
5
%
Private student loans (excluding PCI)(1)
95
%
 
5
%
 
 
 
 
(1)
PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."

12
Table of Contents

For private student loans, additional credit risk management activities include monitoring the amount of loans in forbearance. Forbearance allows borrowers experiencing temporary financial difficulties and willing to make payments, the ability to temporarily suspend payments. Eligible borrowers have a lifetime cap on forbearance of 12 months. At June 30, 2018 and December 31, 2017, there were $40 million and $29 million, respectively, of private student loans, including PCI, in forbearance, representing 0.7% and 0.5%, respectively, of total student loans in repayment and forbearance.
Allowance for Loan Losses
The following tables provide changes in the Company’s allowance for loan losses (dollars in millions): 
 
For the Three Months Ended June 30, 2018
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
2,252

 
$
301

 
$
170

 
$
13

 
$
2,736

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
637

 
84

 
22

 
(1
)
 
742

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(684
)
 
(80
)
 
(24
)
 
(1
)
 
(789
)
Recoveries
129

 
8

 
3

 
—

 
140

Net charge-offs
(555
)
 
(72
)
 
(21
)
 
(1
)
 
(649
)
Other(2)
—

 
—

 
(1
)
 
—

 
(1
)
Balance at end of period
$
2,334

 
$
313

 
$
170

 
$
11

 
$
2,828

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2017
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,892

 
$
207

 
$
156

 
$
9

 
$
2,264

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
533

 
82

 
23

 
2

 
640

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(561
)
 
(61
)
 
(22
)
 
(1
)
 
(645
)
Recoveries
116

 
7

 
2

 
—

 
125

Net charge-offs
(445
)
 
(54
)
 
(20
)
 
(1
)
 
(520
)
Balance at end of period
$
1,980

 
$
235

 
$
159

 
$
10

 
$
2,384

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

13
Table of Contents

The following tables provide changes in the Company’s allowance for loan losses (dollars in millions): 
 
For the Six Months Ended June 30, 2018
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
2,147

 
$
301

 
$
162

 
$
11

 
$
2,621

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
1,282

 
157

 
53

 
1

 
1,493

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(1,347
)
 
(161
)
 
(49
)
 
(1
)
 
(1,558
)
Recoveries
252

 
16

 
6

 
—

 
274

Net charge-offs
(1,095
)
 
(145
)
 
(43
)
 
(1
)
 
(1,284
)
Other(2)
—

 
—

 
(2
)
 
—

 
(2
)
Balance at end of period
$
2,334

 
$
313

 
$
170

 
$
11

 
$
2,828

 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2017
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,790

 
$
200

 
$
158

 
$
19

 
$
2,167

Additions
 
 
 
 
 
 
 
 
 
Provision for loan losses
1,057

 
140

 
35

 
(6
)
 
1,226

Deductions
 
 
 
 
 
 
 
 
 
Charge-offs
(1,096
)
 
(118
)
 
(39
)
 
(3
)
 
(1,256
)
Recoveries
229

 
13

 
5

 
—

 
247

Net charge-offs
(867
)
 
(105
)
 
(34
)
 
(3
)
 
(1,009
)
Balance at end of period
$
1,980

 
$
235

 
$
159

 
$
10

 
$
2,384

 
 
 
 
 
 
 
 
 
 
(1)
Includes both PCI and non-PCI private student loans.
(2)
Net change in reserves on PCI pools having no remaining non-accretable difference.
Net charge-offs of principal are recorded against the allowance for loan losses, as shown in the preceding table. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions): 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)
$
110

 
$
87

 
$
219

 
$
171

Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)
$
28

 
$
23

 
$
55

 
$
45

 
 
 
 
 
 
 
 

14
Table of Contents

The following tables provide additional detail of the Company’s allowance for loan losses and recorded investment in its loan portfolio by impairment methodology (dollars in millions):
 
Credit Card
 
Personal
Loans
 
Student
Loans(1)
 
Other
Loans
 
Total
At June 30, 2018
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with ASC 450-20
$
2,074

 
$
276

 
$
121

 
$
4

 
$
2,475

Evaluated for impairment in accordance with
ASC 310-10-35(2)(3)
260

 
37

 
22

 
7

 
326

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30
—

 
—

 
27

 
—

 
27

Total allowance for loan losses
$
2,334

 
$
313

 
$
170

 
$
11

 
$
2,828

Recorded investment in loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with ASC 450-20
$
66,114

 
$
7,174

 
$
7,099

 
$
516

 
$
80,903

Evaluated for impairment in accordance with
ASC 310-10-35(2)(3)
1,698

 
130

 
161

 
55

 
2,044

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30
—

 
—

 
1,842

 
—

 
1,842

Total recorded investment
$
67,812

 
$
7,304

 
$
9,102

 
$
571

 
$
84,789

 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with ASC 450-20
$
1,921

 
$
269

 
$
112

 
$
4

 
$
2,306

Evaluated for impairment in accordance with
ASC 310-10-35(2)(3)
226

 
32

 
21

 
7

 
286

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30
—

 
—

 
29

 
—

 
29

Total allowance for loan losses
$
2,147

 
$
301

 
$
162