x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the year ended December 31, 2015
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Delaware
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36-2517428
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2500 Lake Cook Road, Riverwoods, Illinois 60015
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(224) 405-0900
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(Address of principal executive offices, including zip code)
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(Registrant’s telephone number, including area code)
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Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Part I | Item 1.
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Business
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•
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Discover it
card offers 5% Cashback Bonus in categories that change each quarter up to a quarterly maximum (signing up is required) and 1% Cashback Bonus on all other purchases, as well as other benefits.
|
•
|
Discover it NHL
card offers the same reward features as the
Discover it
card plus 10% off purchases at shopNHL.com and a team-branded credit card.
|
•
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Discover it Chrome
card offers 2% Cashback Bonus at gas stations and restaurants on up to $1,000 in combined purchases each quarter and 1% Cashback Bonus on all other purchases, as well as other benefits
|
•
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The
Discover it Miles
card offers 1.5 miles for every dollar spent on purchases, no annual fee and an annual credit of up to $30 for in-flight Wi-Fi charges.
|
•
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Discover it Secured
card offers the same reward features as the
Discover it Chrome
card, as well as other benefits. This card requires the customer to provide a security deposit as collateral for the credit card account. Starting one year after account opening, Discover reviews the account monthly to determine whether the security deposit can be returned. These reviews look for responsible credit use across all of the customer’s cards and loans.
|
•
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Discover More
card offers 5% Cashback Bonus in categories that change each quarter up to a quarterly maximum (signing up is required). Customers earn .25% Cashback Bonus on their first $3,000 on all other annual purchases and on all warehouse purchases, and 1% Cashback Bonus on purchases over $3,000.
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•
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Discover Open Road
card offers 2% Cashback Bonus on the first $250 in combined gas and restaurant purchases each billing period. Customers earn .25% Cashback Bonus on their first $3,000 on all other annual purchases and on all warehouse purchases, and 1% Cashback Bonus on purchases over $3,000.
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•
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Discover Motiva
card provides customers with Cashback Bonus equal to 5% of their interest charges each month for making on-time payments. Customers earn .25% Cashback Bonus on their first $3,000 on all other annual purchases and on all warehouse purchases, and 1% Cashback Bonus on purchases over $3,000.
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•
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Miles by Discover
customers receive two miles for every $1 on the first $3,000 in travel and restaurant purchases each year and one mile for every $1 on all other purchases.
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•
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Escape by Discover
customers earn two miles for every $1 on all purchases.
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•
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Discover Business
card offers 5% Cashback Bonus on the first $2,000 spent in office supply purchases, 2% Cashback Bonus on the first $2,000 spent in gas purchases each year, .25% Cashback Bonus on the first $5,000 in annual purchases and up to 1% Cashback Bonus on all other purchases.
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•
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Identity Theft Protection.
The most comprehensive identity theft monitoring product includes an initial credit report, credit bureau report monitoring at the three major credit bureaus, prompt alerts to key changes to credit bureau files that help customers spot possible identity theft quickly, internet surveillance to monitor up to 20 credit and debit card numbers and social security numbers on suspicious websites, identity theft insurance up to $25,000 to cover certain out-of-pocket expenses due to identity theft, and access to knowledgeable professionals who can provide information about identity theft issues.
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•
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Payment Protection.
This product allows customers to suspend their payments for up to two years, depending on the qualifying event and product level, when certain qualifying life events occur. While on benefit, customers have no minimum monthly payment, and are not charged interest, late fees or the fees for the product. This product covers a variety of different events, such as unemployment, disability, natural disasters or other life events, such as marriage or birth of a child. Depending on the product and availability under state laws, outstanding balances up to $10,000 or $25,000, depending on product level are cancelled in the event of death.
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•
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Wallet Protection.
This product offers one-call convenience if a customer's wallet is lost or stolen, including requesting cancellation and replacement of the customer's credit and debit cards, monitoring the customer's credit bureau reports at the three major credit bureaus for 180 days and alerting them to key changes to their credit files, and providing up to $100 to replace the customer's wallet or purse.
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•
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Online account services that allow customers to customize their accounts, choose how and when they pay their bills, view annual account summaries that assist them with budgeting, research transaction details, initiate transaction disputes and chat with or email a customer representative;
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•
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Email and mobile text reminders that help customers avoid fees, keep their accounts secure and track big purchases or returns;
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Money management tools like the Spend Analyzer, Paydown Planner and Purchase Planner; and
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•
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An online portal where customers automatically earn 5-20% Cashback Bonus when they shop at well-known online merchants using their Discover card.
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Name
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Age
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Position
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David W. Nelms
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55
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Chairman and Chief Executive Officer
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Roger C. Hochschild
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51
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President and Chief Operating Officer
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R. Mark Graf
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51
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Executive Vice President, Chief Financial Officer
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Kathryn McNamara Corley
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56
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Executive Vice President, General Counsel and Secretary
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Steven E. Cunningham
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46
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Executive Vice President, Chief Risk Officer
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Julie A. Loeger
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52
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Executive Vice President, Chief Marketing Officer
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Carlos M. Minetti
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53
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Executive Vice President, President of Consumer Banking
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Diane E. Offereins
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58
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Executive Vice President, President - Payment Services
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James V. Panzarino
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63
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Executive Vice President, President - Credit and Card Operations
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R. Douglas Rose
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47
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Senior Vice President and Chief Human Resources Officer
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Glenn P. Schneider
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54
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Executive Vice President and Chief Information Officer
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Item 1A.
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Risk Factors
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•
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Security attacks can originate from a wide variety of sources and geographic locations.
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•
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We rely on many third-party service providers and network participants, including merchants, and, as such, a security breach or cyber-attack affecting one of these third parties could impact us. For example, the financial services industry continues to see attacks against the environments where personal and identifiable information is handled. For additional information see the risk factor
"
—
We rely on third parties to deliver services. If we face difficulties managing our relationships with third-party service providers, our revenue or results of operations could be materially adversely affected."
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•
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To access our products and services, our customers may use computers and mobile devices that are beyond our security control systems.
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•
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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;
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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;
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the actions and initiatives of current and potential competitors;
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our ability to manage our expenses;
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•
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our ability to successfully achieve card acceptance across our networks and maintain relationships with network participants;
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•
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our ability to sustain and grow our private student loan, personal loan and home equity loan products;
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losses as a result of mortgage loan repurchase and indemnification obligations to secondary market purchasers;
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difficulty obtaining regulatory approval for, financing, closing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies;
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our ability to manage our credit risk, market risk, liquidity risk, operational risk, compliance and legal risk, and strategic risk;
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•
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the availability and cost of funding and capital;
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access to deposit, securitization, equity, debt and credit markets;
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•
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the impact of rating agency actions;
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•
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the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices;
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•
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losses in our investment portfolio;
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•
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limits on our ability to pay dividends and repurchase our common stock;
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•
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limits on our ability to receive payments from our subsidiaries;
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fraudulent activities or material security breaches of key systems;
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•
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our ability to remain organizationally effective;
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•
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our ability to increase or sustain Discover card usage or attract new customers;
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•
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our ability to maintain relationships with merchants;
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•
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the effect of political, economic and market conditions, geopolitical events and unforeseen or catastrophic events;
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•
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our ability to introduce new products or services;
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•
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our ability to manage our relationships with third-party vendors;
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•
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our ability to maintain current technology and integrate new and acquired systems;
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•
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our ability to collect amounts for disputed transactions from merchants and merchant acquirers;
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•
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our ability to attract and retain employees;
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•
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our ability to protect our reputation and our intellectual property; and
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•
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new lawsuits, investigations or similar matters or unanticipated developments related to current matters.
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Item 1B.
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Unresolved Staff Comments
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Item 2.
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Properties
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Item 3.
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Legal Proceedings
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Item 4.
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Mine Safety Disclosures
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Part II | Item 5.
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Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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The table below sets forth information regarding purchases of our common stock related to our share repurchase program and employee transactions that were made by us or on our behalf during the most recent quarter:
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|||||||||||||
Period
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Total Number of Shares Purchased
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Average Price Paid Per Share
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Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
(1)
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Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs
(1)
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||||||
October 1-31, 2015
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||||||
Repurchase program
(1)
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2,624,797
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$
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54.28
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2,624,797
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$
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1,270,248,441
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Employee transactions
(2)
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3,047
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$
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53.77
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N/A
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N/A
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November 1-30, 2015
|
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|
||||||
Repurchase program
(1)
|
2,504,069
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$
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56.70
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2,504,069
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$
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1,128,269,559
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Employee transactions
(2)
|
796
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|
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$
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54.86
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N/A
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N/A
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|
December 1-31, 2015
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|
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|
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|
||||||
Repurchase program
(1)
|
2,746,066
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$
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54.83
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2,746,066
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$
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977,714,252
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Employee transactions
(2)
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2,184
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$
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53.07
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N/A
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N/A
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||||||
Total
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|
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|
||||||
Repurchase program
(1)
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7,874,932
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$
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55.24
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7,874,932
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$
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977,714,252
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Employee transactions
(2)
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6,027
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$
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53.66
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N/A
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N/A
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(1)
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On
April 16, 2015
, our board of directors approved a share repurchase program authorizing the repurchase of up to
$2.2 billion
of our outstanding shares of common stock. This program expires on
July 31, 2016
and may be terminated at any time.
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(2)
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Reflects shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock options.
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|
Discover
Financial
Services
|
|
S&P 500
Index
|
|
S&P 500 Financials
Index
|
||||||
November 30, 2010
|
$
|
100.00
|
|
|
$
|
100.00
|
|
|
$
|
100.00
|
|
November 30, 2011
|
$
|
130.30
|
|
|
$
|
105.63
|
|
|
$
|
88.83
|
|
November 30, 2012
|
$
|
229.00
|
|
|
$
|
119.96
|
|
|
$
|
108.99
|
|
December 31, 2012
(1)
|
$
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211.92
|
|
|
$
|
120.81
|
|
|
$
|
113.96
|
|
December 31, 2013
|
$
|
309.83
|
|
|
$
|
156.57
|
|
|
$
|
151.80
|
|
December 31, 2014
|
$
|
364.40
|
|
|
$
|
174.40
|
|
|
$
|
171.69
|
|
December 31, 2015
|
$
|
295.57
|
|
|
$
|
173.13
|
|
|
$
|
165.72
|
|
|
|
|
|
|
|
(1)
|
In 2013, we changed fiscal years creating a one month transition period in December 2012.
|
Item 6.
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Selected Financial Data
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|
For the Calendar Years Ended
December 31,
|
|
For the Fiscal Years Ended
November 30,
|
|
For the One Month Ended December 31, 2012
|
||||||||||||||||||
|
2015
|
|
2014
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|
2013
|
|
2012
|
|
2011
|
|
|||||||||||||
|
(dollars in millions, except per share amounts)
|
||||||||||||||||||||||
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Interest income
|
$
|
7,945
|
|
|
$
|
7,596
|
|
|
$
|
7,064
|
|
|
$
|
6,703
|
|
|
$
|
6,345
|
|
|
$
|
595
|
|
Interest expense
|
1,263
|
|
|
1,134
|
|
|
1,146
|
|
|
1,331
|
|
|
1,485
|
|
|
103
|
|
||||||
Net interest income
|
6,682
|
|
|
6,462
|
|
|
5,918
|
|
|
5,372
|
|
|
4,860
|
|
|
492
|
|
||||||
Other income
|
2,057
|
|
|
2,015
|
|
|
2,306
|
|
|
2,281
|
|
|
2,205
|
|
|
200
|
|
||||||
Revenue net of interest expense
|
8,739
|
|
|
8,477
|
|
|
8,224
|
|
|
7,653
|
|
|
7,065
|
|
|
692
|
|
||||||
Provision for loan losses
|
1,512
|
|
|
1,443
|
|
|
1,086
|
|
|
848
|
|
|
1,013
|
|
|
178
|
|
||||||
Other expense
|
3,615
|
|
|
3,340
|
|
|
3,194
|
|
|
3,052
|
|
|
2,541
|
|
|
240
|
|
||||||
Income before income tax expense
|
3,612
|
|
|
3,694
|
|
|
3,944
|
|
|
3,753
|
|
|
3,511
|
|
|
274
|
|
||||||
Income tax expense
|
1,315
|
|
|
1,371
|
|
|
1,474
|
|
|
1,408
|
|
|
1,284
|
|
|
104
|
|
||||||
Net income
|
$
|
2,297
|
|
|
$
|
2,323
|
|
|
$
|
2,470
|
|
|
$
|
2,345
|
|
|
$
|
2,227
|
|
|
$
|
170
|
|
Net income allocated to common stockholders
|
$
|
2,246
|
|
|
$
|
2,270
|
|
|
$
|
2,414
|
|
|
$
|
2,318
|
|
|
$
|
2,202
|
|
|
$
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Statement of Financial Condition Data (as of):
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Loan receivables
|
$
|
72,385
|
|
|
$
|
69,969
|
|
|
$
|
65,771
|
|
|
$
|
61,017
|
|
|
$
|
57,670
|
|
|
$
|
62,598
|
|
Total assets
|
$
|
86,936
|
|
|
$
|
83,126
|
|
|
$
|
79,340
|
|
|
$
|
75,283
|
|
|
$
|
69,117
|
|
|
$
|
73,491
|
|
Total stockholders' equity
|
$
|
11,275
|
|
|
$
|
11,134
|
|
|
$
|
10,809
|
|
|
$
|
9,778
|
|
|
$
|
8,242
|
|
|
$
|
9,873
|
|
Allowance for loan losses
|
$
|
1,869
|
|
|
$
|
1,746
|
|
|
$
|
1,648
|
|
|
$
|
1,725
|
|
|
$
|
2,205
|
|
|
$
|
1,788
|
|
Long-term borrowings
|
$
|
24,724
|
|
|
$
|
22,544
|
|
|
$
|
20,474
|
|
|
$
|
19,729
|
|
|
$
|
18,287
|
|
|
$
|
17,666
|
|
Per Share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Basic EPS from continuing operations
|
$
|
5.14
|
|
|
$
|
4.91
|
|
|
$
|
4.97
|
|
|
$
|
4.47
|
|
|
$
|
4.06
|
|
|
$
|
0.34
|
|
Diluted EPS from continuing operations
|
$
|
5.13
|
|
|
$
|
4.90
|
|
|
$
|
4.96
|
|
|
$
|
4.46
|
|
|
$
|
4.06
|
|
|
$
|
0.34
|
|
Weighted-average shares outstanding (000's)
|
436,855
|
|
|
462,115
|
|
|
485,492
|
|
|
518,428
|
|
|
541,813
|
|
|
497,881
|
|
||||||
Weighted-average shares outstanding (fully diluted) (000's)
|
437,498
|
|
|
463,412
|
|
|
486,861
|
|
|
519,620
|
|
|
542,626
|
|
|
498,994
|
|
||||||
Dividends declared per share of common stock
|
$
|
1.08
|
|
|
$
|
0.92
|
|
|
$
|
0.60
|
|
|
$
|
0.40
|
|
|
$
|
0.20
|
|
|
$
|
0.14
|
|
Common stock dividend payout ratio
|
21.01
|
%
|
|
18.73
|
%
|
|
12.07
|
%
|
|
8.95
|
%
|
|
4.92
|
%
|
|
41.48
|
%
|
||||||
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Return on average total equity
|
21
|
%
|
|
21
|
%
|
|
24
|
%
|
|
26
|
%
|
|
30
|
%
|
|
21
|
%
|
||||||
Return on average assets
|
3
|
%
|
|
3
|
%
|
|
3
|
%
|
|
3
|
%
|
|
3
|
%
|
|
3
|
%
|
||||||
Average stockholders' equity to average total assets
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
|
13
|
%
|
|
12
|
%
|
|
14
|
%
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Data (continued)
|
|||||||||||||||||||||||
|
For the Calendar Years Ended
December 31,
|
|
For the Fiscal Years Ended
November 30,
|
|
For the One Month Ended December 31, 2012
|
||||||||||||||||||
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
2011
|
|
|||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||||
Selected Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Total Loan Receivables
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Loan receivables
|
$
|
72,385
|
|
|
$
|
69,969
|
|
|
$
|
65,771
|
|
|
$
|
61,017
|
|
|
$
|
57,670
|
|
|
$
|
62,598
|
|
Average loan receivables
|
$
|
69,061
|
|
|
$
|
65,853
|
|
|
$
|
61,820
|
|
|
$
|
58,043
|
|
|
$
|
53,260
|
|
|
$
|
61,877
|
|
Interest yield
|
11.40
|
%
|
|
11.40
|
%
|
|
11.28
|
%
|
|
11.38
|
%
|
|
11.78
|
%
|
|
11.21
|
%
|
||||||
Net principal charge-off rate
|
2.01
|
%
|
|
2.04
|
%
|
|
1.98
|
%
|
|
2.29
|
%
|
|
3.97
|
%
|
|
2.19
|
%
|
||||||
Delinquency rate (over 30 days)
|
1.67
|
%
|
|
1.66
|
%
|
|
1.64
|
%
|
|
1.75
|
%
|
|
2.29
|
%
|
|
1.69
|
%
|
||||||
Delinquency rate (over 90 days)
|
0.76
|
%
|
|
0.78
|
%
|
|
0.77
|
%
|
|
0.83
|
%
|
|
1.14
|
%
|
|
0.82
|
%
|
||||||
Credit Card Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Credit card loan receivables
|
$
|
57,896
|
|
|
$
|
56,128
|
|
|
$
|
53,150
|
|
|
$
|
49,642
|
|
|
$
|
46,972
|
|
|
$
|
51,135
|
|
Average credit card loan receivables
|
$
|
54,846
|
|
|
$
|
52,600
|
|
|
$
|
49,816
|
|
|
$
|
47,301
|
|
|
$
|
45,522
|
|
|
$
|
50,494
|
|
Interest yield
|
12.08
|
%
|
|
12.09
|
%
|
|
12.00
|
%
|
|
12.16
|
%
|
|
12.42
|
%
|
|
11.92
|
%
|
||||||
Net principal charge-off rate
|
2.22
|
%
|
|
2.27
|
%
|
|
2.21
|
%
|
|
2.62
|
%
|
|
4.47
|
%
|
|
2.47
|
%
|
||||||
Delinquency rate (over 30 days)
|
1.72
|
%
|
|
1.73
|
%
|
|
1.72
|
%
|
|
1.86
|
%
|
|
2.38
|
%
|
|
1.79
|
%
|
||||||
Delinquency rate (over 90 days)
|
0.85
|
%
|
|
0.85
|
%
|
|
0.84
|
%
|
|
0.91
|
%
|
|
1.19
|
%
|
|
0.90
|
%
|
||||||
Personal Loans
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Personal loan receivables
|
$
|
5,490
|
|
|
$
|
5,007
|
|
|
$
|
4,191
|
|
|
$
|
3,272
|
|
|
$
|
2,648
|
|
|
$
|
3,296
|
|
Average personal loan receivables
|
$
|
5,245
|
|
|
$
|
4,592
|
|
|
$
|
3,706
|
|
|
$
|
2,944
|
|
|
$
|
2,228
|
|
|
$
|
3,290
|
|
Interest yield
|
12.04
|
%
|
|
12.36
|
%
|
|
12.52
|
%
|
|
12.35
|
%
|
|
11.94
|
%
|
|
12.43
|
%
|
||||||
Net principal charge-off rate
|
2.15
|
%
|
|
2.04
|
%
|
|
2.13
|
%
|
|
2.33
|
%
|
|
3.02
|
%
|
|
2.52
|
%
|
||||||
Delinquency rate (over 30 days)
|
0.89
|
%
|
|
0.79
|
%
|
|
0.70
|
%
|
|
0.76
|
%
|
|
0.87
|
%
|
|
0.77
|
%
|
||||||
Delinquency rate (over 90 days)
|
0.27
|
%
|
|
0.22
|
%
|
|
0.21
|
%
|
|
0.23
|
%
|
|
0.28
|
%
|
|
0.23
|
%
|
||||||
Private Student Loans (excluding PCI)
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Private student loan receivables
|
$
|
5,647
|
|
|
$
|
4,850
|
|
|
$
|
3,969
|
|
|
$
|
3,000
|
|
|
$
|
2,069
|
|
|
$
|
3,072
|
|
Average private student loan receivables
|
$
|
5,272
|
|
|
$
|
4,450
|
|
|
$
|
3,561
|
|
|
$
|
2,557
|
|
|
$
|
1,637
|
|
|
$
|
3,021
|
|
Interest yield
|
7.16
|
%
|
|
7.02
|
%
|
|
7.07
|
%
|
|
7.20
|
%
|
|
7.04
|
%
|
|
7.22
|
%
|
||||||
Net principal charge-off rate
|
1.07
|
%
|
|
1.29
|
%
|
|
1.30
|
%
|
|
0.73
|
%
|
|
0.48
|
%
|
|
0.81
|
%
|
||||||
Delinquency rate (over 30 days)
|
1.91
|
%
|
|
1.80
|
%
|
|
1.66
|
%
|
|
1.07
|
%
|
|
0.63
|
%
|
|
1.22
|
%
|
||||||
Delinquency rate (over 90 days)
|
0.43
|
%
|
|
0.52
|
%
|
|
0.46
|
%
|
|
0.27
|
%
|
|
0.14
|
%
|
|
0.29
|
%
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
•
|
Net income was $2.3 billion in both the current and prior year.
|
•
|
Net interest income increased 3.4% compared to the prior year.
|
•
|
Total loans grew $2.4 billion, or 3.5%, from the prior year to $72.4 billion.
|
•
|
Net charge-off rate for total loans decreased 3 basis points from the prior year to 2.01% and the total loans delinquency rate for loans over 30 days past due increased 1 basis point to 1.67%.
|
•
|
Credit card loans grew $1.8 billion, or 3.1%, to $57.9 billion and Discover card sales volume increased 2.5% from the prior year.
|
•
|
Net charge-off rate for credit card loans decreased 5 basis points from the prior year to 2.22% and the credit card delinquency rate for loans over 30 days past due decreased 1 basis point to 1.72%.
|
•
|
Payment Services transaction dollar volume for the segment was $189.7 billion, down 6% from the prior year.
|
•
|
We repurchased approximately 29 million shares, or 6%, of our outstanding common stock for $1.7 billion.
|
•
|
During 2014, our net income was $2.3 billion, compared to $2.5 billion in 2013.
|
•
|
Our total loans grew $4.2 billion in 2014, or 6.4%, from 2013 to $70.0 billion.
|
•
|
During 2014, our credit card loans grew $3.0 billion, or 5.6%, to $56.1 billion and Discover card sales volume increased 5.1% from 2013.
|
•
|
Net charge-off rate for our credit card loans increased 6 basis points in 2014 from 2013 to 2.27% and the delinquency rate for credit card loans over 30 days past due increased 1 basis point to 1.73%.
|
•
|
During 2014, our Payment Services transaction dollar volume for the segment was $202.3 billion, up 3% from 2013.
|
•
|
We incurred a $178 million charge to earnings in 2014 to enhance our rewards program by allowing easier redemption of rewards, which resulted in the elimination of our current estimate of customer rewards forfeiture.
|
•
|
During 2014, our capital market activities included issuances of approximately $5.0 billion in public credit card asset-backed securities. Discover Bank issued $1.1 billion in senior bank notes and Discover Financial Services issued $500 million of senior notes.
|
•
|
We repurchased approximately 25 million shares, or 5%, of our outstanding common stock for $1.5 billion during the year ended December 31, 2014.
|
•
|
During 2013, our capital market activities included issuances of approximately $4.7 billion in public credit card asset-backed securities. Discover Bank issued $1.7 billion in senior bank notes.
|
•
|
We repurchased approximately 27 million shares of common stock for $1.3 billion, reducing our number of shares outstanding by 5% during the year ended December 31, 2013.
|
(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 proprietary sales volume on the Discover Network.
|
(3)
|
Represents Discover card activity related to net sales, balance transfers, cash advances and other activity.
|
(4)
|
Represents Discover card activity related to net sales.
|
The following table outlines changes in our consolidated statements of income (dollars in millions):
|
|||||||||||||||||||||||||
|
For the Years Ended December 31,
|
|
2015 vs. 2014
increase (decrease) |
|
2014 vs. 2013
increase (decrease) |
||||||||||||||||||||
|
2015
|
|
2014
|
|
2013
|
|
$
|
|
%
|
|
$
|
|
%
|
||||||||||||
Interest income
|
$
|
7,945
|
|
|
$
|
7,596
|
|
|
$
|
7,064
|
|
|
$
|
349
|
|
|
5
|
%
|
|
$
|
532
|
|
|
8
|
%
|
Interest expense
|
1,263
|
|
|
1,134
|
|
|
1,146
|
|
|
129
|
|
|
11
|
%
|
|
(12
|
)
|
|
(1
|
)%
|
|||||
Net interest income
|
6,682
|
|
|
6,462
|
|
|
5,918
|
|
|
220
|
|
|
3
|
%
|
|
544
|
|
|
9
|
%
|
|||||
Provision for loan losses
|
1,512
|
|
|
1,443
|
|
|
1,086
|
|
|
69
|
|
|
5
|
%
|
|
357
|
|
|
33
|
%
|
|||||
Net interest income after provision for loan losses
|
5,170
|
|
|
5,019
|
|
|
4,832
|
|
|
151
|
|
|
3
|
%
|
|
187
|
|
|
4
|
%
|
|||||
Other income
|
2,057
|
|
|
2,015
|
|
|
2,306
|
|
|
42
|
|
|
2
|
%
|
|
(291
|
)
|
|
(13
|
)%
|
|||||
Other expense
|
3,615
|
|
|
3,340
|
|
|
3,194
|
|
|
275
|
|
|
8
|
%
|
|
146
|
|
|
5
|
%
|
|||||
Income before income tax expense
|
3,612
|
|
|
3,694
|
|
|
3,944
|
|
|
(82
|
)
|
|
(2
|
)%
|
|
(250
|
)
|
|
(6
|
)%
|
|||||
Income tax expense
|
1,315
|
|
|
1,371
|
|
|
1,474
|
|
|
(56
|
)
|
|
(4
|
)%
|
|
(103
|
)
|
|
(7
|
)%
|
|||||
Net income
|
$
|
2,297
|
|
|
$
|
2,323
|
|
|
$
|
2,470
|
|
|
$
|
(26
|
)
|
|
(1
|
)%
|
|
$
|
(147
|
)
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
The level and composition of loan receivables, including the proportion of credit card loans to other loans, as well as the proportion of loan receivables bearing interest at promotional rates as compared to standard rates;
|
•
|
The credit performance of our loans, particularly with regard to charge-offs of finance charges, which reduce interest income;
|
•
|
The terms of long-term borrowings and certificates of deposit upon initial offering, including maturity and interest rate;
|
•
|
The level and composition of other interest-bearing assets and liabilities, including our liquidity portfolio;
|
•
|
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 and the London Interbank Offered Rate;
|
•
|
The effectiveness of interest rate swaps in our interest rate risk management program; and
|
•
|
The difference between the carrying amount and future cash flows expected to be collected on PCI loans.
|
Average Balance Sheet Analysis
(dollars in millions)
|
||||||||||||||||||||||||||||||||
|
For the Years Ended December 31,
|
|||||||||||||||||||||||||||||||
|
2015
|
|
2014
|
|
2013
|
|||||||||||||||||||||||||||
|
Average Balance
|
|
Rate
|
|
Interest
|
|
Average Balance
|
|
Rate
|
|
Interest
|
|
Average Balance
|
|
Rate
|
|
Interest
|
|||||||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Cash and cash equivalents
|
$
|
9,840
|
|
|
0.26
|
%
|
|
$
|
26
|
|
|
$
|
7,228
|
|
|
0.25
|
%
|
|
$
|
18
|
|
|
$
|
5,557
|
|
|
0.25
|
%
|
|
$
|
14
|
|
Restricted cash
|
631
|
|
|
0.14
|
%
|
|
1
|
|
|
763
|
|
|
0.08
|
%
|
|
1
|
|
|
704
|
|
|
0.10
|
%
|
|
1
|
|
||||||
Investment securities
|
2,876
|
|
|
1.71
|
%
|
|
49
|
|
|
4,000
|
|
|
1.67
|
%
|
|
67
|
|
|
5,190
|
|
|
1.42
|
%
|
|
74
|
|
||||||
Loan receivables
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Credit card
(2)(3)
|
54,846
|
|
|
12.08
|
%
|
|
6,626
|
|
|
52,600
|
|
|
12.09
|
%
|
|
6,359
|
|
|
49,816
|
|
|
12.00
|
%
|
|
5,978
|
|
||||||
Personal loans
|
5,245
|
|
|
12.04
|
%
|
|
631
|
|
|
4,592
|
|
|
12.36
|
%
|
|
568
|
|
|
3,706
|
|
|
12.52
|
%
|
|
464
|
|
||||||
Private student loans
|
5,272
|
|
|
7.16
|
%
|
|
378
|
|
|
4,450
|
|
|
7.02
|
%
|
|
312
|
|
|
3,561
|
|
|
7.07
|
%
|
|
252
|
|
||||||
PCI student loans
|
3,385
|
|
|
6.51
|
%
|
|
220
|
|
|
3,916
|
|
|
6.64
|
%
|
|
260
|
|
|
4,434
|
|
|
6.13
|
%
|
|
272
|
|
||||||
Mortgage loans held for sale
|
93
|
|
|
3.63
|
%
|
|
3
|
|
|
118
|
|
|
3.92
|
%
|
|
5
|
|
|
216
|
|
|
3.47
|
%
|
|
7
|
|
||||||
Other
|
220
|
|
|
4.90
|
%
|
|
11
|
|
|
177
|
|
|
3.49
|
%
|
|
6
|
|
|
87
|
|
|
3.00
|
%
|
|
2
|
|
||||||
Total loan receivables
|
69,061
|
|
|
11.40
|
%
|
|
7,869
|
|
|
65,853
|
|
|
11.40
|
%
|
|
7,510
|
|
|
61,820
|
|
|
11.28
|
%
|
|
6,975
|
|
||||||
Total interest-earning assets
|
82,408
|
|
|
9.64
|
%
|
|
7,945
|
|
|
77,844
|
|
|
9.76
|
%
|
|
7,596
|
|
|
73,271
|
|
|
9.64
|
%
|
|
7,064
|
|
||||||
Allowance for loan losses
|
(1,782
|
)
|
|
|
|
|
|
(1,645
|
)
|
|
|
|
|
|
(1,639
|
)
|
|
|
|
|
||||||||||||
Other assets
|
4,469
|
|
|
|
|
|
|
4,279
|
|
|
|
|
|
|
4,348
|
|
|
|
|
|
||||||||||||
Total assets
|
$
|
85,095
|
|
|
|
|
|
|
$
|
80,478
|
|
|
|
|
|
|
$
|
75,980
|
|
|
|
|
|
|||||||||
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Time deposits
(4)
|
$
|
26,480
|
|
|
1.61
|
%
|
|
427
|
|
|
$
|
26,627
|
|
|
1.66
|
%
|
|
443
|
|
|
$
|
27,718
|
|
|
2.02
|
%
|
|
559
|
|
|||
Money market deposits
(5)
|
7,280
|
|
|
0.98
|
%
|
|
71
|
|
|
7,624
|
|
|
0.91
|
%
|
|
70
|
|
|
5,719
|
|
|
0.87
|
%
|
|
50
|
|
||||||
Other interest-bearing savings deposits
|
12,538
|
|
|
1.00
|
%
|
|
125
|
|
|
10,617
|
|
|
0.96
|
%
|
|
101
|
|
|
9,428
|
|
|
0.95
|
%
|
|
89
|
|
||||||
Total interest-bearing deposits
(6)
|
46,298
|
|
|
1.35
|
%
|
|
623
|
|
|
44,868
|
|
|
1.37
|
%
|
|
614
|
|
|
42,865
|
|
|
1.63
|
%
|
|
698
|
|
||||||
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Short-term borrowings
|
84
|
|
|
1.41
|
%
|
|
1
|
|
|
111
|
|
|
1.59
|
%
|
|
2
|
|
|
199
|
|
|
1.57
|
%
|
|
3
|
|
||||||
Securitized borrowings
(4)(5)
|
16,924
|
|
|
1.94
|
%
|
|
329
|
|
|
16,686
|
|
|
1.78
|
%
|
|
297
|
|
|
16,297
|
|
|
1.74
|
%
|
|
284
|
|
||||||
Other long-term borrowings
(4)
|
6,691
|
|
|
4.63
|
%
|
|
310
|
|
|
4,192
|
|
|
5.28
|
%
|
|
221
|
|
|
2,609
|
|
|
6.18
|
%
|
|
161
|
|
||||||
Total borrowings
|
23,699
|
|
|
2.70
|
%
|
|
640
|
|
|
20,989
|
|
|
2.48
|
%
|
|
520
|
|
|
19,105
|
|
|
2.35
|
%
|
|
448
|
|
||||||
Total interest-bearing liabilities
|
69,997
|
|
|
1.80
|
%
|
|
1,263
|
|
|
65,857
|
|
|
1.72
|
%
|
|
1,134
|
|
|
61,970
|
|
|
1.85
|
%
|
|
1,146
|
|
||||||
Other liabilities and stockholders’ equity
|
15,098
|
|
|
|
|
|
|
14,621
|
|
|
|
|
|
|
14,010
|
|
|
|
|
|
||||||||||||
Total liabilities and stockholders’ equity
|
$
|
85,095
|
|
|
|
|
|
|
$
|
80,478
|
|
|
|
|
|
|
$
|
75,980
|
|
|
|
|
|
|||||||||
Net interest income
|
|
|
|
|
$
|
6,682
|
|
|
|
|
|
|
$
|
6,462
|
|
|
|
|
|
|
$
|
5,918
|
|
|||||||||
Net interest margin
(7)
|
|
|
9.68
|
%
|
|
|
|
|
|
9.81
|
%
|
|
|
|
|
|
9.57
|
%
|
|
|
||||||||||||
Net yield on interest-bearing assets
(8)
|
|
|
8.11
|
%
|
|
|
|
|
|
8.30
|
%
|
|
|
|
|
|
8.08
|
%
|
|
|
||||||||||||
Interest rate spread
(9)
|
|
|
7.84
|
%
|
|
|
|
|
|
8.04
|
%
|
|
|
|
|
|
7.79
|
%
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Average balances of loan receivables include non-accruing loans, which are included in the yield calculations. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.
|
(2)
|
Interest income on credit card loans includes
$192 million
,
$192 million
and
$171 million
of amortization of balance transfer fees for the
years ended December 31, 2015, 2014 and 2013
, respectively.
|
(3)
|
The year ended December 31, 2013 includes the impact of interest rate swap agreements used to change a portion of certain floating-rate credit card loan receivables to fixed-rate.
|
(4)
|
Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding.
|
(5)
|
Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding.
|
(6)
|
Includes the impact of FDIC insurance premiums.
|
(7)
|
Net interest margin represents net interest income as a percentage of average total loan receivables.
|
(8)
|
Net yield on interest-bearing 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 the rate on total interest-bearing liabilities.
|
Rate/Volume Variance Analysis
(1)
(dollars in millions)
|
|||||||||||||||||||||||
|
Year Ended December 31, 2015 vs.
Year Ended December 31, 2014
|
|
Year Ended December 31, 2014 vs.
Year Ended December 31, 2013 |
||||||||||||||||||||
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
||||||||||||
Increase/(decrease) in net interest income due to changes in:
|
|
|
|
|
|
|
|
|
|||||||||||||||
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Cash and cash equivalents
|
$
|
7
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Investment securities
|
(19
|
)
|
|
1
|
|
|
(18
|
)
|
|
(19
|
)
|
|
12
|
|
|
(7
|
)
|
||||||
Loan receivables:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Credit card
|
271
|
|
|
(4
|
)
|
|
267
|
|
|
336
|
|
|
45
|
|
|
381
|
|
||||||
Personal loans
|
78
|
|
|
(15
|
)
|
|
63
|
|
|
110
|
|
|
(6
|
)
|
|
104
|
|
||||||
Private student loans
|
59
|
|
|
7
|
|
|
66
|
|
|
62
|
|
|
(2
|
)
|
|
60
|
|
||||||
PCI student loans
|
(35
|
)
|
|
(5
|
)
|
|
(40
|
)
|
|
(33
|
)
|
|
21
|
|
|
(12
|
)
|
||||||
Mortgage loans held for sale
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
1
|
|
|
(2
|
)
|
||||||
Other
|
2
|
|
|
3
|
|
|
5
|
|
|
3
|
|
|
1
|
|
|
4
|
|
||||||
Total loan receivables
|
374
|
|
|
(15
|
)
|
|
359
|
|
|
475
|
|
|
60
|
|
|
535
|
|
||||||
Total interest income
|
362
|
|
|
(13
|
)
|
|
349
|
|
|
460
|
|
|
72
|
|
|
532
|
|
||||||
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Time deposits
|
(3
|
)
|
|
(13
|
)
|
|
(16
|
)
|
|
(21
|
)
|
|
(95
|
)
|
|
(116
|
)
|
||||||
Money market deposits
|
(3
|
)
|
|
4
|
|
|
1
|
|
|
17
|
|
|
3
|
|
|
20
|
|
||||||
Other interest-bearing savings deposits
|
19
|
|
|
5
|
|
|
24
|
|
|
11
|
|
|
1
|
|
|
12
|
|
||||||
Total interest-bearing deposits
|
13
|
|
|
(4
|
)
|
|
9
|
|
|
7
|
|
|
(91
|
)
|
|
(84
|
)
|
||||||
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Short-term borrowings
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
||||||
Securitized borrowings
|
4
|
|
|
28
|
|
|
32
|
|
|
7
|
|
|
6
|
|
|
13
|
|
||||||
Other long-term borrowings
|
119
|
|
|
(30
|
)
|
|
89
|
|
|
86
|
|
|
(26
|
)
|
|
60
|
|
||||||
Total borrowings
|
122
|
|
|
(2
|
)
|
|
120
|
|
|
92
|
|
|
(20
|
)
|
|
72
|
|
||||||
Total interest expense
|
135
|
|
|
(6
|
)
|
|
129
|
|
|
99
|
|
|
(111
|
)
|
|
(12
|
)
|
||||||
Net interest income
|
$
|
227
|
|
|
$
|
(7
|
)
|
|
$
|
220
|
|
|
$
|
361
|
|
|
$
|
183
|
|
|
$
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances between the
years ended December 31, 2015, 2014 and 2013
based on the percentage of the rate or volume variance to the sum of the two absolute variances.
|
Loan receivables consist of the following (dollars in millions):
|
|||||||||||||||||||||||
|
December 31,
|
|
November 30,
|
||||||||||||||||||||
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
||||||||||||
Student loans held for sale
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
714
|
|
Loan portfolio
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Credit card loans
|
57,896
|
|
|
56,128
|
|
|
53,150
|
|
|
51,135
|
|
|
49,642
|
|
|
46,972
|
|
||||||
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Personal loans
|
5,490
|
|
|
5,007
|
|
|
4,191
|
|
|
3,296
|
|
|
3,272
|
|
|
2,648
|
|
||||||
Private student loans
|
5,647
|
|
|
4,850
|
|
|
3,969
|
|
|
3,072
|
|
|
3,000
|
|
|
2,069
|
|
||||||
Mortgage loans held for sale
(1)
|
—
|
|
|
122
|
|
|
148
|
|
|
355
|
|
|
322
|
|
|
—
|
|
||||||
Other
|
236
|
|
|
202
|
|
|
135
|
|
|
38
|
|
|
37
|
|
|
17
|
|
||||||
Total other loans
|
11,373
|
|
|
10,181
|
|
|
8,443
|
|
|
6,761
|
|
|
6,631
|
|
|
4,734
|
|
||||||
Purchased credit-impaired loans
(2)
|
3,116
|
|
|
3,660
|
|
|
4,178
|
|
|
4,702
|
|
|
4,744
|
|
|
5,250
|
|
||||||
Total loan portfolio
|
72,385
|
|
|
69,969
|
|
|
65,771
|
|
|
62,598
|
|
|
61,017
|
|
|
56,956
|
|
||||||
Total loan receivables
|
72,385
|
|
|
69,969
|
|
|
65,771
|
|
|
62,598
|
|
|
61,017
|
|
|
57,670
|
|
||||||
Allowance for loan losses
|
(1,869
|
)
|
|
(1,746
|
)
|
|
(1,648
|
)
|
|
(1,788
|
)
|
|
(1,725
|
)
|
|
(2,205
|
)
|
||||||
Net loan receivables
|
$
|
70,516
|
|
|
$
|
68,223
|
|
|
$
|
64,123
|
|
|
$
|
60,810
|
|
|
$
|
59,292
|
|
|
$
|
55,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On June 16, 2015, we announced the closing of our mortgage origination business. Pursuant to that announcement, we sold all mortgage loans held for sale in our portfolio and ceased originating new mortgages. Note 3: Business Dispositions to our consolidated financial statements for more information.
|
(2)
|
Represents purchased credit-impaired private student loans. See Note 5: Loan Receivables to our consolidated financial statements for more information regarding PCI loans.
|
•
|
The impact of general economic conditions on the consumer, including unemployment levels, bankruptcy trends and interest rate movements;
|
•
|
Changes in consumer spending and payment behaviors;
|
•
|
Changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio and maturation of the loan portfolio;
|
•
|
The level and direction of historical and anticipated loan delinquencies and charge-offs;
|
•
|
The credit quality of the loan portfolio, which reflects, among other factors, our credit granting practices and effectiveness of collection efforts; and
|
•
|
Regulatory changes or new regulatory guidance.
|
(1)
|
Includes both PCI and non-PCI private student loans.
|
(1)
|
Charge-offs for PCI loans did not result in a charge to earnings during any of the years presented and are therefore excluded from the calculation. See Note 5: Loan Receivables to our consolidated financial statements for more information regarding the accounting for charge-offs on PCI loans.
|
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 restructured loans (dollars in millions):
|
|||||||||||||||||||||||||||||||||||||||||
|
Calendar Years Ended December 31,
|
|
Fiscal Years Ended November 30,
|
|
One Month Ended December 31, 2012
|
||||||||||||||||||||||||||||||||||||
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
2011
|
|
|||||||||||||||||||||||||||||||
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
||||||||||||||||||
Loans 30 or more days delinquent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Credit card loans
|
$
|
995
|
|
|
1.72
|
%
|
|
$
|
971
|
|
|
1.73
|
%
|
|
$
|
912
|
|
|
1.72
|
%
|
|
$
|
925
|
|
|
1.86
|
%
|
|
$
|
1,117
|
|
|
2.38
|
%
|
|
$
|
917
|
|
|
1.79
|
%
|
Personal loans
|
$
|
49
|
|
|
0.89
|
%
|
|
$
|
40
|
|
|
0.79
|
%
|
|
$
|
29
|
|
|
0.70
|
%
|
|
$
|
25
|
|
|
0.76
|
%
|
|
$
|
22
|
|
|
0.87
|
%
|
|
$
|
26
|
|
|
0.77
|
%
|
Private student loans (excluding PCI loans
(1)
)
|
$
|
108
|
|
|
1.91
|
%
|
|
$
|
87
|
|
|
1.80
|
%
|
|
$
|
66
|
|
|
1.66
|
%
|
|
$
|
32
|
|
|
1.07
|
%
|
|
$
|
13
|
|
|
0.63
|
%
|
|
$
|
37
|
|
|
1.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Loans 90 or more days delinquent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Credit card loans
|
$
|
490
|
|
|
0.85
|
%
|
|
$
|
480
|
|
|
0.85
|
%
|
|
$
|
447
|
|
|
0.84
|
%
|
|
$
|
451
|
|
|
0.91
|
%
|
|
$
|
560
|
|
|
1.19
|
%
|
|
$
|
460
|
|
|
0.90
|
%
|
Personal loans
|
$
|
15
|
|
|
0.27
|
%
|
|
$
|
11
|
|
|
0.22
|
%
|
|
$
|
8
|
|
|
0.21
|
%
|
|
$
|
8
|
|
|
0.23
|
%
|
|
$
|
7
|
|
|
0.28
|
%
|
|
$
|
8
|
|
|
0.23
|
%
|
Private student loans (excluding PCI loans
(1)
)
|
$
|
24
|
|
|
0.43
|
%
|
|
$
|
25
|
|
|
0.52
|
%
|
|
$
|
18
|
|
|
0.46
|
%
|
|
$
|
8
|
|
|
0.27
|
%
|
|
$
|
3
|
|
|
0.14
|
%
|
|
$
|
9
|
|
|
0.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Loans not accruing interest
|
$
|
224
|
|
|
0.32
|
%
|
|
$
|
183
|
|
|
0.28
|
%
|
|
$
|
200
|
|
|
0.33
|
%
|
|
$
|
198
|
|
|
0.35
|
%
|
|
$
|
207
|
|
|
0.40
|
%
|
|
$
|
192
|
|
|
0.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Restructured loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Credit card loans
(2)
|
$
|
1,019
|
|
|
1.76
|
%
|
|
$
|
1,037
|
|
|
1.85
|
%
|
|
$
|
1,123
|
|
|
2.11
|
%
|
|
$
|
1,332
|
|
|
2.68
|
%
|
|
$
|
1,217
|
|
|
2.59
|
%
|
|
$
|
1,309
|
|
|
2.56
|
%
|
Personal loans
(3)
|
$
|
68
|
|
|
1.24
|
%
|
|
$
|
55
|
|
|
1.10
|
%
|
|
$
|
31
|
|
|
0.74
|
%
|
|
$
|
21
|
|
|
0.64
|
%
|
|
$
|
8
|
|
|
0.29
|
%
|
|
$
|
21
|
|
|
0.65
|
%
|
Private student loans(excluding PCI
(1)
)
(4)
|
$
|
48
|
|
|
0.85
|
%
|
|
$
|
38
|
|
|
0.78
|
%
|
|
$
|
28
|
|
|
0.71
|
%
|
|
$
|
15
|
|
|
0.50
|
%
|
|
$
|
5
|
|
|
0.26
|
%
|
|
$
|
16
|
|
|
0.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes PCI loans which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because we are recognizing interest income on a pool of loans, it is all considered to be performing.
|
(2)
|
Restructured loans include
$44 million
,
$44 million
,
$43 million
,
$54 million
,
$56 million
and
$38 million
at
December 31, 2015
,
2014
,
2013
and 2012 and November 30, 2012 and 2011, respectively, that are also included in loans over 90 days delinquent or more.
|
(3)
|
Restructured loans include
$4 million
,
$3 million
,
$2 million
,
$2 million
and
$1 million
at
December 31, 2015
,
2014
,
2013
and 2012 and November 30, 2012, respectively, that are also included in loans over 90 days delinquent or more.
|
(4)
|
Restructured loans include
$3 million
,
$5 million
,
$3 million
,
$2 million
and
$2 million
at
December 31, 2015
,
2014
,
2013
and 2012 and November 30, 2012, respectively, that are also included in loans over 90 days delinquent or more.
|
(1)
|
Because of the uncertainty regarding loan repayment patterns, the above amounts have been calculated using contractually required minimum payments. Historically, actual loan repayments have been higher than such minimum payments and, therefore, the above amounts may not necessarily be indicative of our actual loan repayments.
|
(2)
|
On June 16, 2015, we announced the closing of our mortgage origination business. Pursuant to that announcement, we sold all mortgage loans held for sale in our portfolio and ceased originating new mortgages. Note 3: Business Dispositions to our consolidated financial statements for more information.
|
(1)
|
Net of rewards, including Cashback Bonus rewards, of
$1.3 billion
,
$1.4 billion
and
$1.0 billion
for the
years ended December 31, 2015, 2014 and 2013
, respectively. During the three months ended December 31, 2014, we made certain changes to its customer rewards program, eliminating forfeitures. These changes resulted in a one-time expense of $178 million due to the reversal of the estimate for customer rewards forfeiture, a contra-account to accrued expenses and other liabilities. The impact of actual forfeitures on discount and interchange revenue is not material for the
year ended December 31, 2015
. Actual forfeitures resulted in additional discount and interchange revenue and total other income of
$36 million
each for the
years ended December 31,
2014
and
2013
.
|
The following table provides a summary of Discover Financial Services (Parent Company) and Discover Bank outstanding fixed-rate debt (dollars in millions):
|
|||
|
Principal Amount Outstanding
|
||
At December 31, 2015
|
|
||
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing 2017-2025
|
$
|
2,300
|
|
Discover Financial Services (Parent Company) fixed-rate retail notes maturing 2022-2025
|
$
|
40
|
|
Discover Bank fixed-rate senior bank notes, maturing 2018-2026
|
$
|
5,150
|
|
Discover Bank fixed-rate subordinated bank notes, maturing 2019-2020
|
$
|
700
|
|
|
|
(1)
|
An “sf” in the rating denotes rating agency identification for structured finance product ratings.
|
|
December 31,
|
||||||
|
2015
|
|
2014
|
||||
|
(dollars in millions)
|
||||||
Liquidity portfolio
|
|
|
|
||||
Cash and cash equivalents
(1)
|
$
|
9,121
|
|
|
$
|
6,921
|
|
Investment securities
(2)
|
2,956
|
|
|
3,831
|
|
||
Total liquidity portfolio
|
12,077
|
|
|
10,752
|
|
||
Private asset-backed securitizations
(3)
|
6,750
|
|
|
7,500
|
|
||
Primary liquidity sources
|
18,827
|
|
|
18,252
|
|
||
Federal Reserve discount window
(3)(4)
|
23,932
|
|
|
16,024
|
|
||
Total liquidity portfolio and undrawn credit facilities
|
$
|
42,759
|
|
|
$
|
34,276
|
|
|
|
|
|
(1)
|
Cash-in-process is excluded from cash and cash equivalents for liquidity purposes.
|
(2)
|
Excludes
$7 million
and
$16 million
of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of
December 31, 2015
and
December 31, 2014
, respectively.
|
(3)
|
See " — Additional Funding Sources" for additional information.
|
(4)
|
The Federal Reserve Banks' discount collateral margin increased to
76%
from
56%
at
December 31, 2015
and
December 31, 2014
, respectively, resulting in an increase in the Federal Reserve discount window.
|
(1)
|
Adjustments related to capital components include: deferred tax liabilities related to intangible assets and deduction for deferred tax assets.
|
(2)
|
Reconciliation to CET1 capital calculated under Basel III fully phased-in rules shown as not applicable ("N/A") as we are now reconciling from CET1 capital calculated under the Basel III transition rules, the closest U.S. GAAP financial measure in the table below.
|
(1)
|
Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion.
|
(2)
|
Key differences under fully phased-in Basel III rules in the calculation of risk-weighted assets include higher risk weighting for past-due loans and unfunded commitments.
|
(1)
|
Deposits do not include interest payments because payment amounts and timing cannot be reasonably estimated as certain deposit accounts have early withdrawal rights and the option to roll interest payments into the balance.
|
(2)
|
Deposits due in less than one year include deposits with indeterminate maturities.
|
(3)
|
See Note 10: Long-Term Borrowings to our consolidated financial statements for further discussion. Total future payment of interest charges for the floating-rate notes is estimated to be $559 million as of
December 31, 2015
, utilizing the current interest rates as of that date.
|
(4)
|
Purchase obligations for goods and services include payments under, among other things, consulting, outsourcing, data, advertising, sponsorship, software license, telecommunications agreements and global acceptance contracts. Purchase obligations also include payments under rewards program agreements with merchants. Purchase obligations at
December 31, 2015
reflect the minimum purchase obligation under legally binding contracts with contract terms that are both fixed and determinable. These amounts exclude obligations for goods and services that already have been incurred and are reflected on our consolidated statement of financial condition.
|
(5)
|
Other liabilities include our expected future contributions to our pension plan, the contingent liability associated with our equity method securities and a commitment to purchase certain when-issued mortgage-backed securities under an agreement with the Delaware State Housing Authority as part of our community reinvestment initiatives.
|
Item 7A.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Item 8.
|
Financial Statements and Supplementary Data
|
|
December 31,
|
||||||
|
2015
|
|
2014
|
||||
|
(dollars in millions,
except share amounts)
|
||||||
Assets
|
|
|
|
||||
Cash and cash equivalents
|
$
|
9,572
|
|
|
$
|
7,284
|
|
Restricted cash
|
99
|
|
|
106
|
|
||
Investment securities (includes $2,963 and $3,847 at fair value at December 31, 2015 and 2014, respectively)
|
3,084
|
|
|
3,949
|
|
||
Loan receivables:
|
|
|
|
||||
Loan receivables (includes $0 and $122 at fair value at December 31, 2015 and 2014, respectively)
|
72,385
|
|
|
69,969
|
|
||
Allowance for loan losses
|
(1,869
|
)
|
|
(1,746
|
)
|
||
Net loan receivables
|
70,516
|
|
|
68,223
|
|
||
Premises and equipment, net
|
693
|
|
|
670
|
|
||
Goodwill
|
255
|
|
|
257
|
|
||
Intangible assets, net
|
168
|
|
|
176
|
|
||
Other assets
|
2,549
|
|
|
2,461
|
|
||
Total assets
|
$
|
86,936
|
|
|
$
|
83,126
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
||||
Deposits:
|
|
|
|
||||
Interest-bearing deposit accounts
|
$
|
47,157
|
|
|
$
|
45,792
|
|
Non-interest bearing deposit accounts
|
437
|
|
|
297
|
|
||
Total deposits
|
47,594
|
|
|
46,089
|
|
||
Short-term borrowings
|
—
|
|
|
113
|
|
||
Long-term borrowings
|
24,724
|
|
|
22,544
|
|
||
Accrued expenses and other liabilities
|
3,343
|
|
|
3,246
|
|
||
Total liabilities
|
75,661
|
|
|
71,992
|
|
||
Commitments, contingencies and guarantees (Notes 16, 19, and 20)
|
|
|
|
||||
Stockholders’ Equity:
|
|
|
|
||||
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 560,679,352 and 558,194,324 shares issued at December 31, 2015 and 2014, respectively
|
5
|
|
|
5
|
|
||
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 575,000 shares issued and outstanding and aggregate liquidation preference of $575 at December 31, 2015 and 2014, respectively
|
560
|
|
|
560
|
|
||
Additional paid-in capital
|
3,885
|
|
|
3,790
|
|
||
Retained earnings
|
13,250
|
|
|
11,467
|
|
||
Accumulated other comprehensive loss
|
(160
|
)
|
|
(138
|
)
|
||
Treasury stock, at cost; 139,000,423 and 109,006,038 shares at December 31, 2015 and 2014, respectively
|
(6,265
|
)
|
|
(4,550
|
)
|
||
Total stockholders’ equity
|
11,275
|
|
|
11,134
|
|
||
Total liabilities and stockholders’ equity
|
$
|
86,936
|
|
|
$
|
83,126
|
|
|
|
|
|
|
December 31,
|
||||||
|
2015
|
|
2014
|
||||
|
(dollars in millions)
|
||||||
Assets
|
|
|
|
||||
Restricted cash
|
$
|
99
|
|
|
$
|
102
|
|
Loan receivables
|
$
|
30,551
|
|
|
$
|
32,304
|
|
Allowance for loan losses allocated to securitized loan receivables
|
$
|
(811
|
)
|
|
$
|
(833
|
)
|
Other assets
|
$
|
34
|
|
|
$
|
37
|
|
Liabilities
|
|
|
|
||||
Long-term borrowings
|
$
|
16,764
|
|
|
$
|
17,395
|
|
Accrued expenses and other liabilities
|
$
|
12
|
|
|
$
|
11
|
|
|
|
|
|
|
For the Years Ended December 31,
|
||||||||||
|
2015
|
|
2014
|
|
2013
|
||||||
|
(dollars in millions, except per share amounts)
|
||||||||||
Interest income:
|
|
|
|
|
|
||||||
Credit card loans
|
$
|
6,626
|
|
|
$
|
6,359
|
|
|
$
|
5,978
|
|
Other loans
|
1,243
|
|
|
1,151
|
|
|
997
|
|
|||
Investment securities
|
49
|
|
|
67
|
|
|
74
|
|
|||
Other interest income
|
27
|
|
|
19
|
|
|
15
|
|
|||
Total interest income
|
7,945
|
|
|
7,596
|
|
|
7,064
|
|
|||
Interest expense:
|
|
|
|
|
|
||||||
Deposits
|
623
|
|
|
614
|
|
|
698
|
|
|||
Short-term borrowings
|
1
|
|
|
2
|
|
|
3
|
|
|||
Long-term borrowings
|
639
|
|
|
518
|
|
|
445
|
|
|||
Total interest expense
|
1,263
|
|
|
1,134
|
|
|
1,146
|
|
|||
Net interest income
|
6,682
|
|
|
6,462
|
|
|
5,918
|
|
|||
Provision for loan losses
|
1,512
|
|
|
1,443
|
|
|
1,086
|
|
|||
Net interest income after provision for loan losses
|
5,170
|
|
|
5,019
|
|
|
4,832
|
|
|||
Other income:
|
|
|
|
|
|
||||||
Discount and interchange revenue, net
|
1,117
|
|
|
979
|
|
|
1,126
|
|
|||
Protection products revenue
|
261
|
|
|
314
|
|
|
350
|
|
|||
Loan fee income
|
335
|
|
|
334
|
|
|
320
|
|
|||
Transaction processing revenue
|
159
|
|
|
182
|
|
|
192
|
|
|||
Gain on investments
|
9
|
|
|
4
|
|
|
5
|
|
|||
Gain on origination and sale of mortgage loans
|
68
|
|
|
81
|
|
|
144
|
|
|||
Other income
|
108
|
|
|
121
|
|
|
169
|
|
|||
Total other income
|
2,057
|
|
|
2,015
|
|
|
2,306
|
|
|||
Other expense:
|
|
|
|
|
|
||||||
Employee compensation and benefits
|
1,327
|
|
|
1,242
|
|
|
1,164
|
|
|||
Marketing and business development
|
745
|
|
|
735
|
|
|
717
|
|
|||
Information processing and communications
|
349
|
|
|
346
|
|
|
333
|
|
|||
Professional fees
|
610
|
|
|
450
|
|
|
410
|
|
|||
Premises and equipment
|
95
|
|
|
92
|
|
|
82
|
|
|||
Other expense
|
489
|
|
|
475
|
|
|
488
|
|
|||
Total other expense
|
3,615
|
|
|
3,340
|
|
|
3,194
|
|
|||
Income before income tax expense
|
3,612
|
|
|
3,694
|
|
|
3,944
|
|
|||
Income tax expense
|
1,315
|
|
|
1,371
|
|
|
1,474
|
|
|||
Net income
|
$
|
2,297
|
|
|
$
|
2,323
|
|
|
$
|
2,470
|
|
Net income allocated to common stockholders
|
$
|
2,246
|
|
|
$
|
2,270
|
|
|
$
|
2,414
|
|
Basic earnings per common share
|
$
|
5.14
|
|
|
$
|
4.91
|
|
|
$
|
4.97
|
|
Diluted earnings per common share
|
$
|
5.13
|
|
|
$
|
4.90
|
|
|
$
|
4.96
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
||||||||||
|
2015
|
|
2014
|
|
2013
|
||||||
|
(dollars in millions)
|
||||||||||
Net income
|
$
|
2,297
|
|
|
$
|
2,323
|
|
|
$
|
2,470
|
|
Other comprehensive (loss) income, net of taxes
|
|
|
|
|
|
||||||
Unrealized (loss) gain on available-for-sale investment securities, net of tax
|
(23
|
)
|
|
4
|
|
|
(52
|
)
|
|||
Unrealized (loss) gain on cash flow hedges, net of tax
|
(13
|
)
|
|
(20
|
)
|
|
10
|
|
|||
Unrealized pension plan gain (loss), net of tax
|
14
|
|
|
(53
|
)
|
|
45
|
|
|||
Foreign currency translation adjustments, net of tax
|
—
|
|
|
(1
|
)
|
|
1
|
|
|||
Other comprehensive (loss) income
|
(22
|
)
|
|
(70
|
)
|
|
4
|
|
|||
Comprehensive income
|
$
|
2,275
|
|
|
$
|
2,253
|
|
|
$
|
2,474
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Treasury
Stock
|
|
Total
Stockholders’
Equity
|
||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|||||||||||||||||||||
|
(dollars in millions, shares in thousands)
|
||||||||||||||||||||||||||||||||
Balance at December 31, 2012
|
575
|
|
|
$
|
560
|
|
|
553,351
|
|
|
$
|
5
|
|
|
$
|
3,598
|
|
|
$
|
7,472
|
|
|
$
|
(72
|
)
|
|
$
|
(1,690
|
)
|
|
$
|
9,873
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,470
|
|
|
—
|
|
|
—
|
|
|
2,470
|
|
|||||||
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|||||||
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,296
|
)
|
|
(1,296
|
)
|
|||||||
Common stock issued under employee benefit plans
|
—
|
|
|
—
|
|
|
66
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|||||||
Common stock issued and stock-based compensation expense
|
—
|
|
|
—
|
|
|
1,933
|
|
|
—
|
|
|
86
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86
|
|
|||||||
Dividends — common stock
($0.60 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(294
|
)
|
|
—
|
|
|
—
|
|
|
(294
|
)
|
|||||||
Dividends — preferred stock ($65.00 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|||||||
Balance at December 31, 2013
|
575
|
|
|
560
|
|
|
555,350
|
|
|
5
|
|
|
3,687
|
|
|
9,611
|
|
|
(68
|
)
|
|
(2,986
|
)
|
|
10,809
|
|
|||||||
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,323
|
|
|
—
|
|
|
—
|
|
|
2,323
|
|
|||||||
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(70
|
)
|
|
—
|
|
|
(70
|
)
|
|||||||
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,564
|
)
|
|
(1,564
|
)
|
|||||||
Common stock issued under employee benefit plans
|
—
|
|
|
—
|
|
|
62
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|||||||
Common stock issued and stock-based compensation expense
|
—
|
|
|
—
|
|
|
2,782
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|||||||
Dividends — common stock
($0.92 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(430
|
)
|
|
—
|
|
|
—
|
|
|
(430
|
)
|
|||||||
Dividends — preferred stock ($65.00 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|||||||
Balance at December 31, 2014
|
575
|
|
|
560
|
|
|
558,194
|
|
|
5
|
|
|
3,790
|
|
|
11,467
|
|
|
(138
|
)
|
|
(4,550
|
)
|
|
11,134
|
|
|||||||
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,297
|
|
|
—
|
|
|
—
|
|
|
2,297
|
|
|||||||
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
|
—
|
|
|
(22
|
)
|
|||||||
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,715
|
)
|
|
(1,715
|
)
|
|||||||
Common stock issued under employee benefit plans
|
—
|
|
|
—
|
|
|
83
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|||||||
Common stock issued and stock-based compensation expense
|
—
|
|
|
—
|
|
|
2,402
|
|
|
—
|
|
|
91
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
91
|
|
|||||||
Dividends — common stock
($1.08 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(477
|
)
|
|
—
|
|
|
—
|
|
|
(477
|
)
|
|||||||
Dividends — preferred stock ($65.00 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|||||||
Balance at December 31, 2015
|
575
|
|
|
$
|
560
|
|
|
560,679
|
|
|
$
|
5
|
|
|
$
|
3,885
|
|
|
$
|
13,250
|
|
|
$
|
(160
|
)
|
|
$
|
(6,265
|
)
|
|
$
|
11,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
||||||||||
|
2015
|
|
2014
|
|
2013
|
||||||
|
(dollars in millions)
|
||||||||||
Cash flows from operating activities
|
|
|
|
|
|
||||||
Net income
|
$
|
2,297
|
|
|
$
|
2,323
|
|
|
$
|
2,470
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
||||||
Provision for loan losses
|
1,512
|
|
|
1,443
|
|
|
1,086
|
|
|||
Depreciation and amortization
|
391
|
|
|
369
|
|
|
334
|
|
|||
Amortization of deferred revenues and accretion of accretable yield on acquired loans
|
(432
|
)
|
|
(474
|
)
|
|
(465
|
)
|
|||
Net gain on origination and sale of loans, investments, and other assets
|
(26
|
)
|
|
(56
|
)
|
|
(123
|
)
|
|||
Proceeds from sale of mortgage loans originated for sale
|
2,714
|
|
|
2,811
|
|
|
4,160
|
|
|||
Net principal disbursed on mortgage loans originated for sale
|
(2,519
|
)
|
|
(2,700
|
)
|
|
(3,805
|
)
|
|||
Other, net
|
(8
|
)
|
|
275
|
|
|
381
|
|
|||
Changes in assets and liabilities:
|
|
|
|
|
|
||||||
Increase in other assets
|
(237
|
)
|
|
(238
|
)
|
|
(252
|
)
|
|||
Increase (decrease) in accrued expenses and other liabilities
|
162
|
|
|
73
|
|
|
(269
|
)
|
|||
Net cash provided by operating activities
|
3,854
|
|
|
3,826
|
|
|
3,517
|
|
|||
|
|
|
|
|
|
||||||
Cash flows from investing activities
|
|
|
|
|
|
||||||
Maturities and sales of available-for-sale investment securities
|
1,517
|
|
|
1,460
|
|
|
1,423
|
|
|||
Purchases of available-for-sale investment securities
|
(677
|
)
|
|
(390
|
)
|
|
(325
|
)
|
|||
Maturities of held-to-maturity investment securities
|
17
|
|
|
10
|
|
|
29
|
|
|||
Purchases of held-to-maturity investment securities
|
(37
|
)
|
|
(53
|
)
|
|
(2
|
)
|
|||
Net principal disbursed on loans originated for investment
|
(3,479
|
)
|
|
(5,095
|
)
|
|
(3,915
|
)
|
|||
Purchases of loan receivables
|
—
|
|
|
—
|
|
|
(136
|
)
|
|||
Purchases of other investments
|
(51
|
)
|
|
(60
|
)
|
|
(114
|
)
|
|||
Decrease in restricted cash
|
7
|
|
|
76
|
|
|
108
|
|
|||
Proceeds from sale of premises and equipment
|
1
|
|
|
—
|
|
|
—
|
|
|||
Purchases of premises and equipment
|
(168
|
)
|
|
(145
|
)
|
|
(231
|
)
|
|||
Proceeds from sale of subsidiaries
|
2
|
|
|
—
|
|
|
—
|
|
|||
Net cash used for investing activities
|
(2,868
|
)
|
|
(4,197
|
)
|
|
(3,163
|
)
|
|||
|
|
|
|
|
|
||||||
Cash flows from financing activities
|
|
|
|
|
|
||||||
Net decrease in short-term borrowings
|
(113
|
)
|
|
(27
|
)
|
|
(231
|
)
|
|||
Proceeds from issuance of securitized debt
|
2,975
|
|
|
5,049
|
|
|
4,650
|
|
|||
Maturities and repayment of securitized debt
|
(3,634
|
)
|
|
(4,678
|
)
|
|
(3,638
|
)
|
|||
Proceeds from issuance of other long-term borrowings
|
2,789
|
|
|
1,646
|
|
|
1,744
|
|
|||
Payment of contingent consideration for purchase of net assets of a business, at fair value
|
—
|
|
|
—
|
|
|
(9
|
)
|
|||
Proceeds from issuance of common stock
|
5
|
|
|
5
|
|
|
13
|
|
|||
Purchases of treasury stock
|
(1,715
|
)
|
|
(1,564
|
)
|
|
(1,296
|
)
|
|||
Net increase in deposits
|
1,510
|
|
|
1,137
|
|
|
2,782
|
|
|||
Dividends paid on common and preferred stock
|
(515
|
)
|
|
(467
|
)
|
|
(399
|
)
|
|||
Net cash provided by financing activities
|
1,302
|
|
|
1,101
|
|
|
3,616
|
|
|||
Net increase in cash and cash equivalents
|
2,288
|
|
|
730
|
|
|
3,970
|
|
|||
Cash and cash equivalents, at beginning of period
|
7,284
|
|
|
6,554
|
|
|
2,584
|
|
|||
Cash and cash equivalents, at end of period
|
$
|
9,572
|
|
|
$
|
7,284
|
|
|
$
|
6,554
|
|
|
|
|
|
|
|
||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
||||||
Cash paid during the period for:
|
|
|
|
|
|
||||||
Interest expense
|
$
|
1,070
|
|
|
$
|
933
|
|
|
$
|
975
|
|
Income taxes, net of income tax refunds
|
$
|
1,341
|
|
|
$
|
1,388
|
|
|
$
|
1,348
|
|
|
|
|
|
|
|
1.
|
Background and Basis of Presentation
|
2.
|
Summary of Significant Accounting Policies
|
3.
|
Business Dispositions
|
4.
|
Investments
|
(1)
|
Includes
$7 million
,
$16 million
and
$9 million
of U.S. Treasury securities pledged as swap collateral as of
December 31, 2015
,
2014
and
2013
, respectively.
|
(2)
|
Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
|
(1)
|
Available-for-sale investment securities are reported at fair value.
|
(2)
|
Held-to-maturity investment securities are reported at amortized cost.
|
(3)
|
Amount represents securities pledged as collateral to a government-related merchant for which transaction settlement occurs beyond the normal 24-hour period.
|
(4)
|
Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.
|
|
One Year
or
Less
|
|
After One
Year
Through
Five Years
|
|
After Five
Years
Through
Ten Years
|
|
After Ten
Years
|
|
Total
|
|||||
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|||||
Available-for-Sale—Weighted-Average Yields
(1)
|
|
|
|
|
|
|
|
|
|
|||||
U.S Treasury securities
|
1.37
|
%
|
|
0.91
|
%
|
|
—
|
%
|
|
—
|
%
|
|
1.13
|
%
|
U.S government agency securities
|
1.53
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
1.53
|
%
|
Residential mortgage-backed securities - Agency
|
—
|
%
|
|
—
|
%
|
|
1.54
|
%
|
|
2.06
|
%
|
|
1.89
|
%
|
Total available-for-sale investment securities
|
1.44
|
%
|
|
0.91
|
%
|
|
1.54
|
%
|
|
2.06
|
%
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|||||
Held-to-Maturity—Weighted-Average Yields
|
|
|
|
|
|
|
|
|
|
|||||
U.S. Treasury securities
|
0.29
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
0.29
|
%
|
State and political subdivisions of states
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
4.66
|
%
|
|
4.66
|
%
|
Residential mortgage-backed securities
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
2.78
|
%
|
|
2.78
|
%
|
Total held-to-maturity investment securities
|
0.29
|
%
|
|
—
|
%
|
|
—
|
%
|
|
2.89
|
%
|
|
2.88
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The weighted-average yield for available-for-sale investment securities is calculated based on the amortized cost.
|
5.
|
Loan Receivables
|
(1)
|
Amounts include
$21.6 billion
and
$21.7 billion
underlying investors’ interest in trust debt at
December 31, 2015
and
2014
, respectively, and
$7.2 billion
and
$8.6 billion
in seller's interest at
December 31, 2015
and
2014
, respectively. See Note 6: Credit Card and Student Loan Securitization Activities for further information.
|
(2)
|
On June 16, 2015, the Company announced that it was closing the mortgage origination business, as disclosed in Note 3: Business Dispositions. Pursuant to that announcement, the Company sold all mortgage loans held for sale in its portfolio and ceased originating new mortgages.
|
(3)
|
Other includes home equity loans.
|
(4)
|
Amounts include
$1.7 billion
and
$2.0 billion
of loans pledged as collateral against the notes issued from the Student Loan Corporation ("SLC") securitization trusts at
December 31, 2015
and
2014
, respectively. See Note 6: Credit Card and Student Loan Securitization Activities.
|
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 mortgage loans held for sale and 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 December 31, 2015
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card loans
(2)
|
$
|
505
|
|
|
$
|
490
|
|
|
$
|
995
|
|
|
$
|
422
|
|
|
$
|
198
|
|
Other loans
|
|
|
|
|
|
|
|
|
|
||||||||||
Personal loans
(3)
|
34
|
|
|
15
|
|
|
49
|
|
|
13
|
|
|
6
|
|
|||||
Private student loans (excluding PCI)
(4)
|
84
|
|
|
24
|
|
|
108
|
|
|
25
|
|
|
—
|
|
|||||
Other
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
20
|
|
|||||
Total other loans (excluding PCI)
|
118
|
|
|
40
|
|
|
158
|
|
|
38
|
|
|
26
|
|
|||||
Total loan receivables (excluding PCI)
|
$
|
623
|
|
|
$
|
530
|
|
|
$
|
1,153
|
|
|
$
|
460
|
|
|
$
|
224
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
At December 31, 2014
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card loans
(2)
|
$
|
491
|
|
|
$
|
480
|
|
|
$
|
971
|
|
|
$
|
442
|
|
|
$
|
157
|
|
Other loans
|
|
|
|
|
|
|
|
|
|
||||||||||
Personal loans
(3)
|
29
|
|
|
11
|
|
|
40
|
|
|
10
|
|
|
5
|
|
|||||
Private student loans (excluding PCI)
(4)
|
62
|
|
|
25
|
|
|
87
|
|
|
25
|
|
|
—
|
|
|||||
Other
|
1
|
|
|
1
|
|
|
2
|
|
|
—
|
|
|
21
|
|
|||||
Total other loans (excluding PCI)
|
92
|
|
|
37
|
|
|
129
|
|
|
35
|
|
|
26
|
|
|||||
Total loan receivables (excluding PCI)
|
$
|
583
|
|
|
$
|
517
|
|
|
$
|
1,100
|
|
|
$
|
477
|
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
|
(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
$30 million
,
$27 million
and
$29 million
for the
years ended December 31, 2015, 2014 and 2013
, 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
$42 million
and
$43 million
of loans accounted for as troubled debt restructurings at
December 31, 2015
and
2014
, respectively.
|
(3)
|
Personal loans that are 90 or more days delinquent and accruing interest include
$4 million
and
$3 million
of loans accounted for as troubled debt restructurings at both
December 31, 2015
and
2014
, respectively.
|
(4)
|
Private student loans that are 90 or more days delinquent and accruing interest include
$3 million
and
$5 million
of loans accounted for as troubled debt restructurings at
December 31, 2015
and
2014
, respectively.
|
(1)
|
PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."
|
The following tables provide changes in the Company’s allowance for loan losses for the periods presented (dollars in millions):
|
|||||||||||||||||||
|
For the Year Ended December 31, 2015
|
||||||||||||||||||
|
Credit Card
|
|
Personal Loans
|
|
Student
Loans
(1)
|
|
Other
|
|
Total
|
||||||||||
Balance at beginning of period
|
$
|
1,474
|
|
|
$
|
120
|
|
|
$
|
135
|
|
|
$
|
17
|
|
|
$
|
1,746
|
|
Additions
|
|
|
|
|
|
|
|
|
|
||||||||||
Provision for loan losses
|
1,300
|
|
|
147
|
|
|
64
|
|
|
1
|
|
|
1,512
|
|
|||||
Deductions
|
|
|
|
|
|
|
|
|
|
||||||||||
Charge-offs
|
(1,660
|
)
|
|
(129
|
)
|
|
(65
|
)
|
|
(1
|
)
|
|
(1,855
|
)
|
|||||
Recoveries
|
440
|
|
|
17
|
|
|
9
|
|
|
—
|
|
|
466
|
|
|||||
Net charge-offs
|
(1,220
|
)
|
|
(112
|
)
|
|
(56
|
)
|
|
(1
|
)
|
|
(1,389
|
)
|
|||||
Balance at end of period
|
$
|
1,554
|
|
|
$
|
155
|
|
|
$
|
143
|
|
|
$
|
17
|
|
|
$
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||
|
For the Year Ended December 31, 2014
|
||||||||||||||||||
|
Credit Card
|
|
Personal Loans
|
|
Student
Loans (1) |
|
Other
|
|
Total
|
||||||||||
Balance at beginning of period
|
$
|
1,406
|
|
|
$
|
112
|
|
|
$
|
113
|
|
|
$
|
17
|
|
|
$
|
1,648
|
|
Additions
|
|
|
|
|
|
|
|
|
|
||||||||||
Provision for loan losses
|
1,259
|
|
|
102
|
|
|
79
|
|
|
3
|
|
|
1,443
|
|
|||||
Deductions
|
|
|
|
|
|
|
|
|
|
||||||||||
Charge-offs
|
(1,636
|
)
|
|
(105
|
)
|
|
(62
|
)
|
|
(3
|
)
|
|
(1,806
|
)
|
|||||
Recoveries
|
445
|
|
|
11
|
|
|
5
|
|
|
—
|
|
|
461
|
|
|||||
Net charge-offs
|
(1,191
|
)
|
|
(94
|
)
|
|
(57
|
)
|
|
(3
|
)
|
|
(1,345
|
)
|
|||||
Balance at end of period
|
$
|
1,474
|
|
|
$
|
120
|
|
|
$
|
135
|
|
|
$
|
17
|
|
|
$
|
1,746
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||
|
For the Year Ended December 31, 2013
|
||||||||||||||||||
|
Credit Card
|
|
Personal Loans
|
|
Student
Loans (1) |
|
Other
|
|
Total
|
||||||||||
Balance at beginning of period
|
$
|
1,613
|
|
|
$
|
99
|
|
|
$
|
75
|
|
|
$
|
1
|
|
|
$
|
1,788
|
|
Additions
|
|
|
|
|
|
|
|
|
|
||||||||||
Provision for loan losses
|
893
|
|
|
92
|
|
|
84
|
|
|
17
|
|
|
1,086
|
|
|||||
Deductions
|
|
|
|
|
|
|
|
|
|
||||||||||
Charge-offs
|
(1,604
|
)
|
|
(86
|
)
|
|
(48
|
)
|
|
(1
|
)
|
|
(1,739
|
)
|
|||||
Recoveries
|
504
|
|
|
7
|
|
|
2
|
|
|
—
|
|
|
513
|
|
|||||
Net charge-offs
|
(1,100
|
)
|
|
(79
|
)
|
|
(46
|
)
|
|
(1
|
)
|
|
(1,226
|
)
|
|||||
Balance at end of period
|
$
|
1,406
|
|
|
$
|
112
|
|
|
$
|
113
|
|
|
$
|
17
|
|
|
$
|
1,648
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes both PCI and non-PCI private student loans.
|
(1)
|
Includes both PCI and non-PCI private student loans.
|
(2)
|
Excludes mortgage loans held for sale. Certain other loans, including non-performing Diners Club licensee loans, are individually evaluated for impairment.
|
(3)
|
Loan receivables evaluated for impairment in accordance with Accounting Standards Codification ("ASC") 310-10-35 include credit card loans, personal loans and student loans collectively evaluated for impairment in accordance with ASC Subtopic 310-40,
Receivables,
which consists of modified loans accounted for as troubled debt restructurings. Other loans are individually evaluated for impairment and generally do not represent troubled debt restructurings.
|
(4)
|
The unpaid principal balance of credit card loans was
$869 million
and
$878 million
at
December 31, 2015
and
2014
respectively. The unpaid principal balance of personal loans was
$67 million
and
$54 million
at
December 31, 2015
and
2014
, respectively. The unpaid principal balance of student loans was
$47 million
and
$37 million
at
December 31, 2015
and
2014
, respectively. All loans accounted for as troubled debt restructurings have a related allowance for loan losses.
|
(1)
|
The Company does not separately track interest income on loans in modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs.
|
(2)
|
The Company does not separately track the amount of gross interest income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on non-impaired credit card loans and the average interest rate earned on loans in the modification programs to the average loans in the modification programs.
|
(3)
|
This balance is considered impaired, but is excluded from the internal and external program amounts reflected in this table. Represents credit card loans that were modified in troubled debt restructurings, but are no longer enrolled in troubled debt restructuring program due to noncompliance with the terms of the modification or successful completion of a program.
|
(1)
|
The outstanding balance upon default is the loan balance at the end of the month prior to default. Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain revoked in most cases.
|
(2)
|
A customer defaults from a modification program after
two
consecutive missed payments.
|
(3)
|
Student loan defaults have been defined as loans that are
60
or more days delinquent.
|
(1)
|
Conforming loans are loans that conform to Government-Sponsored Enterprises guidelines.
|
(2)
|
FHA loans are loans that are insured by the Federal Housing Administration and are typically made to borrowers with low down payments. The initial loan amount must be within certain limits.
|
(3)
|
Jumbo loans are loans with an initial amount larger than the limits set by a Government-Sponsored Enterprise.
|
(4)
|
VA loans are loans that are insured by and conform to the Department of Veteran Affairs guidelines.
|
The Company originates credit card loans throughout the United States. The geographic distribution of the Company's credit card loan receivables was as follows (dollars in millions):
|
|||||||||||||
|
December 31,
|
||||||||||||
|
2015
|
|
2014
|
||||||||||
|
$
|
|
%
|
|
$
|
|
%
|
||||||
California
|
$
|
4,947
|
|
|
8.5
|
%
|
|
$
|
4,776
|
|
|
8.5
|
%
|
Texas
|
4,781
|
|
|
8.3
|
|
|
4,557
|
|
|
8.1
|
|
||
New York
|
4,061
|
|
|
7.0
|
|
|
3,929
|
|
|
7.0
|
|
||
Florida
|
3,463
|
|
|
6.0
|
|
|
3,287
|
|
|
5.9
|
|
||
Illinois
|
3,170
|
|
|
5.5
|
|
|
3,114
|
|
|
5.5
|
|
||
Pennsylvania
|
3,071
|
|
|
5.3
|
|
|
2,989
|
|
|
5.3
|
|
||
Ohio
|
2,511
|
|
|
4.3
|
|
|
2,449
|
|
|
4.4
|
|
||
New Jersey
|
2,163
|
|
|
3.7
|
|
|
2,113
|
|
|
3.8
|
|
||
Georgia
|
1,687
|
|
|
2.9
|
|
|
1,630
|
|
|
2.9
|
|
||
Michigan
|
1,661
|
|
|
2.9
|
|
|
1,634
|
|
|
2.9
|
|
||
Other States
|
26,381
|
|
|
45.6
|
|
|
25,650
|
|
|
45.7
|
|
||
Total credit card loans
|
$
|
57,896
|
|
|
100.0
|
%
|
|
$
|
56,128
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
6.
|
Credit Card and Student Loan Securitization Activities
|
(1)
|
The Company maintains its allowance for loan losses at an amount sufficient to absorb probable losses inherent in all loan receivables, which includes all loan receivables in the trusts. Therefore, credit risk associated with the transferred receivables is fully reflected on the Company’s balance sheet in accordance with GAAP.
|
(1)
|
Investors’ interests include third-party interests and subordinated interests held by wholly-owned subsidiaries of Discover Bank.
|
(1)
|
The Company maintains its allowance for loan losses on PCI loans sufficient to absorb probable decreases in cash flows that were previously expected. Therefore, credit risk associated with the transferred receivables is fully reflected on the Company’s balance sheet in accordance with GAAP.
|
7.
|
Premises and Equipment
|
8.
|
Goodwill and Intangible Assets
|
9.
|
Deposits
|
(1)
|
Includes
$1.1 billion
and
$1.2 billion
in certificates of deposit greater than $250,000, the Federal Deposit Insurance Corporation ("FDIC") insurance limit, as of
December 31, 2015
and
December 31, 2014
, respectively.
|
10.
|
Long-Term Borrowings
|
(1)
|
The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in London Interbank Offered Rate (“LIBOR”). Use of these interest rate swaps impacts carrying value of the debt. See Note 22: Derivatives and Hedging Activities.
|
(2)
|
Discover Card Execution Note Trust floating-rate asset-backed securities include issuances with the following interest rate terms:
1-month LIBOR + 18 to 45 basis points
and
3-month LIBOR + 20 basis points
as of
December 31, 2015
.
|
(3)
|
The Company uses interest rate swaps to manage its exposure to changes in interest rates related to future cash flows resulting from interest payments on a portion of these long-term borrowings. There is no impact on debt carrying value from use of these interest rate swaps. See Note 22: Derivatives and Hedging Activities.
|
(4)
|
SLC Private Student Loan Trusts floating-rate asset-backed securities include issuances with the following interest rate terms:
3-month LIBOR + 17 to 45 basis points
,
Prime rate + 75 to 100 basis points
and
1-month LIBOR + 350 basis points
as of
December 31, 2015
.
|
(5)
|
The Company acquired an interest rate swap related to the securitized debt assumed in the SLC transaction. The swap does not qualify for hedge accounting and has no impact on debt carrying value. See Note 22: Derivatives and Hedging Activities.
|
(6)
|
Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying student loans. The dates shown represent final maturity dates.
|
(7)
|
Includes $
311 million
of senior notes maturing in 2031, $
659 million
of senior and subordinated notes maturing in 2036 and $
173 million
of senior notes maturing in 2042 as of
December 31, 2015
.
|
(8)
|
As of
December 31, 2015
, the outstanding amount of capital lease obligations was not material.
|
11.
|
Stock-Based Compensation Plans
|
The following table details the compensation cost, net of forfeitures (dollars in millions):
|
|||||||||||
|
For the Years Ended December 31,
|
||||||||||
|
2015
|
|
2014
|
|
2013
|
||||||
RSUs
|
$
|
34
|
|
|
$
|
33
|
|
|
$
|
31
|
|
PSUs
|
22
|
|
|
27
|
|
|
28
|
|
|||
Total stock-based compensation expense
|
$
|
56
|
|
|
$
|
60
|
|
|
$
|
59
|
|
|
|
|
|
|
|
||||||
Income tax benefit
|
$
|
21
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
|
|
|
|
|
The following table sets forth the activity related to vested and unvested RSUs:
|
||||||||||
|
Number of Units
|
|
Weighted-Average Grant-Date Fair Value
|
|
Aggregate
Intrinsic Value
(in millions)
|
|||||
RSUs at December 31, 2014
|
3,362,398
|
|
|
$
|
32.92
|
|
|
$
|
220
|
|
Granted
|
822,117
|
|
|
$
|
56.71
|
|
|
|
||
Conversions to common stock
|
(1,155,136
|
)
|
|
$
|
30.69
|
|
|
|
||
Forfeited
|
(112,216
|
)
|
|
$
|
48.32
|
|
|
|
||
RSUs at December 31, 2015
|
2,917,163
|
|
|
$
|
39.97
|
|
|
$
|
156
|
|
|
|
|
|
|
|
(1)
|
Unvested RSUs represent awards where recipients have yet to satisfy either explicit vesting terms or retirement-eligibility requirements.
|
The following table sets forth the activity related to vested and unvested PSUs:
|
||||||||||
|
Number of Units
|
|
Weighted-Average Grant-Date Fair Value
|
|
Aggregate Intrinsic Value (in millions)
|
|||||
PSUs at December 31, 2014
|
1,559,675
|
|
|
$
|
36.92
|
|
|
$
|
102
|
|
Granted
|
354,773
|
|
|
$
|
57.32
|
|
|
|
||
Conversions to common stock
|
(612,748
|
)
|
|
$
|
24.74
|
|
|
|
||
Forfeited
|
(130,315
|
)
|
|
$
|
48.33
|
|
|
|
||
PSUs at December 31, 2015
|
1,171,385
|
|
|
$
|
48.21
|
|
|
$
|
63
|
|
|
|
|
|
|
|
(1)
|
Includes
511,524
PSUs granted in
2013
that are earned based on the Company's achievement of EPS during the
three-year performance period which ends December 31, 2015
and are subject to the requisite service period which ended
February 1, 2016
.
|
(2)
|
Includes
340,838
PSUs granted in
2014
that are earned based on the Company's achievement of EPS during the
three-year performance period which ends December 31, 2016
and are subject to the requisite service period which ends
February 1, 2017
.
|
(3)
|
Includes
319,023
PSUs granted in
2015
that may be earned based on the Company's achievement of EPS during the
three-year performance period which ends December 31, 2017
and are subject to the requisite service period which ends
February 1, 2018
.
|
(1)
|
No stock options have been granted by the Company since its spin-off from Morgan Stanley.
|
The following table summarizes the total intrinsic value of options exercised and total fair value of options vested (dollars in millions):
|
|||||||||||
|
For the Years Ended December 31,
|
||||||||||
|
2015
|
|
2014
|
|
2013
|
||||||
Intrinsic value of options exercised
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
11
|
|
|
|
|
|
|
|
12.
|
Employee Benefit Plans
|
Net periodic benefit cost expensed by the Company included the following components (dollars in millions):
|
|||||||||||
|
For the Years Ended December 31,
|
||||||||||
|
2015
|
|
2014
|
|
2013
|
||||||
Service cost, benefits earned during the period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost on projected benefit obligation
|
23
|
|
|
22
|
|
|
21
|
|
|||
Expected return on plan assets
|
(24
|
)
|
|
(23
|
)
|
|
(23
|
)
|
|||
Net amortization
|
5
|
|
|
3
|
|
|
5
|
|
|||
Net periodic benefit cost
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
|
|
|
|
|
Pretax amounts recognized in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost consist of (dollars in millions):
|
|||
|
December 31, 2015
|
||
Prior service credit
|
$
|
5
|
|
Net loss
|
(242
|
)
|
|
Total
|
$
|
(237
|
)
|
|
|
The following table provides a reconciliation of the changes in the benefit obligation and fair value of plan assets as well as a summary of the Discover Pension Plan's funded status (dollars in millions):
|
|||||||
|
For the Years Ended December 31,
|
||||||
|
2015
|
|
2014
|
||||
Reconciliation of benefit obligation
|
|
|
|
||||
Benefit obligation at beginning of year
|
$
|
570
|
|
|
$
|
452
|
|
Service cost
|
—
|
|
|
—
|
|
||
Interest cost
|
23
|
|
|
22
|
|
||
Employee contributions
|
—
|
|
|
—
|
|
||
Actuarial (gain) loss
|
(48
|
)
|
|
112
|
|
||
Plan amendments
|
—
|
|
|
—
|
|
||
Benefits paid
|
(17
|
)
|
|
(16
|
)
|
||
Benefit obligation at end of year
|
528
|
|
|
570
|
|
||
|
|
|
|
||||
Reconciliation of fair value of plan assets
|
|
|
|
||||
Fair value of plan assets at beginning of year
|
401
|
|
|
367
|
|
||
Actual return on plan assets
|
(6
|
)
|
|
50
|
|
||
Employer contributions
|
—
|
|
|
—
|
|
||
Employee contributions
|
—
|
|
|
—
|
|
||
Benefits paid
|
(17
|
)
|
|
(16
|
)
|
||
Fair value of plan assets at end of year
|
378
|
|
|
401
|
|
||
|
|
|
|
||||
Unfunded status (recorded in accrued expenses and other liabilities)
|
$
|
(150
|
)
|
|
$
|
(169
|
)
|
|
|
|
|
The following table presents the assumptions used to determine the benefit obligation:
|
|||||
|
December 31,
|
||||
|
2015
|
|
2014
|
||
Discount rate
|
4.50
|
%
|
|
4.08
|
%
|
|
|
|
|
13.
|
Common and Preferred Stock
|
14.
|
Accumulated Other Comprehensive Income
|
(1)
|
Includes unrealized gains/losses on hedge of net investment in foreign subsidiary, net of tax benefit and net gains on foreign currency translation adjustments. There was no hedge of net investment in foreign subsidiary at
December 31, 2015
as a result of the sale of Diners Club Italy in 2015.
|
15.
|
Other Expense
|
(1)
|
Includes fair value adjustment of
$21 million
resulting from recording Diners Club Italy as held for sale for the
year ended December 31, 2014
.
|
16.
|
Income Taxes
|
(1)
|
Overpayment of taxes in 2013 to 2015 for the timing of deductions resulting from uncertain tax positions for the years 1999 through 2012.
|
(2)
|
For the
years ended December 31, 2015, 2014 and 2013
, amounts included
$138 million
,
$144 million
and
$142 million
respectively, of unrecognized tax benefits, which, if recognized, would favorably affect the effective tax rate.
|
17.
|
Earnings Per Share
|
18.
|
Capital Adequacy
|
•
|
8.0%
Total capital (i.e., Tier 1 plus Tier 2) to risk-weighted assets;
|
•
|
6.0%
Tier 1 capital (i.e., CET1 plus Additional Tier 1) to risk-weighted assets;
|
•
|
4.0%
Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”); and
|
•
|
4.5%
CET1 to risk-weighted assets.
|
(1)
|
As of January 1, 2015, actual capital amounts and ratios are calculated under Basel III rules subject to transition provisions. The Company reported under Basel I at
December 31, 2014
.
|
19.
|
Commitments, Contingencies and Guarantees
|
The Company leases various office space and equipment under capital and non-cancelable operating leases, which expire at various dates through 2028. Future minimum payments on capital leases were not material at December 31, 2015. The following table shows future minimum payments on non-cancelable operating leases with original terms in excess of one year (dollars in millions):
|
|||
|
Operating
Leases
|
||
2016
|
$
|
14
|
|
2017
|
12
|
|
|
2018
|
11
|
|
|
2019
|
9
|
|
|
2020
|
7
|
|
|
Thereafter
|
35
|
|
|
Total minimum lease payments
|
$
|
88
|
|
|
|
•
|
Merchant Guarantee
. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants.
|
•
|
ATM Guarantee.
PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.
|
(1)
|
Represents period transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume.
|
20.
|
Litigation and Regulatory Matters
|
21.
|
Fair Value Measurements and Disclosures
|
•
|
Level 1
: Fair values determined by Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
|
•
|
Level 2
: Fair values determined by Level 2 inputs are those that utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive markets, quoted prices for the identical assets in an inactive market, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company evaluates factors such as the frequency of transactions, the size of the bid-ask spread and the significance of adjustments made when considering transactions involving similar assets or liabilities to assess the relevance of those observed prices. If relevant and observable prices are available, the fair values of the related assets or liabilities would be classified as Level 2.
|
•
|
Level 3
: Fair values determined by Level 3 inputs are those based on unobservable inputs and include situations where there is little, if any, market activity for the asset or liability being valued. In instances in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.
|
•
|
Mortgage loans held for sale.
Valuations of mortgage loans held for sale were based on the loan amount, note rate, loan program, expected sale date of the loan and, most significantly, investor pricing tables stratified by product, note rate and term, adjusted for current market conditions. Mortgage loans held for sale were classified as Level 2 as the investor pricing tables used to value them were an observable input. Impaired mortgage loans held for sale were classified as Level 3 as loss severity was an unobservable input used in valuation. The Company recognized interest income separately from changes in fair value.
|
•
|
Interest rate lock commitments
. IRLCs for loans to be sold to investors using a mandatory or assignment of trade method derived their base value from an underlying loan type with similar characteristics using the TBA MBS market, which was actively quoted and easily validated through external sources. The data inputs used in this valuation included, but were not limited to, loan type, underlying loan amount, note rate, loan program and commitment term. IRLCs for loans to be sold to investors on a best-efforts basis derived their base value from the value of the underlying loans using investor pricing tables stratified by product, note rate and term, adjusted for current market conditions. These valuations were adjusted at the loan-level to consider the servicing release premium and loan pricing adjustments specific to each loan. For all IRLCs, this base value was then adjusted for the anticipated loan funding probability, or pull through rate. The anticipated loan funding probability was an unobservable input based on historical experience, which resulted in classification of IRLCs as Level 3.
|
•
|
Forward delivery contracts.
Under the Company's risk management policy, the Company economically hedged the changes in fair value of IRLCs and mortgage loans held for sale caused by changes in interest rates by using TBA MBS and entering into best-efforts forward delivery contracts. These hedging instruments were recorded at fair value with changes in fair value recorded in other income. TBA MBS used to hedge both IRLCs and loans held for sale were valued based primarily on observable inputs related to characteristics of the underlying MBS stratified by product, coupon and settlement date. Therefore, these derivatives were classified as Level 2. Best-efforts forward delivery contracts were valued based on investor pricing tables, which were observable inputs, stratified by product, note rate and term, adjusted for current market conditions. An anticipated loan funding probability was applied to value best-efforts contracts hedging IRLCs, which resulted in the classification of these contracts as Level 3. The current base loan price and, for best-efforts contracts hedging IRLCs, the anticipated loan funding probability, were the most significant assumptions affecting the value of the best-efforts contracts. The best-efforts forward delivery contracts hedging loans held for sale were classified as Level 2, so such contracts were transferred from Level 3 to Level 2 at the time the underlying loan was originated.
|
The following tables disclose the estimated fair value of the Company's financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions):
|
|||||||||||||||||||
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Total
|
|
Carrying Value
|
||||||||||
Balance at December 31, 2015
|
|
|
|
|
|
|
|
|
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
||||||||||
U.S. Treasury securities
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
States and political subdivisions of states
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
7
|
|
|||||
Residential mortgage-backed securities - Agency
|
—
|
|
|
114
|
|
|
—
|
|
|
114
|
|
|
113
|
|
|||||
Held-to-maturity investment securities
|
$
|
1
|
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
122
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
9,572
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,572
|
|
|
$
|
9,572
|
|
Restricted cash
|
$
|
99
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
99
|
|
|
$
|
99
|
|
Net loan receivables
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71,455
|
|
|
$
|
71,455
|
|
|
$
|
70,516
|
|
Accrued interest receivables
|
$
|
—
|
|
|
$
|
660
|
|
|
$
|
—
|
|
|
$
|
660
|
|
|
$
|
660
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Liabilities
|
|
|
|
|
|
|
|
|
|
||||||||||
Deposits
|
$
|
—
|
|
|
$
|
47,714
|
|
|
$
|
—
|
|
|
$
|
47,714
|
|
|
$
|
47,594
|
|
Short-term borrowings
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term borrowings - owed to securitization investors
|
$
|
—
|
|
|
$
|
15,634
|
|
|
$
|
1,220
|
|
|
$
|
16,854
|
|
|
$
|
16,764
|
|
Other long-term borrowings
|
$
|
—
|
|
|
$
|
8,355
|
|
|
$
|
—
|
|
|
$
|
8,355
|
|
|
$
|
7,960
|
|
Accrued interest payables
|
$
|
—
|
|
|
$
|
158
|
|
|
$
|
—
|
|
|
$
|
158
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Balance at December 31, 2014
|
|
|
|
|
|
|
|
|
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
||||||||||
U.S. Treasury securities
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
States and political subdivisions of states
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
|
10
|
|
|||||
Residential mortgage-backed securities - Agency
|
—
|
|
|
93
|
|
|
—
|
|
|
93
|
|
|
91
|
|
|||||
Held-to-maturity investment securities
|
$
|
1
|
|
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
104
|
|
|
$
|
102
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
7,284
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,284
|
|
|
$
|
7,284
|
|
Restricted cash
|
$
|
106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
106
|
|
|
$
|
106
|
|
Net loan receivables
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,316
|
|
|
$
|
69,316
|
|
|
$
|
68,101
|
|
Accrued interest receivables
|
$
|
—
|
|
|
$
|
618
|
|
|
$
|
—
|
|
|
$
|
618
|
|
|
$
|
618
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Liabilities
|
|
|
|
|
|
|
|
|
|
||||||||||
Deposits
|
$
|
—
|
|
|
$
|
46,242
|
|
|
$
|
—
|
|
|
$
|
46,242
|
|
|
$
|
46,089
|
|
Short-term borrowings
|
$
|
—
|
|
|
$
|
113
|
|
|
$
|
—
|
|
|
$
|
113
|
|
|
$
|
113
|
|
Long-term borrowings - owed to securitization investors
|
$
|
—
|
|
|
$
|
16,067
|
|
|
$
|
1,561
|
|
|
$
|
17,628
|
|
|
$
|
17,395
|
|
Other long-term borrowings
|
$
|
—
|
|
|
$
|
5,721
|
|
|
$
|
1
|
|
|
$
|
5,722
|
|
|
$
|
5,149
|
|
Accrued interest payables
|
$
|
—
|
|
|
$
|
132
|
|
|
$
|
—
|
|
|
$
|
132
|
|
|
$
|
132
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net loan receivables exclude mortgage loans held for sale that were measured at fair value on a recurring basis.
|
22.
|
Derivatives and Hedging Activities
|
(1)
|
The foreign exchange forward contract had a notional amount of EUR
6 million
as of
December 31, 2014
.
|
(2)
|
The foreign exchange forward contracts have notional amounts of EUR
19 million
, GBP
7 million
and SGD
1 million
as of
December 31, 2015
and EUR
27 million
and GBP
8 million
, SGD
1 million
and CHF
8 million
as of
December 31, 2014
.
|
(3)
|
Interest rate swaps not designated as hedges and interest rate lock commitments do not have associated master netting arrangements.
|
(4)
|
In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At
December 31, 2015
, the Company had
one
outstanding contract with a notional amount of
$52 million
and immaterial fair value. At
December 31, 2014
, the Company
one
outstanding contract with a notional amount of
$33 million
and immaterial fair value.
|
(5)
|
Collateral amounts, which consist of both cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged.
|
23.
|
Segment Disclosures
|
•
|
Direct Banking:
The Direct Banking segment includes Discover-branded credit cards issued to individuals on the Discover Network and other consumer products and services, including private student loans, personal loans, home equity loans, and other consumer lending and deposit products. The Company announced the closure of its the mortgage origination business in June 2015 as described in Note 3: Business Dispositions. The majority of Direct Banking revenues relate to interest income earned on the segment's loan products. Additionally, the Company’s credit card products generate substantially all revenues related to discount and interchange, protection products and loan fee income.
|
•
|
Payment Services:
The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and the Company’s Network Partners business, which provides payment transaction processing and settlement services on the Discover Network. The majority of Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue (included in other income) from Diners Club. Additionally until its sale on October 1, 2015, this segment included the business operations of Diners Club Italy, which primarily consisted of activity related to issuing Diners Club charge cards in that country.
|
•
|
The Company aggregates operating segments when determining reportable segments.
|
•
|
Corporate overhead is not allocated between segments; all corporate overhead is included in the Direct Banking segment.
|
•
|
Through its operation of the Discover Network, the Direct Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments, with the exception of an allocation of direct and incremental costs driven by the Company's Payment Services segment.
|
•
|
The assets of the Company are not allocated among the operating segments in the information reviewed by the Company’s chief operating decision maker.
|
•
|
The revenues of each segment are derived from external sources. The segments do not earn revenue from intercompany sources.
|
•
|
Income taxes are not specifically allocated between the operating segments in the information reviewed by the Company’s chief operating decision maker.
|
24.
|
Related Party Transactions
|
25.
|
Parent Company Condensed Financial Information
|
|
December 31,
|
||||||
|
2015
|
|
2014
|
||||
|
(dollars in millions)
|
||||||
Assets:
|
|
|
|
||||
Cash and cash equivalents
(1)
|
$
|
2,133
|
|
|
$
|
79
|
|
Notes receivable from subsidiaries
(2)
|
736
|
|
|
2,436
|
|
||
Investments in subsidiaries
|
10,924
|
|
|
10,360
|
|
||
Other assets
|
217
|
|
|
204
|
|
||
Total assets
|
$
|
14,010
|
|
|
$
|
13,079
|
|
|
|
|
|
||||
Liabilities and Stockholders' Equity:
|
|
|
|
||||
Non-interest bearing deposit accounts
|
$
|
2
|
|
|
$
|
1
|
|
Interest-bearing deposit accounts
|
2
|
|
|
4
|
|
||
Total deposits
|
4
|
|
|
5
|
|
||
Short-term borrowings from subsidiaries
|
314
|
|
|
108
|
|
||
Other long-term borrowings
|
2,119
|
|
|
1,559
|
|
||
Accrued expenses and other liabilities
|
298
|
|
|
273
|
|
||
Total liabilities
|
2,735
|
|
|
1,945
|
|
||
Stockholders' equity
|
11,275
|
|
|
11,134
|
|
||
Total liabilities and stockholders' equity
|
$
|
14,010
|
|
|
$
|
13,079
|
|
|
|
|
|
(1)
|
The Parent Company had
$2.1 billion
in a money market deposit account at Discover Bank as of
December 31, 2015
, which is included in cash and cash equivalents. These funds are available to the Parent for liquidity purposes.
|
(2)
|
The Parent Company advanced
$500 million
to Discover Bank as of
December 31, 2015
, which is included in notes receivable from subsidiaries. These funds are available to the Parent for liquidity purposes.
|
|
For the Years Ended December 31,
|
||||||||||
|
2015
|
|
2014
|
|
2013
|
||||||
|
(dollars in millions)
|
||||||||||
Interest income
|
$
|
29
|
|
|
$
|
18
|
|
|
$
|
22
|
|
Interest expense
|
128
|
|
|
86
|
|
|
84
|
|
|||
Net interest expense
|
(99
|
)
|
|
(68
|
)
|
|
(62
|
)
|
|||
Dividends from subsidiaries
|
1,780
|
|
|
1,860
|
|
|
1,600
|
|
|||
Total income
|
1,681
|
|
|
1,792
|
|
|
1,538
|
|
|||
Other expense
|
|
|
|
|
|
||||||
Employee compensation and benefits
|
—
|
|
|
1
|
|
|
—
|
|
|||
Professional fees
|
—
|
|
|
3
|
|
|
3
|
|
|||
Other
|
1
|
|
|
—
|
|
|
1
|
|
|||
Total other expense
|
1
|
|
|
4
|
|
|
4
|
|
|||
Income before income tax expense and equity in undistributed net income of subsidiaries
|
1,680
|
|
|
1,788
|
|
|
1,534
|
|
|||
Income tax benefit
|
37
|
|
|
18
|
|
|
17
|
|
|||
Equity in undistributed net income of subsidiaries
|
580
|
|
|
517
|
|
|
919
|
|
|||
Net income
|
2,297
|
|
|
2,323
|
|
|
2,470
|
|
|||
Other comprehensive income, net
|
(22
|
)
|
|
(70
|
)
|
|
4
|
|
|||
Comprehensive income
|
$
|
2,275
|
|
|
$
|
2,253
|
|
|
$
|
2,474
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
||||||||||
|
2015
|
|
2014
|
|
2013
|
||||||
|
(dollars in millions)
|
||||||||||
Cash flows from operating activities
|
|
|
|
|
|
||||||
Net income
|
$
|
2,297
|
|
|
$
|
2,323
|
|
|
$
|
2,470
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
||||||
Equity in undistributed net income of subsidiaries
|
(580
|
)
|
|
(517
|
)
|
|
(919
|
)
|
|||
Stock-based compensation expense
|
56
|
|
|
60
|
|
|
59
|
|
|||
Deferred income taxes
|
(10
|
)
|
|
(5
|
)
|
|
(2
|
)
|
|||
Depreciation and amortization
|
23
|
|
|
21
|
|
|
19
|
|
|||
Changes in assets and liabilities:
|
|
|
|
|
|
||||||
Increase in other assets
|
(13
|
)
|
|
(50
|
)
|
|
(33
|
)
|
|||
Increase in other liabilities and accrued expenses
|
83
|
|
|
32
|
|
|
29
|
|
|||
Net cash provided by operating activities
|
1,856
|
|
|
1,864
|
|
|
1,623
|
|
|||
|
|
|
|
|
|
||||||
Cash flows from investing activities
|
|
|
|
|
|
||||||
Increase in investment in subsidiaries
|
(21
|
)
|
|
(35
|
)
|
|
—
|
|
|||
Decrease (increase) in loans to subsidiaries
|
1,700
|
|
|
(182
|
)
|
|
(29
|
)
|
|||
Net cash provided by (used for) investing activities
|
1,679
|
|
|
(217
|
)
|
|
(29
|
)
|
|||
|
|
|
|
|
|
||||||
Cash flows from financing activities
|
|
|
|
|
|
||||||
Net increase (decrease) in short-term borrowings from subsidiaries
|
206
|
|
|
(38
|
)
|
|
58
|
|
|||
Proceeds from issuance of common stock
|
5
|
|
|
5
|
|
|
13
|
|
|||
Proceeds from issuance of long-term borrowings
|
539
|
|
|
500
|
|
|
—
|
|
|||
Purchases of treasury stock
|
(1,715
|
)
|
|
(1,564
|
)
|
|
(1,296
|
)
|
|||
Net decrease in deposits
|
(1
|
)
|
|
(8
|
)
|
|
(7
|
)
|
|||
Dividends paid on common and preferred stock
|
(515
|
)
|
|
(467
|
)
|
|
(399
|
)
|
|||
Net cash used for financing activities
|
(1,481
|
)
|
|
(1,572
|
)
|
|
(1,631
|
)
|
|||
Increase (decrease) in cash and cash equivalents
|
2,054
|
|
|
75
|
|
|
(37
|
)
|
|||
Cash and cash equivalents, at beginning of period
|
79
|
|
|
4
|
|
|
41
|
|
|||
Cash and cash equivalents, at end of period
|
$
|
2,133
|
|
|
$
|
79
|
|
|
$
|
4
|
|
|
|
|
|
|
|
||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
||||||
Cash paid during the period for:
|
|
|
|
|
|
||||||
Interest expense
|
$
|
97
|
|
|
$
|
66
|
|
|
$
|
65
|
|
Income taxes, net of income tax refunds
|
$
|
109
|
|
|
$
|
65
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
26.
|
Subsequent Events
|
27.
|
Quarterly Results
|
(1)
|
During the three months ended December 31, 2014, the Company made certain changes to its customer rewards program eliminating forfeitures. These changes resulted in a one-time expense of
$178 million
due to the reversal of the estimate for customer rewards forfeiture, a contra-account to accrued expenses and other liabilities.
|
(2)
|
Because the inputs to net income allocated to common stockholders and earnings per share are calculated using weighted averages for the quarter, the sum of all four quarters may differ from the year to date amounts in the consolidated statements of income.
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
Item 9A.
|
Controls and Procedures
|
Item 9B.
|
Other Information
|
Part III | Item 10.
|
Directors, Executive Officers and Corporate Governance
|
Item 11.
|
Executive Compensation
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
Plan Category
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(1)
|
|
Weighted-average exercise price of outstanding options, warrants and rights
|
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|
||||
|
(a)
|
|
(b)
|
|
(c)
|
||||
Equity compensation plans approved by security holders
|
4,182,260
|
|
|
$
|
26.68
|
|
|
26,352,088
|
|
Equity compensation plans not approved by security holders
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Total
|
4,182,260
|
|
|
$
|
26.68
|
|
|
26,352,088
|
|
|
|
|
|
|
|
(1)
|
Includes 2,917,163 vested and unvested restricted stock units and 1,171,385 vested and unvested performance stock units that can be converted to up to 1.5 shares per each unit dependent on the performance factor.
|
Item 13.
|
Certain Relationships and Related Transactions, and Director Independence
|
Item 14.
|
Principal Accounting Fees and Services
|
Part IV | Item 15.
|
Exhibits, Financial Statement Schedules
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
Reports of Independent Registered Public Accounting Firm
|
|
Consolidated Statements of Financial Condition as of December 31, 2015 and 2014
|
|
Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013
|
|
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and
2013
|
|
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2015, 2014 and 2013
|
|
Consolidated Statements of Cash Flows for the calendar years ended December 31, 2015, 2014 and 2013
|
|
Notes to the Consolidated Financial Statements
|
|
|
|
|
Discover Financial Services
(Registrant)
|
||
|
|
|
|
|
By:
|
|
/s/ R. M
ARK
G
RAF
|
|
|
|
R. Mark Graf
Executive Vice President and Chief Financial Officer
|
Signature
|
Title
|
|
|
/
S
/ D
AVID
W. N
ELMS
|
Chairman and Chief Executive Officer
|
David W. Nelms
|
|
|
|
/
S
/ R
.
M
ARK
G
RAF
|
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
|
R. Mark Graf
|
|
|
|
/
S
/ E
DWARD
W. M
c
G
ROGAN
|
Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)
|
Edward W. McGrogan
|
|
|
|
/
S
/ L
AWRENCE
A. W
EINBACH
|
Lead Director
|
Lawrence A. Weinbach
|
|
|
|
/
S
/ J
EFFREY
S. A
RONIN
|
Director
|
Jeffrey S. Aronin
|
|
|
|
/
S
/ M
ARY
K. B
USH
|
Director
|
Mary K. Bush
|
|
|
|
/
S
/ G
REGORY
C. C
ASE
|
Director
|
Gregory C. Case
|
|
|
|
/
S
/ C
ANDACE
H. D
UNCAN
|
Director
|
Candace H. Duncan
|
|
|
|
/
S
/ JOSEPH F. EAZOR
|
Director
|
Joseph F. Eazor
|
|
|
|
/
S
/ C
YNTHIA
A. G
LASSMAN
|
Director
|
Cynthia A. Glassman
|
|
|
|
/
S
/ R
ICHARD
H. L
ENNY
|
Director
|
Richard H. Lenny
|
|
|
|
/
S
/ T
HOMAS
G. M
AHERAS
|
Director
|
Thomas G. Maheras
|
|
|
|
/
S
/ M
ICHAEL
H. M
OSKOW
|
Director
|
Michael H. Moskow
|
|
|
|
/
S
/ M
ARK
A
.
T
HIERER
|
Director
|
Mark A. Thierer
|
|
Exhibit
Number
|
|
Description
|
2.1*
|
|
Separation and Distribution Agreement, dated as of June 29, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 2.1 to Discover Financial Services' Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto), as amended by the First Amendment to the Separation and Distribution Agreement dated as of June 29, 2007 between Discover Financial Services and Morgan Stanley, dated February 11, 2010 (filed as Exhibit 10.2 to Discover Financial Services' Current Report on Form 8-K filed on February 12, 2010 and incorporated herein by reference thereto).
|
|
|
|
2.2*
|
|
Agreement for the Sale and Purchase of the Goldfish Credit Card Business, dated February 7, 2008, among Discover Financial Services, Goldfish Bank Limited, Discover Bank, SCFC Receivables Corporation, and Barclays Bank Plc (filed as Exhibit 2.1 to Discover Financial Services' Current Report on Form 8-K filed on February 7, 2008 and incorporated herein by reference thereto), as amended and restated by Amended and Restated Agreement for the Sale and Purchase of the Goldfish Credit Card Business, dated March 31, 2008, among Discover Financial Services, Goldfish Bank Limited, Discover Bank, SCFC Receivables Corporation, Barclays Bank PLC, and Barclays Group US Inc. (filed as Exhibit 2.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 14, 2008 and incorporated herein by reference thereto).
|
|
|
|
2.3
|
|
Agreement and Plan of Merger by and among Discover Bank, Academy Acquisition Corp. and The Student Loan Corporation dated as of September 17, 2010 (filed as Exhibit 2.3 to Discover Financial Services' Annual Report on Form 10-K for the fiscal year ended November 30, 2010 filed on January 26, 2011 and incorporated by reference thereto).
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of Discover Financial Services (filed as Exhibit 3.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on July 1, 2009 and incorporated herein by reference thereto).
|
|
|
|
3.2
|
|
Amended and Restated By-Laws of Discover Financial Services (filed as Exhibit 3.1 to Discover Financial Services' Current Report on Form 8-K filed on July 30, 2015 and incorporated herein by reference thereto).
|
|
|
|
3.3
|
|
Certificate of Elimination of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Discover Financial Services (filed as Exhibit 3.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on June 26, 2012 and incorporated herein by reference thereto).
|
|
|
|
3.4
|
|
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to Discover Financial Services' Current Report on Form 8-K filed on October 16, 2012 and incorporated herein by reference thereto).
|
|
|
|
4.1
|
|
Senior Indenture, dated as of June 12, 2007, by and between Discover Financial Services and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on June 12, 2007 and incorporated herein by reference thereto).
|
|
|
|
4.2
|
|
Subordinated Indenture, dated as of September 8, 2015, by and between Discover Financial Services and U.S. Bank National Association (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on September 8, 2015 and incorporated herein by reference thereto).
|
|
|
|
4.3
|
|
Fiscal and Paying Agency Agreement, dated November 16, 2009, between Discover Bank, as issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on November 16, 2009 and incorporated herein by reference thereto).
|
|
|
|
4.4
|
|
Fiscal and Paying Agency Agreement, dated April 15, 2010, between Discover Bank, as issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on April 16, 2010 and incorporated herein by reference thereto).
|
|
|
|
4.5
|
|
Deposit Agreement, dated October 16, 2012 (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on October 16, 2012 and incorporated herein by reference thereto).
|
|
|
|
4.6
|
|
Form of Certificate Representing the Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 4.2 to Discover Financial Services' Current Report on Form 8-K filed on October 16, 2012 and incorporated herein by reference thereto).
|
|
|
|
Exhibit
Number
|
|
Description
|
4.7
|
|
Fiscal and Paying Agency Agreement between Discover Bank and U.S. Bank National Association dated as of February 21, 2013 (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on February 21, 2013 and incorporated herein by reference thereto).
|
|
|
|
4.8
|
|
Fiscal and Paying Agency Agreement, dated as of August 8, 2013, between Discover Bank, as issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on August 8, 2013 and incorporated herein by reference thereto).
|
|
|
|
4.9
|
|
Fiscal and Paying Agency Agreement, dated as of March 13, 2014, between Discover Bank, as issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on March 13, 2014 and incorporated herein by reference thereto).
|
|
|
|
4.10
|
|
Fiscal and Paying Agency Agreement, dated as of August 7, 2014, between Discover Bank, as issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on August 7, 2014 and incorporated herein by reference thereto).
|
|
|
|
4.11
|
|
Fiscal and Paying Agency Agreement, dated June 4, 2015, between Discover Bank, as issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services’ current report on Form 8-K filed on June 4, 2015 and incorporated herein by reference thereto).
|
|
|
|
4.12
|
|
Fiscal and Paying Agency Agreement, dated August 13, 2015, between Discover Bank, as issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services’ current report on Form 8-K filed on August 13, 2015 and incorporated herein by reference thereto).
|
|
|
|
|
|
Other instruments defining the rights of holders of long-term debt securities of Discover Financial Services and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Discover Financial Services agrees to furnish copies of these instruments to the SEC upon request
.
|
|
|
|
10.1
|
|
Tax Sharing Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.1 to Discover Financial Services' Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
|
|
|
|
10.2
|
|
U.S. Employee Matters Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.2 to Discover Financial Services' Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
|
|
|
|
10.3
|
|
Transition Services Agreement, dated as of June 30, 2007, between Morgan Stanley and Discover Financial Services (filed as Exhibit 10.3 to Discover Financial Services' Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
|
|
|
|
10.4
|
|
Transitional Trade Mark License Agreement, dated as of June 30, 2007, between Morgan Stanley & Co. PLC and Goldfish Bank Limited (filed as Exhibit 10.4 to Discover Financial Services' Current Report on Form 8-K filed on July 5, 2007 and incorporated herein by reference thereto).
|
|
|
|
10.5
|
|
Amended and Restated Trust Agreement, dated as of December 22, 2015, between Discover Funding LLC, as Beneficiary, and Wilmington Trust Company, as Owner Trustee (filed as Exhibit 4.6 to Discover Bank's Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto)
|
|
|
|
10.6
|
|
Third Amended and Restated Pooling and Servicing Agreement, dated as of December 22, 2015, between Discover Bank, as Master Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.2 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
|
|
|
|
10.7
|
|
Amended and Restated Series Supplement for Series 2007-CC, dated as of December 22, 2015, among Discover Bank, as Master Servicer and Servicer, Discover Funding LLC, as Transferor, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.3 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
|
|
|
|
Exhibit
Number
|
|
Description
|
10.8†
|
|
Discover Financial Services Omnibus Incentive Plan (filed as an attachment to Discover Financial Services' Proxy Statement on Schedule 14A filed on February 27, 2009 and incorporated herein by reference thereto).
|
|
|
|
10.9†
|
|
Amended Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.6 to Discover Financial Services' Quarterly Report on Form 10-Q filed on July 12, 2007 and incorporated herein by reference thereto).
|
10.10†
|
|
Directors' Compensation Plan of Discover Financial Services (filed as Exhibit 10.3 to Discover Financial Services' Current Report on Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto), as amended and restated as of January 20, 2011 (filed as Exhibit A to the Discover Financial Services' definitive proxy statement filed on February 18, 2011 and incorporated by reference thereto), as further amended by Amendment No. 2, effective as of December 1, 2011.
|
|
|
|
10.11†
|
|
Amended Form of Restricted Stock Unit Award Under Discover Financial Services Directors' Compensation Plan (filed as Exhibit 10.7 to Discover Financial Services' Quarterly Report on Form 10-Q filed on July 12, 2007 and incorporated herein by reference thereto).
|
|
|
|
10.12†
|
|
Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.2 to Discover Financial Services' Current Report on Form 8-K filed on June 19, 2007 and incorporated herein by reference thereto) as amended by Amendment No. 1 to Discover Financial Services Employee Stock Purchase Plan effective as of May 1, 2008 (filed as Exhibit 10.12 to Discover Financial Services' Annual Report on Form 10-K filed on January 28, 2009 and incorporated herein by reference thereto); Amendment No. 2 to Discover Financial Services Employee Stock Purchase Plan, effective as of December 1, 2009 (filed as Exhibit 10.2 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 9, 2010 and incorporated herein by reference thereto); and Amendment No. 3 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.3 to Discover Financial Services' Quarterly Report on Form 10-Q filed on September 28, 2011 and incorporated herein by reference thereto).
|
|
|
|
10.13†
|
|
Offer of Employment, dated as of January 8, 1999 (filed as Exhibit 10.2 to Discover Financial Services' Current Report on Form 8-K filed on June 12, 2007 and incorporated herein by reference thereto).
|
|
|
|
10.14†
|
|
Waiver of Change of Control Benefits, dated September 24, 2007 (filed as Exhibit 10.15 to Discover Financial Services' Registration Statement on Form S-4 filed on November 27, 2007 and incorporated herein by reference thereto).
|
|
|
|
10.15
|
|
Collateral Certificate Transfer Agreement, dated as of July 26, 2007 between Discover Bank, as Depositor and Discover Card Execution Note Trust (filed as Exhibit 4.4 to Discover Bank's Current Report on Form 8-K filed on July 27, 2007 and incorporated herein by reference thereto).
|
|
|
|
10.16
|
|
Amended and Restated Indenture, dated as of December 22, 2015, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.4 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
|
|
|
|
10.17
|
|
Second Amended and Restated Indenture Supplement for the DiscoverSeries Notes, dated as of December 22, 2015, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.5 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
|
|
|
|
10.18
|
|
Omnibus Amendment to Indenture Supplement and Terms Documents, dated as of July 2, 2009, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.1 to Discover Bank's Current Report on Form 8-K filed on July 6, 2009 and incorporated herein by reference thereto).
|
|
|
|
10.19†
|
|
Discover Financial Services Change-in-Control Severance Policy Amended and Restated October 15, 2014 (filed as Exhibit 10.1 to Discover Financial Services' Current Report on Form 8-K filed on October 16, 2014 and incorporated by reference thereto).
|
|
|
|
10.20
|
|
Release and Settlement Agreement, executed as of October 27, 2008, by and among Discover Financial Services, DFS Services, LLC, Discover Bank, and their Subsidiaries and Affiliates; MasterCard Incorporated and MasterCard International Incorporated and their Affiliates; and Visa Inc. and its Affiliates and Predecessors including Visa U.S.A. Inc. and Visa International Service Association (filed as Exhibit 99.1 to Discover Financial Services' Current Report on Form 8-K filed on October 28, 2008).
|
|
|
|
Exhibit
Number
|
|
Description
|
10.21†
|
|
2008 Year End Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.21 to Discover Financial Services' Annual Report on Form 10-K filed on January 28, 2009 and incorporated herein by reference thereto).
|
|
|
|
10.22†
|
|
2008 Special Grant Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.22 to Discover Financial Services' Annual Report on Form 10-K filed on January 28, 2009 and incorporated herein by reference thereto).
|
|
|
|
10.23
|
|
Form of Waiver, executed by each of Discover Financial Services' senior executive officers and certain other employees (filed as Exhibit 10.3 to Discover Financial Services' Current Report on Form 8-K filed on March 13, 2009 and incorporated herein by reference thereto).
|
|
|
|
10.24
|
|
Form of Executive Compensation Agreement, dated March 13, 2009, executed by each of Discover Financial Services' senior executive officers and certain other employees (filed as Exhibit 10.4 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 8, 2009 and incorporated herein by reference thereto).
|
|
|
|
10.25†
|
|
Form of Share Award Agreement Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10(a) to Discover Financial Services' Current Report on Form 8-K filed on December 11, 2009 and incorporated herein by reference thereto).
|
|
|
|
10.26†
|
|
Amendment to 2009 Year End Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan, effective December 1, 2009 (filed as Exhibit 10.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 9, 2010 and incorporated herein by reference thereto).
|
|
|
|
10.27
|
|
Settlement Agreement and Mutual Release between Discover Financial Services and Morgan Stanley, dated February 11, 2010 (filed as Exhibit 10.1 to Discover Financial Services' Current Report on Form 8-K filed on February 12, 2010 and incorporated herein by reference thereto).
|
|
|
|
10.28
|
|
Purchase Price Adjustment Agreement by and among Citibank, N.A., The Student Loan Corporation and Discover Bank, dated September 17, 2010 (filed as Exhibit 10.32 to Discover Financial Services' Annual Report on Form 10-K filed on January 26, 2011 and incorporated by reference thereto).
|
|
|
|
10.29
|
|
Amendment to Purchase Price Adjustment Agreement by and among Citibank, N.A., The Student Loan Corporation and Discover Bank, dated December 30, 2010 (filed as Exhibit 10.33 to Discover Financial Services' Annual Report on Form 10-K filed on January 26, 2011 and incorporated by reference thereto).
|
|
|
|
10.30
|
|
Indemnification Agreement by and between Citibank, N.A. and Discover Bank, dated September 17, 2010 (filed as Exhibit 10.34 to Discover Financial Services' Annual Report on Form 10-K filed on January 26, 2011 and incorporated by reference thereto).
|
|
|
|
10.31
|
|
First Amendment to Indemnification Agreement by and between Citibank, N.A. and Discover Bank, dated December 30, 2010 (filed as Exhibit 10.35 to Discover Financial Services' Annual Report on Form 10-K filed on January 26, 2011 and incorporated by reference thereto).
|
|
|
|
10.32
|
|
Form Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.4 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 8, 2011 and incorporated by reference thereto).
|
|
|
|
10.33
|
|
Form Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.5 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 8, 2011 and incorporated by reference thereto).
|
|
|
|
10.34
|
|
Asset Purchase Agreement between Discover Bank and Citibank, N.A. dated August 31, 2011 (filed as Exhibit 10.2 to Discover Financial Services' Quarterly Report on Form 10-Q filed on September 28, 2011 and incorporated by reference thereto).
|
|
|
|
10.35
|
|
Form 2012 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 3, 2012 and incorporated by reference thereto).
|
|
|
|
10.36
|
|
Form 2012 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 3, 2012 and incorporated by reference thereto).
|
Exhibit
Number
|
|
Description
|
|
|
|
10.37
|
|
Form 2013 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 30, 2013 and incorporated herein by reference thereto).
|
|
|
|
10.38
|
|
Form 2013 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 30, 2013 and incorporated herein by reference thereto).
|
|
|
|
10.39
|
|
Amendment No. 3 to the Directors' Compensation Plan of Discover Financial Services, effective as of July 1, 2013 (filed as Exhibit 10.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on July 30, 2013 and incorporated herein by reference thereto).
|
|
|
|
10.40
|
|
Form of 2013 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services' Current Report on Form 8-K filed on December 26, 2013 and incorporated herein by reference thereto).
|
|
|
|
10.41
|
|
Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as an attachment to Discover Financial Services' Proxy Statement on Schedule 14A filed on March 19, 2014 and incorporated herein by reference thereto).
|
|
|
|
10.42
|
|
Form 2014 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and
Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services' Quarterly
Report on Form 10-Q filed on April 29, 2014 and incorporated herein by reference thereto).
|
|
|
|
10.43
|
|
Form 2014 Award Certificate for Performance Stock Units Under Discover Financial Services Amended
and Restated 2007 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services'
Quarterly Report on Form 10-Q filed on April 29, 2014 and incorporated herein by reference thereto).
|
|
|
|
10.44
|
|
Amendment No. 4 to the Directors' Compensation Plan of Discover Financial Services, effective as of May 7, 2014 (filed as Exhibit 10.2 to Discover Financial Services' Quarterly Report on Form 10-Q filed on
August 1, 2014 and incorporated herein by reference thereto).
|
|
|
|
10.45
|
|
Form 2015 Award Certificate for Cash-Converted Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto).
|
|
|
|
10.46
|
|
Form 2015 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.2 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto).
|
|
|
|
10.47
|
|
Form 2015 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.3 to Discover Financial Services' Quarterly Report on Form 10-Q filed on April 30, 2015 and incorporated herein by reference thereto).
|
|
|
|
10.48
|
|
Form of 2015 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services' Current Report on Form 8-K filed on April 30, 2015 and incorporated by reference thereto).
|
|
|
|
10.49
|
|
Amendment No. 4 to Discover Financial Services Employee Stock Purchase Plan (filed as Exhibit 10.1 to Discover Financial Services' Current Report on Form 8-K filed on October 29, 2015 and incorporated by reference thereto).
|
|
|
|
10.50
|
|
Form of 2015 Special Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan (filed as Exhibit 10.1 to Discover Financial Services' Current Report on Form 8-K filed on December 21, 2105 and incorporated by reference thereto).
|
|
|
|
10.51
|
|
Receivables Sale and Contribution Agreement, dated as of December 22, 2015 between Discover Bank and Discover Funding LLC (filed as Exhibit 4.1 to Discover Bank’s Current Report on Form 8-K filed on December 23, 2015 and incorporated herein by reference thereto).
|
|
|
|
Exhibit
Number
|
|
Description
|
10.52
|
|
Form 2016 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan
|
|
|
|
10.53
|
|
Form 2016 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan
|
|
|
|
11
|
|
Statement Re: Computation of Per Share Earnings (the calculation of per share earnings is in Part II, Item 8, Note 17: Earnings Per Share to the consolidated financial statements and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S-K).
|
|
|
|
12.1
|
|
Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
|
|
|
|
21
|
|
Subsidiaries of the Registrant.
|
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
|
24
|
|
Powers of Attorney (included on signature page).
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
|
|
|
|
101.INS
|
|
XBRL Instance Document.
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document.
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
|
|
*
|
We agree to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to such agreement upon the request of the Commission in accordance with Item 601(b)(2) of Regulation S-K.
|
†
|
Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 15(b) of this report.
|
1.
|
Restricted Stock Units Generally.......................................................3
|
2.
|
Vesting Schedule; Conversion; Retention Requirement....................3
|
3.
|
Special Provisions for Certain “Specified Employees”.....................4
|
4.
|
Dividend Equivalent Payments..........................................................4
|
5.
|
Death; Disability; Retirement............................................................4
|
6.
|
Reduction in Force.............................................................................5
|
7.
|
Change in Control..............................................................................5
|
8.
|
Termination of Employment..............................................................6
|
9.
|
Forfeiture/Cancellation/Clawback of RSU Awards Under Certain
|
10.
|
Tax and Other Withholding Obligations............................................8
|
11.
|
Satisfaction of Obligations.................................................................8
|
12.
|
Nontransferability..............................................................................9
|
13.
|
Designation of a Beneficiary.............................................................9
|
14.
|
Ownership and Possession................................................................10
|
15.
|
Securities Law Matters......................................................................10
|
16.
|
Compliance with Laws and Regulations...........................................10
|
17.
|
No Entitlements.................................................................................10
|
18.
|
Consents............................................................................................12
|
19.
|
Electronic Delivery and Consent to Electronic Participation...........12
|
20.
|
Award Modification..........................................................................12
|
21.
|
Severability.......................................................................................13
|
22.
|
Successors.........................................................................................13
|
23.
|
Governing Law..................................................................................13
|
24.
|
Section 409A.....................................................................................13
|
25.
|
Defined Terms...................................................................................13
|
1.
|
Restricted Stock Units Generally
.
|
2.
|
Vesting Schedule; Conversion; Retention Requirement.
|
3.
|
Special Provisions for Certain “Specified Employees”
.
|
4.
|
Dividend Equivalent Payments
.
|
5.
|
Death; Disability; Retirement
.
|
6.
|
Reduction in Force
.
|
7.
|
Change in Control
.
|
8.
|
Termination of Employment
.
|
9.
|
Forfeiture/Cancellation/Clawback of RSU Awards Under Certain Circumstances
.
|
10.
|
Tax and Other Withholding Obligations
.
|
11.
|
Satisfaction of Obligations
.
|
12.
|
Nontransferability
.
|
13.
|
Designation of a Beneficiary
.
|
14.
|
Ownership and Possession
.
|
15.
|
Securities Law Matters
.
|
16.
|
Compliance with Laws and Regulations
.
|
17.
|
No Entitlements
.
|
18.
|
Consents
.
|
19.
|
Electronic Delivery and Consent to Electronic Participation.
|
20.
|
Award Modification
.
|
21.
|
Severability
.
|
22.
|
Successors
.
|
23.
|
Governing Law
.
|
24.
|
Section 409A.
|
25.
|
Defined Terms
.
|
Primary Beneficiary(ies)
|
Relationship
|
Percentage
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
Contingent Beneficiary(ies)
|
Relationship
|
Percentage
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
1.
|
Performance Stock Units Generally...................................................3
|
2.
|
Performance Measures.......................................................................3
|
3.
|
Vesting Schedule; Conversion; Retention Requirement....................3
|
4.
|
Special Provisions for Certain “Specified Employees”.....................4
|
5.
|
Dividend Equivalent Payments..........................................................4
|
6.
|
Death; Disability; Retirement............................................................5
|
7.
|
Reduction in Force.............................................................................6
|
8.
|
Change in Control..............................................................................6
|
9.
|
Termination of Employment..............................................................7
|
10.
|
Forfeiture/Cancellation/Clawback of PSU Awards Under Certain
|
11.
|
Tax and Other Withholding Obligations............................................9
|
12.
|
Satisfaction of Obligations.................................................................9
|
13.
|
Nontransferability..............................................................................10
|
14.
|
Designation of a Beneficiary.............................................................11
|
15.
|
Ownership and Possession................................................................11
|
16.
|
Securities Law Matters......................................................................11
|
17.
|
Compliance with Laws and Regulations...........................................12
|
18.
|
No Entitlements.................................................................................12
|
19.
|
Consents............................................................................................13
|
20.
|
Electronic Delivery and Consent to Electronic Participation...........13
|
21.
|
Award Modification..........................................................................14
|
22.
|
Severability.......................................................................................14
|
23.
|
Successors.........................................................................................14
|
24.
|
Governing Law..................................................................................14
|
25.
|
Section 409A.....................................................................................14
|
26.
|
Defined Terms...................................................................................15
|
1.
|
Performance Stock Units Generally
.
|
2.
|
Performance Measures
.
|
3.
|
Vesting Schedule;Conversion; Retention Requirement
.
|
4.
|
Special Provisions for Certain “Specified Employees”
.
|
5.
|
Dividend Equivalent Payments
.
|
6.
|
Death; Disability; Retirement
.
|
7.
|
Reduction in Force
.
|
8.
|
Change in Control
.
|
9.
|
Termination of Employment
.
|
10.
|
Forfeiture/Cancellation/Clawback of PSU Awards Under Certain Circumstances
.
|
11.
|
Tax and Other Withholding Obligations
.
|
12.
|
Satisfaction of Obligations
.
|
13.
|
Nontransferability
.
|
14.
|
Designation of a Beneficiary
.
|
15.
|
Ownership and Possession
.
|
16.
|
Securities Law Matters
.
|
17.
|
Compliance with Laws and Regulations
.
|
18.
|
No Entitlements
.
|
19.
|
Consents
.
|
20.
|
Electronic Delivery and Consent to Electronic Participation.
|
21.
|
Award Modification
.
|
22.
|
Severability
.
|
23.
|
Successors
.
|
24.
|
Governing Law
.
|
25.
|
Section 409A.
|
26.
|
Defined Terms
.
|
Discover EPS Performance*
|
Target Award Multiplier
|
Lower than $X
|
0
|
$X (threshold)
|
0
|
$X
|
0.5
|
$X (target)
|
1.0
|
$X(maximum)
|
1.5
|
Greater than $X
|
1.5
|
Primary Beneficiary(ies)
|
Relationship
|
Percentage
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
Contingent Beneficiary(ies)
|
Relationship
|
Percentage
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
|
For the Calendar Years Ended December 31,
|
|
For the Fiscal Years Ended November 30,
|
|
For the One Month Ended December 31, 2012
|
||||||||||||||||||
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
2011
|
|
|||||||||||||
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Income before income tax expense
|
$
|
3,612
|
|
|
$
|
3,694
|
|
|
$
|
3,944
|
|
|
$
|
3,753
|
|
|
$
|
3,511
|
|
|
$
|
274
|
|
Losses from unconsolidated investees
|
50
|
|
|
29
|
|
|
18
|
|
|
12
|
|
|
5
|
|
|
1
|
|
||||||
Total earnings
|
$
|
3,662
|
|
|
$
|
3,723
|
|
|
$
|
3,962
|
|
|
$
|
3,765
|
|
|
$
|
3,516
|
|
|
$
|
275
|
|
Fixed charges:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Total interest expense
|
$
|
1,263
|
|
|
$
|
1,134
|
|
|
$
|
1,146
|
|
|
$
|
1,331
|
|
|
$
|
1,485
|
|
|
$
|
103
|
|
Interest factor in rents
|
6
|
|
|
5
|
|
|
5
|
|
|
6
|
|
|
5
|
|
|
1
|
|
||||||
Total fixed charges
|
$
|
1,269
|
|
|
$
|
1,139
|
|
|
$
|
1,151
|
|
|
$
|
1,337
|
|
|
$
|
1,490
|
|
|
$
|
104
|
|
Combined fixed charges and preferred stock dividends:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Total interest expense
|
$
|
1,263
|
|
|
$
|
1,134
|
|
|
$
|
1,146
|
|
|
$
|
1,331
|
|
|
$
|
1,485
|
|
|
$
|
103
|
|
Interest factor in rents
|
6
|
|
|
5
|
|
|
5
|
|
|
6
|
|
|
5
|
|
|
1
|
|
||||||
Preferred stock dividends
|
59
|
|
|
60
|
|
|
60
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||
Total combined fixed charges and preferred stock dividends
|
$
|
1,328
|
|
|
$
|
1,199
|
|
|
$
|
1,211
|
|
|
$
|
1,337
|
|
|
$
|
1,490
|
|
|
$
|
104
|
|
Earnings before income tax expense and fixed charges
|
$
|
4,931
|
|
|
$
|
4,862
|
|
|
$
|
5,113
|
|
|
$
|
5,102
|
|
|
$
|
5,006
|
|
|
$
|
379
|
|
Earnings before income tax expense and combined fixed charges and preferred stock dividends
|
$
|
4,990
|
|
|
$
|
4,922
|
|
|
$
|
5,173
|
|
|
$
|
5,102
|
|
|
$
|
5,006
|
|
|
$
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Ratio of earnings to fixed charges
|
3.9
|
|
|
4.3
|
|
|
4.4
|
|
|
3.8
|
|
|
3.4
|
|
|
3.6
|
|
||||||
Ratio of earnings to combined fixed charges and preferred stock dividends
|
3.8
|
|
|
4.1
|
|
|
4.3
|
|
|
3.8
|
|
|
3.4
|
|
|
3.6
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fixed charges are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness and an estimate of interest within rental expense. Combined fixed charges and preferred stock requirements are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness, an estimate of interest within rental expense and preference security dividend requirements.
|
1.
|
I have reviewed this Annual Report on Form 10-K of Discover Financial Services (the “registrant”);
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c)
|
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
|
/s/ D
AVID
W. N
ELMS
|
|
David W. Nelms
|
|
Chairman of the Board and
Chief Executive Officer
|
|
1.
|
I have reviewed this Annual Report on Form 10-K of Discover Financial Services (the “registrant”);
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c)
|
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
|
/s/ R. M
ARK
G
RAF
|
|
R. Mark Graf
|
|
Executive Vice President and Chief Financial Officer
|
|
1.
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
2.
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
/s/ D
AVID
W. N
ELMS
|
|
David W. Nelms
|
|
Chairman of the Board and Chief Executive Officer
|
|
/s/ R. M
ARK
G
RAF
|
|
R. Mark Graf
|
|
Executive Vice President and Chief Financial Officer
|
|