News Column

Discover Financial Services Reports Second Quarter Net Income of $644 Million or $1.35 Per Diluted Share

July 22, 2014

RIVERWOODS, Ill.--(BUSINESS WIRE)-- Discover Financial Services (NYSE: DFS) today reported net income of $644 million or $1.35 per diluted share for the second quarter of 2014, as compared to $602 million or $1.20 per diluted share for the second quarter of 2013. The company's return on equity for the second quarter of 2014 was 23%.

Second Quarter Highlights

  • Revenue net of interest expense was up $131 million, or 6%, from the prior year to $2.2 billion.
  • Total loans grew $4.2 billion, or 7%, from the prior year to $65.9 billion.
  • Credit card loans grew $3.0 billion, or 6%, to $52.7 billion and Discover card sales volume increased 6% from the prior year.
  • Net charge-off rate for credit card loans decreased 1 basis point from the prior year to 2.33% and the delinquency rate for loans over 30 days past due increased 5 basis points to 1.63%.
  • Payment Services pretax income was $31 million. Transaction dollar volume for the segment was $50.9 billion, up 3% from the prior year.

    "Our record earnings per share this quarter reflect outstanding fundamental performance in our Direct Banking segment in terms of loan growth and credit performance,” said David Nelms, chairman and CEO of Discover. "Our continued focus on gaining wallet share with existing customers and acquiring new accounts with Discover IT drove strong card receivables and sales growth of 6%."

    Segment Results:

    Direct Banking

    Direct Banking pretax income of $984 million in the quarter was down $18 million, or 2%, from the prior year.

    Total loans ended the quarter at $65.8 billion, up 7% compared to the prior year. Credit card loans ended the quarter at $52.7 billion, up 6% from the prior year. Personal loans increased $949 million, or 26%, from the prior year and private student loans increased $370 million, or 5%, from the prior year. Excluding purchased student loans, private student loans grew $889 million, or 26%, from the prior year.

    Revenue net of interest expense increased $131 million, up 7% from the prior year due to loan growth and net interest margin expansion.

    Net interest income increased $159 million, or 11%, from the prior year, benefiting from loan growth, lower interest expense and higher loan yield. Net interest margin was 9.85%, up 41 basis points from the prior year. The increase in net interest margin reflects decreased funding costs and higher loan yield. Credit card yield was 12.10%, an increase of 13 basis points from the prior year. The increase in credit card yield reflects a higher portion of customers revolving balances and lower interest charge-offs. Interest expense as a percent of total loans decreased 25 basis points from the prior year as the company continued to take advantage of available low rate funding.

    Other income decreased $28 million, or 5%, from the prior year due to lower direct mortgage related income and lower protection product revenue, which were somewhat offset by higher interchange revenue.

    The delinquency rate for credit card loans over 30 days past due was 1.63%, up 5 basis points from the prior year and down 9 basis points compared to the prior quarter. Credit card net charge-off rate for the second quarter was 2.33%, down 1 basis point from the prior year and up 1 basis point from the prior quarter. The student loan net charge-off rate excluding PCI loans was 1.30%, down 28 basis points from the prior year. The personal loans net charge-off rate of 1.95% decreased by 29 basis points from the prior year.

    Provision for loan losses of $360 million increased $135 million from the prior year primarily due to an increase in loan loss reserves. The reserve build for the second quarter of 2014 was $23 million. The second quarter of 2013 included a reserve release of $93 million.

    Expenses increased $14 million, or 2%, from the prior year primarily due to increased headcount and higher professional fees, partially offset by lower marketing expense.

    Payment Services

    Payment Services pretax income was $31 million in the quarter, up $52 million from the prior year. The second quarter of 2013 had total pretax charges of $55 million, including a $15 million increase in loan loss provisions, related to supporting Diners Club International franchises in Europe.

    Payment Services dollar volume was $50.9 billion for the second quarter of 2014, up 3% from the prior year. PULSE transaction dollar volume was up 4% year-over-year.

    Share Repurchases

    During the second quarter of 2014, the company repurchased approximately 3 million shares of common stock for $177 million. Shares of common stock outstanding declined by 1% from the prior quarter.

    Conference Call and Webcast Information

    The company will host a conference call to discuss its second quarter results on Tuesday, July 22, 2014, at 4:00 p.m. Central time. Interested parties can listen to the conference call via a live audio webcast at http://investorrelations.discoverfinancial.com.

    About Discover

    Discover Financial Services (NYSE: DFS) is a direct banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company issues the Discover card, America's cash rewards pioneer, and offers home loans, private student loans, personal loans, home equity loans, checking and savings accounts, certificates of deposit and money market accounts through its direct banking business. It operates the Discover Network, with millions of merchant and cash access locations; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global payments network with acceptance in more than 185 countries and territories. For more information, visit www.discover.com/company.

    A financial summary follows. Financial, statistical, and business related information, as well as information regarding business and segment trends, is included in the financial supplement filed as Exhibit 99.2 to the company's Current Report on Form 8-K filed today with the Securities and Exchange Commission (“SEC”). Both the earnings release and the financial supplement are available online at the SEC's website (http://www.sec.gov) and the company's website (http://investorrelations.discoverfinancial.com).

    This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. Such statements are based upon the current beliefs and expectations of the company's management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this press release, and there is no undertaking to update or revise them as more information becomes available.

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

    Additional factors that could cause the company's results to differ materially from those described in the forward-looking statements can be found under “Risk Factors,” “Business - Competition,” “Business - Supervision and Regulation” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the company's Annual Report on Form 10-K for the year ended December 31, 2013 and under “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, which are filed with the SEC and available at the SEC's internet site (http://www.sec.gov).

     
    DISCOVER FINANCIAL SERVICES
    (unaudited, in millions, except per share statistics)
      Quarter Ended
    Jun 30,   Mar 31,   Jun 30,
    2014   2014   2013

    EARNINGS SUMMARY

    Interest Income $1,863$1,833$1,727
    Interest Expense 274   270   297  
    Net Interest Income 1,589 1,563 1,430
     
    Discount/Interchange Revenue 595 519 546
    Rewards Cost 268   265   238  
    Discount and Interchange Revenue, net 327 254 308
    Protection Products Revenue 78 83 88
    Loan Fee Income 80 83 76
    Transaction Processing Revenue 46 44 47
    Other Income 52   51   92  
    Total Other Income 583   515   611  
     
    Revenue Net of Interest Expense 2,172 2,078 2,041
     
    Provision for Loan Losses 360 272 240
     
    Employee Compensation and Benefits 301 307 285
    Marketing and Business Development 168 169 185
    Information Processing & Communications 87 84 85
    Professional Fees 112 99 101
    Premises and Equipment 22 23 20
    Other Expense 107   102   144  
    Total Other Expense 797 784 820
         
    Income Before Income Taxes 1,015 1,022 981
    Tax Expense 371   391   379  
    Net Income $644   $631   $602  
     
    Net Income Allocated to Common Stockholders $630   $618   $588  
     
     

    PER SHARE STATISTICS

    Basic EPS $1.35$1.31$1.20
    Diluted EPS $1.35$1.31$1.20
    Common Stock Price (period end) $61.98$58.19$47.64
    Book Value per share $24.46$23.53$21.52
     

    SEGMENT- INCOME BEFORE INCOME TAXES

    Direct Banking $984$994$1,002
    Payment Services 31   28   (21 )
    Total $1,015   $1,022   $981  
     

    BALANCE SHEET SUMMARY

    Total Assets $78,937   $79,584   $74,944  
    Total Liabilities 67,556 68,563 64,496
    Total Equity 11,381   11,021   10,448  
    Total Liabilities and Stockholders' Equity $78,937   $79,584   $74,944  
     

    TOTAL LOAN RECEIVABLES

    Ending Loans 1, 2$65,875$63,852$61,703
    Average Loans 1, 2$64,728$64,227$60,793
     
    Interest Yield 11.42 % 11.44 % 11.24 %
    Gross Principal Charge-off Rate 2.82 % 2.82 % 2.99 %
    Gross Principal Charge-off Rate excluding PCI Loans 3 3.01 % 3.01 % 3.23 %
    Net Principal Charge-off Rate 2.08 % 2.08 % 2.10 %
    Net Principal Charge-off Rate excluding PCI Loans 3 2.22 % 2.22 % 2.27 %
    Delinquency Rate (over 30 days) excluding PCI Loans 3 1.56 % 1.65 % 1.50 %
    Delinquency Rate (over 90 days) excluding PCI Loans 3 0.73 % 0.80 % 0.73 %
    Gross Principal Charge-off Dollars $455$447$453
    Net Principal Charge-off Dollars $337$329$318
    Net Interest and Fee Charge-off Dollars $87$89$85
    Loans Delinquent Over 30 Days 3$964$985$861
    Loans Delinquent Over 90 Days 3$451$478$419
     
    Allowance for Loan Loss (period end) $1,614$1,591$1,556
    Change in Loan Loss Reserves $23 ($57 ) ($78 )
    Reserve Rate 2.45 % 2.49 % 2.52 %
    Reserve Rate Excluding PCI Loans 3 2.56 % 2.61 % 2.72 %
     

    CREDIT CARD LOANS

    Ending Loans $52,742$50,879$49,791
    Average Loans $51,718$51,347$49,002
     
    Interest Yield 12.10 % 12.14 % 11.97 %
    Gross Principal Charge-off Rate 3.22 % 3.22 % 3.41 %
    Net Principal Charge-off Rate 2.33 % 2.32 % 2.34 %
    Delinquency Rate (over 30 days) 1.63 % 1.72 % 1.58 %
    Delinquency Rate (over 90 days) 0.80 % 0.87 % 0.80 %
    Gross Principal Charge-off Dollars $415$408$417
    Net Principal Charge-off Dollars $300$294$286
    Loans Delinquent Over 30 Days $860$876$789
    Loans Delinquent Over 90 Days $420$442$398
     
    Allowance for Loan Loss (period end) $1,359$1,342$1,360
    Change in Loan Loss Reserves $17 ($64 ) ($93 )
    Reserve Rate 2.58 % 2.64 % 2.73 %
     
    Total Discover Card Volume $31,732$28,077$29,684
    Discover Card Sales Volume $29,341$25,697$27,574
     

    NETWORK VOLUME

    PULSE Network $41,500$41,927$40,060
    Network Partners 2,617 2,381 2,442
    Diners Club International4 6,733   6,527   6,848  
    Total Payment Services 50,850 50,835 49,350
    Discover Network - Proprietary 30,342   26,547   28,551  
    Total $81,192   $77,382   $77,901  
     

    1 Total Loans includes mortgages and other loans.

     

    2 Purchased Credit Impaired ("PCI") loans are loans that were acquired in which a deterioration in credit quality occurred between the origination date and the acquisition date. These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the loans are contractually past due. PCI loans are private student loans and are included in total loan receivables.

     

    3 Excludes PCI loans (described above) 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 the company is recognizing interest income on a pool of loans, it is all considered to be performing.

     

    4 Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment.

     

    Note: See Glossary for definitions of financial terms in the financial supplement which is available online at the SEC's website (http://www.sec.gov) and the company's website (http://investorrelations.discoverfinancial.com).






    Discover Financial Services

    Investors:

    Bill Franklin, 224-405-1902

    williamfranklin@discover.com

    or

    Media:

    Jon Drummond, 224-405-1888

    jondrummond@discover.com


    Source: Discover Financial Services


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