Revenues Increased 6% Y-O-Y to $1.8 Billion
RIVERWOODS, Ill.--(BUSINESS WIRE)--Jun. 19, 2012--
Discover Financial Services (NYSE: DFS) today reported net income of
$537 million or $1.00 per diluted share for the second quarter of 2012,
as compared to $600 million or $1.09 per share for the second quarter of
2011. Strong year-over-year revenue growth was offset by lower reserve
releases. The company’s return on equity was 24%.
Second Quarter Highlights
-
Total loans grew $4.5 billion, or 9%, from the prior year to $57.1
billion.
-
Credit card loans grew $1.6 billion to $46.6 billion and Discover card
sales volume increased 5% from the prior year.
-
Credit card loan delinquencies and net charge-offs reached historic
lows with a delinquency rate for loans over 30 days past due of 1.91%
and a net charge-off rate of 2.79%.
-
Payment Services pretax income was up 10% from the prior year to $47
million. Transaction volume for the segment was $51.4 billion in the
quarter, an increase of 12% from the prior year.
"Our results this quarter reflect outstanding fundamental performance in
both of our business segments and continued improvement in credit
performance," said David Nelms, chairman and chief executive officer of
Discover. "In addition to the strong financial results for the quarter,
I am excited about our recent expansion into three new products.
Discover now offers mortgages through the recently acquired Home Loan
Center platform, a fixed rate private student loan product to better
meet the tuition funding needs of our customers and our first major
affinity credit card. We believe these new products lay a foundation for
additional revenue and asset growth in the future."
Segment Results:
Direct Banking
Direct Banking pretax income of $820 million in the quarter was down $63
million, or 7%, from the prior year.
Discover card sales volume grew 5% from the prior year to $26.1 billion.
Credit card loans ended the quarter at $46.6 billion, up 4%, or $1.6
billion, from the prior year.
Total loans ended the quarter at $57.1 billion, up $4.5 billion, or 9%,
compared to the prior year. Private student loans increased $2.9
billion, including the acquisition of a $2.4 billion student loan
portfolio in the fourth quarter of 2011. Personal loans increased $703
million from the prior year.
Net interest margin was 9.31%, up 16 basis points from the prior year
and 28 basis points from the prior quarter. The increase in net interest
margin from the prior year reflects decreased funding costs partially
offset by lower credit card yield. Credit card yield was 12.35%, a
decrease of 22 basis points from the prior year and an increase of 14
basis points from the prior quarter. The decline in credit card yield
from the prior year reflects a decline in higher rate balances and an
increase in promotional rate balances, partially offset by lower
interest charge-offs. Interest expense as a percent of total loans
decreased 50 basis points from the prior year and 5 basis points from
the prior quarter as the company continued to take advantage of
available low rate funding.
Net interest income increased $122 million, or 10%, from the prior year,
benefiting from loan growth and lower interest expense. This was
partially offset by a decline in credit card and student loan yields.
The delinquency rate for credit card loans over 30 days past due was
1.91%, an improvement of 88 basis points from the prior year, and 31
basis points from the prior quarter. The credit card net charge-off rate
decreased to 2.79% for the second quarter of 2012, down 222 basis points
from the prior year and 28 basis points from the prior quarter.
Charge-offs were down $235 million from the prior year as a result of
the continued decline in delinquencies. Provision for loan losses of
$232 million increased $56 million, or 32%, from the prior year, driven
by a lower reserve release partially offset by the decline in
charge-offs. The reserve release for the second quarter of 2012 was $110
million reflecting the impact of a 23 basis point decline in the reserve
rate from the prior quarter partially offset by additional reserves due
to loan growth. The second quarter of 2011 included a reserve release of
$401 million.
Other income decreased $21 million, or 4%, from the prior year due to
lower late fee assessments, lower transition services revenue related to
the Student Loan Corporation and a decline in protection products
revenue. The second quarter of 2011 included an increase in the value of
loans held for sale.
Expenses were up $108 million, or 18%, from the prior year. The increase
is primarily due to a $71 million year-over-year increase in legal
reserve expense, as the company added $90 million to the legal reserves
in the quarter. Excluding the change in legal reserve expense, expenses
increased 6% essentially in line with revenue and receivable growth.
Payment Services
Payment Services pretax income was $47 million in the quarter, up $4
million, or 10%, from the prior year. Revenue increased $10 million,
primarily driven by an increase in higher margin point-of-sale
transactions on the PULSE network and increased third-party issuer
volume partially offset by higher incentives. Expenses were up $6
million from the prior year.
Payment Services dollar volume was $51.4 billion for the second quarter
of 2012, up 12% from the prior year, driven by higher PULSE and
third-party issuer volume.
Share Repurchases
In the second quarter of 2012, the company repurchased 13.5 million
shares of common stock for $447 million. Shares outstanding declined by
2.4% from prior quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its second quarter
results on Tuesday, June 19, 2012, at 10:00 am. 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
operates the Discover
card, America's cash rewards pioneer,
and offers home loans, private student loans, personal loans, online
savings accounts, certificates of deposit and money market accounts
through its direct
banking business. Its payment
businesses consist of 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.discoverfinancial.com.
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 those
related to financial regulatory reform, consumer financial services
practices, 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; 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;
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 attract new merchants and
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 November 30, 2011 and
“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 February 29, 2012 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
|
|
|
May 31,
|
|
Feb 29,
|
|
May 31,
|
|
|
2012
|
|
2012
|
|
2011
|
EARNINGS SUMMARY
|
|
|
|
|
|
|
Interest Income
|
|
$1,656
|
|
|
$1,646
|
|
|
$1,573
|
|
Interest Expense
|
|
341
|
|
|
353
|
|
|
380
|
|
Net Interest Income
|
|
1,315
|
|
|
1,293
|
|
|
1,193
|
|
|
|
|
|
|
|
|
Discount/Interchange Revenue
|
|
514
|
|
|
500
|
|
|
489
|
|
Rewards
|
|
248
|
|
|
236
|
|
|
223
|
|
Discount and Interchange Revenue, net
|
|
266
|
|
|
264
|
|
|
266
|
|
Protection Products Revenue
|
|
101
|
|
|
105
|
|
|
105
|
|
Loan Fee Income
|
|
77
|
|
|
85
|
|
|
81
|
|
Transaction Processing Revenue
|
|
52
|
|
|
53
|
|
|
45
|
|
Other Income
|
|
37
|
|
|
43
|
|
|
47
|
|
Total Other Income
|
|
533
|
|
|
550
|
|
|
544
|
|
|
|
|
|
|
|
|
Revenue Net of Interest Expense
|
|
1,848
|
|
|
1,843
|
|
|
1,737
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
|
|
232
|
|
|
152
|
|
|
176
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits
|
|
249
|
|
|
247
|
|
|
230
|
|
Marketing and Business Development
|
|
119
|
|
|
131
|
|
|
124
|
|
Information Processing & Communications
|
|
72
|
|
|
70
|
|
|
66
|
|
Professional Fees
|
|
110
|
|
|
100
|
|
|
105
|
|
Premises and Equipment
|
|
19
|
|
|
17
|
|
|
18
|
|
Other Expense
|
|
180
|
|
|
112
|
|
|
92
|
|
Total Other Expense
|
|
749
|
|
|
677
|
|
|
635
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
867
|
|
|
1,014
|
|
|
926
|
|
Tax Expense
|
|
330
|
|
|
383
|
|
|
326
|
|
Net Income
|
|
$537
|
|
|
$631
|
|
|
$600
|
|
|
|
|
|
|
|
|
Net Income Allocated to Common Stockholders
|
|
$532
|
|
|
$624
|
|
|
$593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE STATISTICS
|
|
|
|
|
|
|
Basic EPS
|
|
$1.01
|
|
|
$1.18
|
|
|
$1.09
|
|
Diluted EPS
|
|
$1.00
|
|
|
$1.18
|
|
|
$1.09
|
|
Common Stock Price (period end)
|
|
$33.11
|
|
|
$30.01
|
|
|
$23.84
|
|
Book Value per share
|
|
$17.20
|
|
|
$16.66
|
|
|
$13.79
|
|
|
|
|
|
|
|
|
SEGMENT- INCOME BEFORE INCOME TAXES
|
|
|
|
|
|
|
Direct Banking
|
|
$820
|
|
|
$962
|
|
|
$883
|
|
Payment Services
|
|
47
|
|
|
52
|
|
|
43
|
|
Total
|
|
$867
|
|
|
$1,014
|
|
|
$926
|
|
|
|
|
|
|
|
|
BALANCE SHEET SUMMARY
|
|
|
|
|
|
|
Total Assets
|
|
$72,083
|
|
|
$70,486
|
|
|
$63,438
|
|
Total Liabilities
|
|
$63,184
|
|
|
$61,657
|
|
|
$55,915
|
|
Total Equity
|
|
8,899
|
|
|
8,829
|
|
|
7,523
|
|
Total Liabilities and Stockholders' Equity
|
|
$72,083
|
|
|
$70,486
|
|
|
$63,438
|
|
|
|
|
|
|
|
|
TOTAL LOAN RECEIVABLES STATISTICS
|
|
|
|
|
|
|
Ending Loans 1, 2
|
|
$57,058
|
|
|
$56,299
|
|
|
$52,510
|
|
Average Loans 1, 2
|
|
$56,180
|
|
|
$57,606
|
|
|
$51,727
|
|
|
|
|
|
|
|
|
Interest Yield
|
|
11.55
|
%
|
|
11.36
|
%
|
|
11.93
|
%
|
Net Principal Charge-off Rate
|
|
2.42
|
%
|
|
2.64
|
%
|
|
4.42
|
%
|
Net Principal Charge-off Rate excluding PCI Loans 3
|
|
2.66
|
%
|
|
2.90
|
%
|
|
4.69
|
%
|
Delinquency Rate (over 30 days) 3
|
|
1.81
|
%
|
|
2.08
|
%
|
|
2.68
|
%
|
Delinquency Rate (over 90 days) 3
|
|
0.91
|
%
|
|
1.08
|
%
|
|
1.44
|
%
|
Net Principal Charge-off Dollars
|
|
$342
|
|
|
$378
|
|
|
$577
|
|
Net Interest and Fee Charge-off Dollars
|
|
$110
|
|
|
$123
|
|
|
$192
|
|
Loans Delinquent Over 30 Days 3
|
|
$941
|
|
|
$1,066
|
|
|
$1,329
|
|
Loans Delinquent Over 90 Days 3
|
|
$474
|
|
|
$554
|
|
|
$715
|
|
|
|
|
|
|
|
|
Allowance for Loan Loss (period end)
|
|
$1,869
|
|
|
$1,979
|
|
|
$2,632
|
|
Change in Loan Loss Reserves
|
|
($110
|
)
|
|
($226
|
)
|
|
($401
|
)
|
Reserve Rate 4
|
|
3.28
|
%
|
|
3.51
|
%
|
|
5.01
|
%
|
Reserve Rate Excluding PCI Loans 2, 4
|
|
3.59
|
%
|
|
3.87
|
%
|
|
5.31
|
%
|
|
|
|
|
|
|
|
CREDIT CARD LOANS STATISTICS
|
|
|
|
|
|
|
Ending Loans
|
|
$46,610
|
|
|
$45,918
|
|
|
$44,961
|
|
Average Loans
|
|
$45,772
|
|
|
$46,919
|
|
|
$44,288
|
|
|
|
|
|
|
|
|
Interest Yield
|
|
12.35
|
%
|
|
12.21
|
%
|
|
12.57
|
%
|
Net Principal Charge-off Rate
|
|
2.79
|
%
|
|
3.07
|
%
|
|
5.01
|
%
|
Delinquency Rate (over 30 days)
|
|
1.91
|
%
|
|
2.22
|
%
|
|
2.79
|
%
|
Delinquency Rate (over 90 days)
|
|
0.99
|
%
|
|
1.18
|
%
|
|
1.51
|
%
|
Net Principal Charge-off Dollars
|
|
$322
|
|
|
$358
|
|
|
$559
|
|
Loans Delinquent Over 30 Days
|
|
$890
|
|
|
$1,019
|
|
|
$1,256
|
|
Loans Delinquent Over 90 Days
|
|
$459
|
|
|
$540
|
|
|
$681
|
|
|
|
|
|
|
|
|
Allowance for Loan Loss (period end)
|
|
$1,713
|
|
|
$1,835
|
|
|
$2,519
|
|
Change in Loan Loss Reserves
|
|
($122
|
)
|
|
($235
|
)
|
|
($420
|
)
|
Reserve Rate
|
|
3.68
|
%
|
|
4.00
|
%
|
|
5.60
|
%
|
|
|
|
|
|
|
|
Total Discover Card Volume
|
|
$28,140
|
|
|
$27,370
|
|
|
$26,927
|
|
Discover Card Sales Volume
|
|
$26,115
|
|
|
$25,604
|
|
|
$24,844
|
|
|
|
|
|
|
|
|
NETWORK VOLUME
|
|
|
|
|
|
|
PULSE Network
|
|
$42,001
|
|
|
$37,577
|
|
|
$36,719
|
|
Third-Party Issuers
|
|
2,189
|
|
|
2,037
|
|
|
1,838
|
|
Diners Club International 5
|
|
7,205
|
|
|
7,100
|
|
|
7,380
|
|
Total Payment Services
|
|
51,395
|
|
|
46,714
|
|
|
45,937
|
|
Discover Network - Proprietary
|
|
26,985
|
|
|
26,482
|
|
|
25,684
|
|
Total
|
|
$78,380
|
|
|
$73,196
|
|
|
$71,621
|
|
|
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 The Reserve Rate includes federal student loans held
for sale.
|
|
5 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).
|
|
Source: Discover Financial Services
Discover Financial Services
Investors:
Bill Franklin,
224-405-1902
williamfranklin@discover.com
or
Media:
Jon
Drummond, 224-405-1888
jondrummond@discover.com