RIVERWOODS, Ill.--(BUSINESS WIRE)--Jul. 23, 2013--
Discover Financial Services (NYSE: DFS) today reported net income of
$602 million or $1.20 per diluted share for the second quarter of 2013,
as compared to $525 million or $0.99 per diluted share for the second
quarter of 2012. The company's return on equity was 23%.
Second Quarter Highlights
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Total loans grew $3.7 billion, or 6%, from the prior year to $61.7
billion.
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Credit card loans grew $2.3 billion, or 5%, to $49.8 billion and
Discover card sales volume increased 4% from the prior year.
-
Credit card loan delinquencies over 30 days past due reached a record
low of 1.58%. Credit card net charge-off rate decreased 2 basis points
sequentially to 2.34%.
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Payment Services pretax income was down $71 million from the prior
year to a pretax loss of $21 million.
"Discover's strong overall results were driven by profitable growth in
Direct Banking and continued improvement in credit offset to a small
degree by a loss in Payment Services as we supported Diners franchises
in Europe," said David Nelms, chairman and CEO of Discover.
Segment Results:
Direct Banking
Direct Banking pretax income of $1.0 billion in the quarter was up $206
million, or 26%, from the prior year.
Discover card sales volume grew 4% from the prior year to $27.6 billion.
Credit card loans ended the quarter at $49.8 billion, up 5% from the
prior year.
Total loans ended the quarter at $61.7 billion, up 6% compared to the
prior year. Private student loans increased $390 million, or 5%, from
the prior year and personal loans increased $652 million, or 22%, from
the prior year.
Revenue net of interest expense increased $182 million, up 10% from the
prior year due to loan growth, revenue from Discover Home Loans, which
was launched in June 2012 after acquiring Home Loan Center assets from
Tree.com, and lower funding costs.
Net interest margin was 9.44%, up 16 basis points from the prior year.
The increase in net interest margin from the prior year reflects
decreased funding costs partially offset by lower loan yield. Credit
card yield was 11.97%, a decrease of 24 basis points from the prior
year. The decline in credit card yield from the prior year reflects an
increase in promotional rate balances and a decline in higher rate
balances, partially offset by lower interest charge-offs. Interest
expense as a percent of total loans decreased 39 basis points from the
prior year as the company continued to take advantage of available low
rate funding.
Net interest income increased $116 million, or 9%, from the prior year,
benefiting from loan growth and lower interest expense, which was
partially offset by a decline in loan yield.
Other income increased $66 million, or 14%, from the prior year
primarily due to revenue from Discover Home Loans and higher net
interchange revenue as a result of increased sales.
The delinquency rate for credit card loans over 30 days past due was
1.58%, an improvement of 27 basis points from the prior year, and a
decrease of 19 basis points from the prior quarter. Credit card net
charge-off rate for the second quarter was 2.34%, down 38 basis points
from the prior year, and down 2 basis points from the prior quarter. The
student loan net charge-off rate excluding PCI loans was 1.58%, up 85
basis points from the prior year and 76 basis points sequentially, due
to a larger portion of the portfolio entering repayment and seasonality,
respectively. Personal loan net charge-off rate decreased 1 basis point
from the prior year and 6 basis points sequentially to 2.24%.
Provision for loan losses of $225 million decreased $37 million from the
prior year, driven by a decline in charge-offs and a higher reserve
release. The reserve release for the second quarter of 2013 was $93
million reflecting the impact of a 21 basis point decline in the reserve
rate from the prior quarter partially offset by additional reserves due
to loan growth. The second quarter of 2012 included a reserve release of
$73 million. Net principal charge-offs were $17 million lower than the
prior year as a result of the continued decline in delinquencies and
bankruptcies.
Expenses were up $13 million, or 2%, from the prior year. The increase
in expenses was due to higher employee compensation and marketing
associated with the Home Loan Center acquisition, increased card
marketing initiatives and higher headcount. The second quarter of 2012
included a $90 million addition to legal reserves.
Payment Services
Payment Services pretax loss for the quarter was $21 million as expenses
increased $49 million from the prior year. Total pretax charges related
to supporting Diners Club International franchises during the quarter
were $55 million, which included a $15 million increase in loan loss
provisions for prior franchise loans.
Payment Services dollar volume was $49.4 billion for the second quarter
of 2013, down 2% from the prior year. PULSE transaction dollar volume
declined by 3% year-over-year due to merchant routing and competitor
actions.
Share Repurchases
During the second quarter of 2013, the company repurchased approximately
7 million shares of common stock for $340 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 23, 2013, 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, checking and 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, 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 November 30, 2012 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, 2013, which are filed with the SEC and available
at the SEC's internet site (http://www.sec.gov).
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DISCOVER FINANCIAL SERVICES
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(unaudited, in millions, except per share statistics)
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Quarter Ended
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Jun 30, 2013
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Mar 31, 2013
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Jun 30, 2012
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EARNINGS SUMMARY
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Interest Income
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$1,727
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$1,708
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$1,646
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Interest Expense
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297
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298
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332
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Net Interest Income
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1,430
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1,410
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1,314
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Discount/Interchange Revenue
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546
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492
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519
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Rewards
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238
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229
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246
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Discount and Interchange Revenue, net
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308
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263
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273
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Protection Products Revenue
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88
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88
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102
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Loan Fee Income
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76
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81
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78
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Transaction Processing Revenue
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47
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53
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56
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Other Income
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92
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97
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43
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Total Other Income
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611
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582
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552
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Revenue Net of Interest Expense
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2,041
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1,992
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1,866
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Provision for Loan Losses
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240
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159
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262
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Employee Compensation and Benefits
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285
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290
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253
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Marketing and Business Development
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185
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169
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121
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Information Processing & Communications
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85
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78
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71
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Professional Fees
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101
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104
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108
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Premises and Equipment
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20
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19
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19
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Other Expense
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144
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93
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186
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Total Other Expense
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820
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753
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758
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Income Before Income Taxes
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981
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1,080
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846
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Tax Expense
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379
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407
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321
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Net Income
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$602
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$673
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$525
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Net Income Allocated to Common Stockholders
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$588
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$659
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$520
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PER SHARE STATISTICS
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Basic EPS
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$1.20
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$1.33
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$0.99
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Diluted EPS
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$1.20
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$1.33
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$0.99
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Common Stock Price (period end)
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$47.64
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$44.84
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$34.58
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Book Value per share
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$21.52
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$20.90
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$17.36
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SEGMENT- INCOME BEFORE INCOME TAXES
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Direct Banking
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$1,002
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$1,033
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$796
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Payment Services
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(21
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47
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50
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Total
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$981
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$1,080
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$846
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BALANCE SHEET SUMMARY
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Total Assets
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$74,944
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$76,139
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$73,238
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Total Liabilities
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64,496
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65,840
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64,298
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Total Equity
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10,448
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10,299
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8,940
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Total Liabilities and Stockholders' Equity
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$74,944
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$76,139
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$73,238
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TOTAL LOAN RECEIVABLES
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Ending Loans 1, 2
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$61,703
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$60,384
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$58,051
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Average Loans 1, 2
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$60,793
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$60,903
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$56,929
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Interest Yield
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11.24
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%
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11.22
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%
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11.45
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%
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Net Principal Charge-off Rate
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2.10
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%
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2.08
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%
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2.37
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%
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Net Principal Charge-off Rate excluding PCI Loans 3
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2.27
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%
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2.25
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%
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2.60
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%
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Delinquency Rate (over 30 days) excluding PCI Loans 3
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1.50
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%
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1.68
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%
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1.75
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%
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Delinquency Rate (over 90 days) excluding PCI Loans 3
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0.73
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%
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0.84
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%
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0.87
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%
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Net Principal Charge-off Dollars
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$318
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$313
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$335
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Net Interest and Fee Charge-off Dollars
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$85
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$93
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$104
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Loans Delinquent Over 30 Days 3
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$861
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$940
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$929
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Loans Delinquent Over 90 Days 3
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$419
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$469
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$460
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Allowance for Loan Loss (period end)
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$1,556
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$1,634
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$1,898
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Change in Loan Loss Reserves
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($78
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($154
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($73
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Reserve Rate
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2.52
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%
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2.71
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%
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3.27
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%
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Reserve Rate Excluding PCI Loans 3
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2.72
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%
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2.93
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%
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3.57
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%
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CREDIT CARD LOANS
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Ending Loans
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$49,791
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$48,655
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$47,451
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Average Loans
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$49,002
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$49,267
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$46,484
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Interest Yield
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11.97
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%
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11.94
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%
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12.21
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%
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Net Principal Charge-off Rate
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2.34
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%
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2.36
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%
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2.72
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%
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Delinquency Rate (over 30 days)
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1.58
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%
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1.77
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%
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1.85
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%
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Delinquency Rate (over 90 days)
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0.80
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%
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0.91
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%
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0.94
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%
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Net Principal Charge-off Dollars
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$286
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$287
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$314
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Loans Delinquent Over 30 Days
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$789
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$862
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$879
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Loans Delinquent Over 90 Days
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$398
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$442
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$445
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Allowance for Loan Loss (period end)
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$1,360
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$1,453
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$1,739
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Change in Loan Loss Reserves
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($93
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($160
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($83
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Reserve Rate
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2.73
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%
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2.99
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%
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3.66
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%
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Total Discover Card Volume
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$29,684
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$26,880
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$28,579
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Discover Card Sales Volume
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$27,574
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$24,864
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$26,411
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NETWORK VOLUME
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PULSE Network
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$40,060
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$39,919
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$41,207
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Network Partners
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2,442
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2,246
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2,195
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Diners Club International 4
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6,848
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6,644
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7,184
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Total Payment Services
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49,350
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48,809
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50,586
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Discover Network - Proprietary
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28,551
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25,738
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27,279
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Total
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$77,901
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$74,547
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$77,865
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1 Total Loans includes mortgages and other loans.
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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.
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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.
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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.
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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).
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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