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Discover Financial Services Reports First Quarter Net Income Of $586 Million Or $1.28 Per Diluted Share

April 21, 2015

RIVERWOODS, Ill.--(BUSINESS WIRE)--Apr. 21, 2015-- Discover Financial Services (NYSE: DFS) today reported net income of $586 million or $1.28 per diluted share for the first quarter of 2015, as compared to $631 million or $1.31 per diluted share for the first quarter of 2014. The company's return on equity for the first quarter of 2015 was 21%.

First Quarter Highlights

  • Total loans grew $3.8 billion, or 5.9%, from the prior year to $67.6 billion.
  • Credit card loans grew $2.6 billion, or 5.1%, to $53.5 billion and Discover card sales volume increased 2.7% from the prior year.
  • Net charge-off rate for credit card loans increased 8 basis points from the prior year to 2.40% and the delinquency rate for loans over 30 days past due decreased 8 basis points to 1.64%.
  • Payment Services transaction dollar volume for the segment was $50.2 billion, down 1% from the prior year.

"We achieved solid loan growth and recently launched our new Discover it Miles card leveraging our strengths in rewards and service," said David Nelms, chairman and CEO of Discover. "We continue to generate a strong return on equity and announced plans to increase share repurchases and dividends."

Segment Results:

Direct Banking

Direct Banking pretax income of $881 million in the quarter was down $113 million, or 11%, driven primarily by higher provisioning for loan losses due to growth.

Total loans ended the quarter at $67.6 billion, up 6.0% compared to the prior year. Credit card loans ended the quarter at $53.5 billion, up 5.1% from the prior year. Personal loans increased $755 million, or 17.5%, from the prior year and private student loans increased $324 million, or 3.9%, from the prior year. Excluding purchased student loans, private student loans grew $851 million, or 19.7%, from the prior year.

Revenue net of interest expense increased $98 million, up 5% from the prior year.

Net interest income increased $66 million, or 4%, from the prior year, benefiting from loan growth partially offset by margin compression. Net interest margin was 9.70%, down 18 basis points from the prior year primarily due to a decline in card yield and an increase in funding costs. Credit card yield was 12.05%, a decrease of 9 basis points from the prior year due to portfolio mix. Interest expense as a percent of total loans increased 8 basis points from the prior year as the company continues to extend funding duration.

Other income increased $32 million, or 7%, from the prior year as higher direct mortgage related income and interchange revenue were partially offset by lower protection products revenue.

The delinquency rate for credit card loans over 30 days past due was 1.64%, down 8 basis points from the prior year and down 9 basis points from the prior quarter. Credit card net charge-off rate for the first quarter was 2.40%, up 8 basis points from the prior year and up 14 basis points from the prior quarter. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 1.03%, down 28 basis points from the prior year. The personal loans net charge-off rate of 2.22% increased by 15 basis points from the prior year.

Provision for loan losses of $388 million increased $118 million from the prior year. Net charge-offs increased $31 million due primarily to several years of consistent loan growth. The reserve build for the first quarter of 2015 was $28 million due mainly to seasoning of loan growth, versus a $59 million reserve release in the prior year.

Expenses increased $93 million, or 13%, from the prior year. Professional fees increased in part due to costs associated with anti-money laundering and related compliance program enhancements. Employee compensation and marketing also contributed to the increase in expenses, as well as higher legal reserves.

Payment Services

Payment Services pretax income was $27 million in the quarter, down $1 million from the prior year. Payment Services dollar volume was $50.2 billion, down 1% from the prior year. PULSE transaction dollar volume was down 3% year-over-year. Network Partners volume was up $568 million, or 24% from the prior year as AribaPay volume more than offset the previously communicated loss of volume from a third party payments partner.

Share Repurchases

During the first quarter of 2015, the company repurchased approximately 6 million shares of common stock for $360 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 first quarter results on Tuesday, April 21, 2015, 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 private student loans, personal loans, home 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 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; difficulty obtaining regulatory approval for, financing, closing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; the company's ability to manage its credit risk, market risk, liquidity risk, operational risk, compliance and legal 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 remain organizationally effective; the company's ability to increase or sustain Discover card usage or attract new customers; the company's ability to maintain relationships with 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; 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, 2014 which is 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
Mar 31,   Dec 31,   Mar 31,
2015   2014   2014

EARNINGS SUMMARY

Interest Income $1,929 $1,974 $1,833
Interest Expense 300 302 270
Net Interest Income 1,629 1,672 1,563
 
Discount/Interchange Revenue 536 620 519
Rewards Cost 268 517 265
Discount and Interchange Revenue, net 268 103 254
Protection Products Revenue 71 75 83
Loan Fee Income 81 86 83
Transaction Processing Revenue 42 46 44
Other Income 80 55 51
Total Other Income 542 365 515
 
Revenue Net of Interest Expense 2,171 2,037 2,078
 
Provision for Loan Losses 390 457 272
 
Employee Compensation and Benefits 331 314 307
Marketing and Business Development 182 216 169
Information Processing & Communications 88 88 84
Professional Fees 127 128 99
Premises and Equipment 24 24 23
Other Expense 121 162 102
Total Other Expense 873 932 784
     
Income Before Income Taxes 908 648 1,022
Tax Expense 322 244 391
Net Income $586 $404 $631
 
Net Income Allocated to Common Stockholders $573 $392 $618
 
 

PER SHARE STATISTICS

Basic EPS $1.28 $0.87 $1.31
Diluted EPS $1.28 $0.87 $1.31
Common Stock Price (period end) $56.35 $65.49 $58.19
Book Value per share $25.22 $24.79 $23.53
 

SEGMENT- INCOME BEFORE INCOME TAXES

Direct Banking $881 $646 $994
Payment Services 27 2 28
Total $908 $648 $1,022
 

BALANCE SHEET SUMMARY

Total Assets $84,178 $83,126 $79,584
Total Liabilities 72,967 71,992 68,563
Total Equity 11,211 11,134 11,021
Total Liabilities and Stockholders' Equity $84,178 $83,126 $79,584
 

TOTAL LOAN RECEIVABLES

Ending Loans 1, 2 $67,648 $69,969 $63,852
Average Loans 1, 2 $68,148 $67,930 $64,227
 
Interest Yield 11.37% 11.40% 11.44%
Gross Principal Charge-off Rate 2.82% 2.70% 2.82%
Gross Principal Charge-off Rate excluding PCI Loans 3 2.98% 2.86% 3.01%
Net Principal Charge-off Rate 2.14% 2.06% 2.08%
Net Principal Charge-off Rate excluding PCI Loans 3 2.26% 2.18% 2.22%

Delinquency Rate (over 30 days) excluding PCI Loans 3,4

1.57% 1.66% 1.65%

Delinquency Rate (over 90 days) excluding PCI Loans 3,4

0.78% 0.78% 0.80%
Gross Principal Charge-off Dollars $474 $463 $447
Net Principal Charge-off Dollars $360 $355 $329
Net Interest and Fee Charge-off Dollars $95 $91 $89

Loans Delinquent Over 30 Days 3,4

$1,006 $1,100 $985

Loans Delinquent Over 90 Days 3,4

$500 $517 $478
 
Allowance for Loan Loss (period end) $1,776 $1,746 $1,591
Change in Loan Loss Reserves $30 $102 ($57)
Reserve Rate 2.63% 2.50% 2.49%
Reserve Rate Excluding PCI Loans 3 2.72% 2.59% 2.61%
 

CREDIT CARD LOANS

Ending Loans $53,499 $56,128 $50,879
Average Loans $54,038 $54,168 $51,347
 
Interest Yield 12.05% 12.08% 12.14%
Gross Principal Charge-off Rate 3.21% 3.03% 3.22%
Net Principal Charge-off Rate 2.40% 2.26% 2.32%

Delinquency Rate (over 30 days) 4

1.64% 1.73% 1.72%

Delinquency Rate (over 90 days) 4

0.86% 0.85% 0.87%
Gross Principal Charge-off Dollars $428 $413 $408
Net Principal Charge-off Dollars $319 $309 $294

Loans Delinquent Over 30 Days 4

$879 $971 $876

Loans Delinquent Over 90 Days 4

$458 $480 $442
 
Allowance for Loan Loss (period end) $1,492 $1,474 $1,342
Change in Loan Loss Reserves $18 $86 ($64)
Reserve Rate 2.79% 2.63% 2.64%
 
Total Discover Card Volume $28,725 $33,211 $28,077
Discover Card Sales Volume $26,379 $30,871 $25,697
Rewards Rate 1.02% 1.67% 1.03%
 

NETWORK VOLUME

PULSE Network $40,814 $41,788 $41,927
Network Partners 2,949 2,263 2,381

Diners Club International 5

6,474 6,933 6,527
Total Payment Services 50,237 50,984 50,835
Discover Network - Proprietary 27,324 32,005 26,547
Total $77,561 $82,989 $77,382

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 During the first quarter of 2015, a payment processing change was implemented which had the effect of contributing favorably to the delinquencies of certain accounts. These changes partially contributed to the decline in the delinquency rate.

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