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Discover Financial Services Reports Third Quarter Net Income Of $612 Million Or $1.38 Per Diluted Share

October 20, 2015

RIVERWOODS, Ill.--(BUSINESS WIRE)--Oct. 20, 2015-- Discover Financial Services (NYSE: DFS) today reported net income of $612 million or $1.38 per diluted share for the third quarter of 2015, as compared to $644 million or $1.37 per diluted share for the third quarter of 2014. The company's return on equity for the third quarter of 2015 was 22%.

Third Quarter Highlights

  • Total loans grew $2.7 billion, or 4.0%, from the prior year to $70.1 billion.
  • Credit card loans grew $2.0 billion, or 3.6%, to $55.7 billion and Discover card sales volume increased 2.6% from the prior year or approximately 7% excluding gas purchases.
  • Net charge-off rate for credit card loans decreased 12 basis points from the prior year to 2.04% and the credit card delinquency rate for loans over 30 days past due decreased 6 basis points to 1.65%.
  • Payment Services transaction dollar volume for the segment was $46.0 billion, down 7% from the prior year.

"Strong credit performance and continued share buybacks drove earnings per share growth," said David Nelms, chairman and CEO of Discover. "While total loan growth slowed slightly due to consumer spending levels, it remained solid. In addition, we achieved the highest level of new card accounts since the recession, which should bode well for the future."

Segment Results:

Direct Banking

Direct Banking pretax income of $950 million in the quarter was down $31 million, or 3%, driven by higher expenses in part due to previously announced anti-money laundering remediation expenses, partially offset by a lower provision for loan losses.

Total loans ended the quarter at $70.1 billion, up 4.1% compared to the prior year. Credit card loans ended the quarter at $55.7 billion, up 3.6% from the prior year. Personal loans increased $595 million, or 12.3%, from the prior year and private student loans increased $275 million, or 3.2%, from the prior year. Excluding purchased student loans, private student loans grew $814 million, or 17.3%, from the prior year.

Revenue net of interest expense increased $7 million, relatively flat to the prior year.

Net interest income increased $47 million, or 3%, from the prior year, benefiting from loan growth partially offset by margin compression. Net interest margin was 9.63%, down 16 basis points from the prior year primarily due to an increase in funding costs. Interest expense as a percent of total loans increased 13 basis points from the prior year due to funding mix and higher rates. Credit card yield was 12.03%, a decrease of 1 basis point from the prior year.

Other income decreased $40 million, or 8%, from the prior year due to run-off in mortgage origination income, lower protection products revenue and higher rewards expense.

The delinquency rate for credit card loans over 30 days past due was 1.65%, down 6 basis points from the prior year and up 10 basis points from the prior quarter. Credit card net charge-off rate for the third quarter was 2.04%, down 12 basis points from the prior year and down 24 basis points from the prior quarter. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 0.94%, down 20 basis points from the prior year. The personal loans net charge-off rate of 1.99% increased by 7 basis points from the prior year.

Provision for loan losses of $332 million decreased $24 million from the prior year primarily due to a smaller reserve build. The reserve build for the third quarter of 2015 was $8 million, versus a $32 million reserve build in the prior year. Net charge-offs were flat year-over-year.

Expenses increased $62 million, or 8%, from the prior year mostly driven by higher regulatory and compliance costs. Professional fees increased in part due to $28 million in look back related anti-money laundering remediation expenses. Employee compensation increased largely due to increased staffing driven in part by regulatory and compliance activities. Wind down and exit expenses associated with the closure of the Home Loans business totaled $23 million in the quarter.

Payment Services

Payment Services pretax income was $24 million in the quarter, down $4 million from the prior year. Payment Services transaction dollar volume was $46.0 billion, down 7% from the prior year. PULSE transaction dollar volume was down 11% year- over-year due to the loss of some volume from a large debit issuer. Network Partners volume was up $1.0 billion, or 47% from the prior year driven by AribaPay volume.

Share Repurchases

During the third quarter of 2015, the company repurchased approximately 8 million shares of common stock for $435 million. Shares of common stock outstanding declined by 1.8% from the prior quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its third quarter results on Tuesday, October 20, 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 equity loans, checking and savings accounts and certificates of deposit 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 non-card 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 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 June 30, 2015, 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
Sep 30,     Jun 30,     Sep 30,
2015 2015 2014

EARNINGS SUMMARY

Interest Income $2,008 $1,947 $1,926
Interest Expense 323 311 288
Net Interest Income 1,685 1,636 1,638
 
Discount/Interchange Revenue 614 612 598
Rewards Cost 326 314 303
Discount and Interchange Revenue, net 288 298 295
Protection Products Revenue 62 68 78
Loan Fee Income 87 80 85
Transaction Processing Revenue 39 40 46
Other Income 27 53 48
Total Other Income 503 539 552
 
Revenue Net of Interest Expense 2,188 2,175 2,190
 
Provision for Loan Losses 332 306 354
 
Employee Compensation and Benefits 337 326 320
Marketing and Business Development 168 199 182
Information Processing & Communications 84 90 87
Professional Fees 160 153 111
Premises and Equipment 24 23 23
Other Expense 109 136 104
Total Other Expense 882 927 827
     
Income Before Income Taxes 974 942 1,009
Tax Expense 362 343 365
Net Income $612 $599 $644
 
Net Income Allocated to Common Stockholders $599 $586 $630
 
 

PER SHARE STATISTICS

Basic EPS $1.38 $1.33 $1.37
Diluted EPS $1.38 $1.33 $1.37
Common Stock Price (period end) $51.99 $57.62 $64.39
Book Value per share $26.32 $25.75 $24.82
 

SEGMENT- INCOME BEFORE INCOME TAXES

Direct Banking $950 $914 $981
Payment Services 24 28 28
Total $974 $942 $1,009
 

BALANCE SHEET SUMMARY

Total Assets $85,611 $84,911 $80,596
Total Liabilities 74,308 73,648 69,295
Total Equity 11,303 11,263 11,301
Total Liabilities and Stockholders' Equity $85,611 $84,911 $80,596
 

TOTAL LOAN RECEIVABLES

Ending Loans 1, 2 $70,078 $69,028 $67,366
Average Loans 1, 2 $69,462 $68,100 $66,481
 
Interest Yield 11.37% 11.35% 11.36%
Gross Principal Charge-off Rate 2.51% 2.76% 2.63%
Gross Principal Charge-off Rate excluding PCI Loans 3 2.64% 2.91% 2.79%
Net Principal Charge-off Rate 1.85% 2.05% 1.94%
Net Principal Charge-off Rate excluding PCI Loans 3 1.94% 2.16% 2.06%
Delinquency Rate (over 30 days) excluding PCI Loans 3,4 1.60% 1.49% 1.64%
Delinquency Rate (over 90 days) excluding PCI Loans 3,4 0.72% 0.69% 0.75%
Gross Principal Charge-off Dollars $440 $469 $440
Net Principal Charge-off Dollars $324 $347 $324
Net Interest and Fee Charge-off Dollars $81 $87 $85
Loans Delinquent Over 30 Days 3,4 $1,070 $980 $1,043
Loans Delinquent Over 90 Days 3,4 $481 $450 $476
 
Allowance for Loan Loss (period end) $1,743 $1,735 $1,644
Change in Loan Loss Reserves $8 ($41) $30
Reserve Rate 2.49% 2.51% 2.44%
Reserve Rate Excluding PCI Loans 3 2.57% 2.60% 2.54%
 

CREDIT CARD LOANS

Ending Loans $55,655 $54,949 $53,699
Average Loans $55,281 $53,987 $53,130
 
Interest Yield 12.03% 12.04% 12.04%
Gross Principal Charge-off Rate 2.83% 3.14% 2.99%
Net Principal Charge-off Rate 2.04% 2.28% 2.16%
Delinquency Rate (over 30 days) 4 1.65% 1.55% 1.71%
Delinquency Rate (over 90 days) 4 0.78% 0.75% 0.82%
Gross Principal Charge-off Dollars $394 $423 $400
Net Principal Charge-off Dollars $285 $307 $289
Loans Delinquent Over 30 Days 4 $919 $850 $920
Loans Delinquent Over 90 Days 4 $437 $414 $440
 
Allowance for Loan Loss (period end) $1,459 $1,441 $1,388
Change in Loan Loss Reserves $18 ($51) $29
Reserve Rate 2.62% 2.62% 2.58%
 
Total Discover Card Volume $32,971 $32,299 $32,091
Discover Card Sales Volume $30,374 $30,017 $29,609
Rewards Rate 1.07% 1.05% 1.02%
 

NETWORK VOLUME

PULSE Network $36,267 $37,162 $40,636
Network Partners 3,206 3,536 2,185
Diners Club International 5 6,560 6,773 6,777
Total Payment Services 46,033 47,471 49,598
Discover Network - Proprietary 31,408 31,084 30,577
Total $77,441 $78,555 $80,175
 

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, we implemented payment processing changes 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