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Discover Financial Services Reports First Quarter Net Income of $575 Million or $1.35 Per Diluted Share

April 19, 2016

RIVERWOODS, Ill.--(BUSINESS WIRE)-- Discover Financial Services (NYSE: DFS) today reported net income of $575 million or $1.35 per diluted share for the first quarter of 2016, as compared to $586 million or $1.28 per diluted share for the first quarter of 2015. The company's return on equity for the first quarter of 2016 was 21%.

First Quarter Highlights

  • Total loans grew $2.7 billion, or 4%, from the prior year to $70.3 billion.
  • Credit card loans grew $2.1 billion, or 4%, to $55.6 billion and Discover card sales volume increased 4% from the prior year.
  • Total net charge-off rate excluding PCI loans decreased 5 basis points from the prior year to 2.21% and the total delinquency rate excluding PCI loans over 30 days past due increased 7 basis points from the prior year to 1.64%.
  • Direct to consumer and affinity deposits grew $3.5 billion, or 12%, from the prior year to $32.8 billion.
  • Payment Services transaction dollar volume for the segment was $45.0 billion, down 10% from the prior year.

“We made progress on our priorities this quarter, most notably accelerating loan growth into our target range,” said David Nelms, chairman and CEO of Discover. “We continue to focus on generating strong returns while prudently managing credit and effectively deploying capital.”

Segment Results:

Direct Banking

Direct Banking pretax income of $882 million in the quarter increased $1 million from the prior year as higher net interest income was offset by lower other income, higher provision for loan losses and higher expenses.

Total loans ended the quarter at $70.3 billion, up 4% compared to the prior year. Credit card loans ended the quarter at $55.6 billion, up 4% from the prior year. Personal loans increased $469 million, or 9%, from the prior year. Relative to the prior year, private student loans increased $218 million, or 3%, and grew $772 million, or 15%, excluding purchased student loans.

Net interest income increased $121 million, or 7%, from the prior year, driven by loan growth and higher net interest margin. Net interest margin was 9.94%, up 24 basis points from the prior year. Card yield was 12.42%, an increase of 37 basis points from the prior year due to portfolio mix and the prime rate increase. Interest expense as a percent of total loans increased 11 basis points from the prior year primarily due to funding mix.

Other income decreased $62 million, or 13%, from the prior year driven primarily by the lack of mortgage origination revenue, as the prior year included $42 million in income related to the now discontinued mortgage operation. In addition, protection products revenue was lower by $10 million.

The delinquency rate for credit card loans over 30 days past due was 1.68%, up 4 basis points from the prior year and down 4 basis points from the prior quarter. Credit card net charge-off rate for the first quarter was 2.34%, down 6 basis points from the prior year and up 16 basis points from the prior quarter. The personal loans net charge-off rate of 2.45% increased by 23 basis points from the prior year. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 0.85%, down 18 basis points from the prior year.

Provision for loan losses of $423 million increased $35 million from the prior year primarily due to a larger reserve build. The reserve build for the first quarter of 2016 was $51 million, $23 million higher than the prior year reserve build primarily due to loan growth.

Expenses increased $23 million, or 3%, from the prior year mostly driven by higher regulatory and compliance costs. The prior year included $37 million in expenses related to the mortgage origination business that was subsequently closed. Professional fees increased primarily due to $30 million in look back related anti-money laundering remediation expenses. Employee compensation increased mostly due to higher staffing levels driven in part by regulatory and compliance activities.

Payment Services

Payment Services pretax income was $32 million in the quarter, up $5 million from the prior year as lower revenues were more than offset by expense reductions.

Payment Services transaction dollar volume was $45.0 billion, down 10% from the prior year. PULSE transaction dollar volume was down 15% year-over-year due to the loss of volume from a large debit issuer. Network Partners volume was up $0.6 billion, or 21%, from the prior year driven by AribaPay volume.

Share Repurchases

During the first quarter of 2016, the company repurchased approximately 9.0 million shares of common stock for $422 million. Net of employee issuance, shares of common stock outstanding declined by 1.8%, or 7.5 million shares, 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 19, 2016, at 4:00 p.m. Central time. Interested parties can listen to the conference call via a live audio webcast at https://investorrelations.discover.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 (https://investorrelations.discover.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; 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, 2015 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,
2016 2015 2015

EARNINGS SUMMARY

Interest Income $2,084 $2,061 $1,929
Interest Expense 334 329 300
Net Interest Income 1,750 1,732 1,629
 
Discount/Interchange Revenue 565 635 536
Rewards Cost 292 372 268
Discount and Interchange Revenue, net 273 263 268
Protection Products Revenue 61 60 71
Loan Fee Income 80 87 81
Transaction Processing Revenue 36 38 42
Other Income 24 25 80
Total Other Income 474 473 542
 
Revenue Net of Interest Expense 2,224 2,205 2,171
 
Provision for Loan Losses 424 484 390
 
Employee Compensation and Benefits 345 333 331
Marketing and Business Development 162 196 182
Information Processing & Communications 88 87 88
Professional Fees 160 170 127
Premises and Equipment 24 24 24
Other Expense 107 123 121
Total Other Expense 886 933 873
 
Income Before Income Taxes 914 788 908
Tax Expense 339 288 322
Net Income $575 $500 $586
 
Net Income Allocated to Common Stockholders $562 $488 $573
 
 

PER SHARE STATISTICS

Basic EPS $1.35 $1.15 $1.28
Diluted EPS $1.35 $1.14 $1.28
Common Stock Price (period end) $50.92 $53.62 $56.35
Book Value per share $27.32 $26.74 $25.22
 

SEGMENT- INCOME BEFORE INCOME TAXES

Direct Banking $882 $767 $881
Payment Services 32 21 27
Total $914 $788 $908
 

BALANCE SHEET SUMMARY

Total Assets $88,093 $86,799 $84,047
Total Liabilities 76,777 75,524 72,836
Total Equity 11,316 11,275 11,211
Total Liabilities and Stockholders' Equity $88,093 $86,799 $84,047
 

TOTAL LOAN RECEIVABLES

Ending Loans 1, 2 $70,320 $72,385 $67,648
Average Loans 1, 2 $70,837 $70,503 $68,148
 
Interest Yield 11.69% 11.49% 11.37%
Gross Principal Charge-off Rate 2.80% 2.65% 2.82%
Gross Principal Charge-off Rate excluding PCI Loans 3 2.92% 2.78% 2.98%
Net Principal Charge-off Rate 2.11% 2.02% 2.14%
Net Principal Charge-off Rate excluding PCI Loans 3 2.21% 2.11% 2.26%
Delinquency Rate (over 30 days) excluding PCI Loans 3 1.64% 1.67% 1.57%
Delinquency Rate (over 90 days) excluding PCI Loans 3 0.79% 0.76% 0.78%
Gross Principal Charge-off Dollars $493 $472 $474
Net Principal Charge-off Dollars $372 $358 $360
Net Interest and Fee Charge-off Dollars $86 $86 $95
Loans Delinquent Over 30 Days 3 $1,105 $1,153 $1,006
Loans Delinquent Over 90 Days 3 $531 $530 $500
 
Allowance for Loan Loss (period end) $1,921 $1,869 $1,776
Change in Loan Loss Reserves $52 $126 $30
Reserve Rate 2.73% 2.58% 2.63%
Reserve Rate Excluding PCI Loans 3 2.80% 2.65% 2.72%
 

CREDIT CARD LOANS

Ending Loans $55,620 $57,896 $53,499
Average Loans $56,124 $56,050 $54,038
 
Interest Yield 12.42% 12.20% 12.05%
Gross Principal Charge-off Rate 3.15% 2.94% 3.21%
Net Principal Charge-off Rate 2.34% 2.18% 2.40%
Delinquency Rate (over 30 days) 1.68% 1.72% 1.64%
Delinquency Rate (over 90 days) 0.86% 0.85% 0.86%
Gross Principal Charge-off Dollars $439 $415 $428
Net Principal Charge-off Dollars $326 $309 $319
Loans Delinquent Over 30 Days $934 $995 $879
Loans Delinquent Over 90 Days $480 $490 $458
 
Allowance for Loan Loss (period end) $1,590 $1,554 $1,492
Change in Loan Loss Reserves $36 $95 $18
Reserve Rate 2.86% 2.68% 2.79%
 
Total Discover Card Volume $30,004 $33,830 $28,725
Discover Card Sales Volume $27,552 $31,672 $26,379
Rewards Rate 1.06% 1.18% 1.02%
 

NETWORK VOLUME

PULSE Network $34,680 $35,902 $40,814
Network Partners 3,572 3,274 2,949
Diners Club International 4 6,738 6,760 6,474
Total Payment Services 44,990 45,936 50,237
Discover Network - Proprietary 28,576 32,910 27,324
Total $73,566 $78,846 $77,561
 

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).

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