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Discover Financial Services Reports Fourth Quarter Net Income of $500 Million or $1.14 Per Diluted Share

January 27, 2016

RIVERWOODS, Ill.--(BUSINESS WIRE)--Jan. 27, 2016-- Discover Financial Services (NYSE: DFS) today reported net income of $500 million or $1.14 per diluted share for the fourth quarter of 2015, as compared to $404 million or $0.87 per diluted share for the fourth quarter of 2014. The company's return on equity for the fourth quarter of 2015 was 18%.

Fourth Quarter Highlights

  • Total loans grew $2.4 billion, or 3.5%, from the prior year to $72.4 billion.
  • Credit card loans grew $1.8 billion, or 3.1%, to $57.9 billion and Discover card sales volume increased 2.6% from the prior year or approximately 5% excluding gas purchases.
  • Total net charge-off rate excluding PCI loans decreased 7 basis points from the prior year to 2.11% and the total delinquency rate excluding PCI loans over 30 days past due increased 1 basis point from the prior year to 1.67%.
  • Reserve build was $126 million in the quarter, up $24 million from the prior year.
  • Payment Services transaction dollar volume for the segment was $45.9 billion, down 10% from the prior year.

"We once again delivered a solid return on equity in the fourth quarter. While we achieved record annual originations in both Student Loans and Personal Loans, card loan growth was at the low end of our target range, slower than we'd like," said David Nelms, chairman and CEO of Discover. "We are taking steps to accelerate card loan growth in 2016 while staying disciplined on credit and continuing to execute on our Payments strategy."

Segment Results:

Direct Banking

Direct Banking pretax income of $767 million in the quarter increased $121 million, or 19%, from the prior year. The prior year results included two one-time items: a $178 million one-time charge related to the elimination of the credit card rewards forfeiture reserve and a $27 million charge related to a goodwill impairment associated with the Discover Home Loans unit that was subsequently closed.

Total loans ended the quarter at $72.4 billion, up 3.5% compared to the prior year. Credit card loans ended the quarter at $57.9 billion, up 3.1% from the prior year. Personal loans increased $483 million, or 9.6%, from the prior year and private student loans increased $253 million, or 3.0%, from the prior year. Excluding purchased student loans, private student loans grew $797 million, or 16.4%, from the prior year.

Net interest income increased $60 million, or 4%, from the prior year, driven by loan growth. Net interest margin was 9.75%, down 2 basis points from the prior year. Total yield was 11.60%, an increase of 7 basis points from the prior year primarily due to card portfolio mix. Interest expense as a percent of total loans increased 8 basis points from the prior year due to funding mix and higher rates.

Other income increased $122 million, or 43%, from the prior year despite the run-off in mortgage origination income and lower protection products revenue as the prior year other income included the one-time charge related to the elimination of the credit card rewards forfeiture reserve.

The delinquency rate for credit card loans over 30 days past due was 1.72%, down 1 basis point from the prior year and up 7 basis points from the prior quarter. Credit card net charge-off rate for the fourth quarter was 2.18%, down 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 1.30%, down 10 basis points from the prior year. The personal loans net charge-off rate of 2.28% increased by 8 basis points from the prior year.

Provision for loan losses of $486 million increased $32 million from the prior year primarily due to a larger reserve build. The reserve build for the fourth quarter of 2015 was $128 million, versus a $101 million reserve build in the prior year.

Expenses increased $29 million, or 3%, from the prior year mostly driven by higher regulatory and compliance costs.

Professional fees increased primarily due to $37 million in look back related anti-money laundering remediation expenses.

Employee compensation increased in part due to increased staffing driven in part by regulatory and compliance activities. The prior year expenses included the goodwill impairment charge related to the Discover Home Loans unit that was subsequently closed.

Payment Services

Payment Services pretax income was $21 million in the quarter, up $19 million from the prior year as the prior year included a $21 million charge from a fair value adjustment related to Diners Club Italy being classified as held-for-sale.

Payment Services transaction dollar volume was $45.9 billion, down 10% from the prior year. PULSE transaction dollar volume was down 14% year-over-year due to the loss of volume from a large debit issuer. Network Partners volume was up $1.0 billion, or 45%, from the prior year driven by AribaPay volume.

Share Repurchases

During the fourth 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 fourth quarter results on Wednesday, January 27, 2016, 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; 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 Reports on Form 10-Q for the quarters ended March 31, 2015, June 30, 2015 and September 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



Dec 31,     Sep 30,    

Dec 31,




2015

2015

2014

EARNINGS SUMMARY










Interest Income

$2,061

$2,008

$1,974
Interest Expense

329

323

302
Net Interest Income

1,732

1,685

1,672









 
Discount/Interchange Revenue

635

614

620
Rewards Cost

372

326

517
Discount and Interchange Revenue, net

263

288

103
Protection Products Revenue

60

62

75
Loan Fee Income

87

87

86
Transaction Processing Revenue

38

39

46
Other Income

25

27

55
Total Other Income

473

503

365









 
Revenue Net of Interest Expense

2,205

2,188

2,037









 
Provision for Loan Losses

484

332

457









 
Employee Compensation and Benefits

333

337

314
Marketing and Business Development

196

168

216
Information Processing & Communications

87

84

88
Professional Fees

170

160

128
Premises and Equipment

24

24

24
Other Expense

123

109

162
Total Other Expense

933

882

932



 

 

 
Income Before Income Taxes

788

974

648
Tax Expense

288

362

244
Net Income

$500

$612

$404









 
Net Income Allocated to Common Stockholders

$488

$599

$392









 









 

PER SHARE STATISTICS










Basic EPS

$1.15

$1.38

$0.87
Diluted EPS

$1.14

$1.38

$0.87
Common Stock Price (period end)

$53.62

$51.99

$65.49
Book Value per share

$26.74

$26.32

$24.79









 

SEGMENT- INCOME BEFORE INCOME TAXES










Direct Banking

$767

$950

$646
Payment Services

21

24

2
Total

$788

$974

$648









 

BALANCE SHEET SUMMARY










Total Assets

$86,936

$85,611

$83,126
Total Liabilities

75,661

74,308

71,992
Total Equity

11,275

11,303

11,134
Total Liabilities and Stockholders' Equity

$86,936

$85,611

$83,126









 

TOTAL LOAN RECEIVABLES










Ending Loans 1, 2

$72,385

$70,078

$69,969
Average Loans 1, 2

$70,503

$69,462

$67,930









 
Interest Yield

11.49%

11.37%

11.40%
Gross Principal Charge-off Rate

2.65%

2.51%

2.70%
Gross Principal Charge-off Rate excluding PCI Loans 3

2.78%

2.64%

2.86%
Net Principal Charge-off Rate

2.02%

1.85%

2.06%
Net Principal Charge-off Rate excluding PCI Loans 3

2.11%

1.94%

2.18%

Delinquency Rate (over 30 days) excluding PCI Loans 3



1.67%

1.60%

1.66%

Delinquency Rate (over 90 days) excluding PCI Loans 3



0.76%

0.72%

0.78%
Gross Principal Charge-off Dollars

$472

$440

$463
Net Principal Charge-off Dollars

$358

$324

$355
Net Interest and Fee Charge-off Dollars

$86

$81

$91

Loans Delinquent Over 30 Days 3



$1,153

$1,070

$1,100

Loans Delinquent Over 90 Days 3



$530

$481

$517









 
Allowance for Loan Loss (period end)

$1,869

$1,743

$1,746
Change in Loan Loss Reserves

$126

$8

$102
Reserve Rate

2.58%

2.49%

2.50%
Reserve Rate Excluding PCI Loans 3

2.65%

2.57%

2.59%









 

CREDIT CARD LOANS










Ending Loans

$57,896

$55,655

$56,128
Average Loans

$56,050

$55,281

$54,169










 
Interest Yield

12.20%

12.03%

12.08%
Gross Principal Charge-off Rate

2.94%

2.83%

3.03%
Net Principal Charge-off Rate

2.18%

2.04%

2.26%

Delinquency Rate (over 30 days)



1.72%

1.65%

1.73%

Delinquency Rate (over 90 days)



0.85%

0.78%

0.85%
Gross Principal Charge-off Dollars

$415

$394

$413
Net Principal Charge-off Dollars

$309

$285

$309

Loans Delinquent Over 30 Days



$995

$919

$971

Loans Delinquent Over 90 Days



$490

$437

$480









 
Allowance for Loan Loss (period end)

$1,554

$1,459

$1,474
Change in Loan Loss Reserves

$95

$18

$86
Reserve Rate

2.68%

2.62%

2.63%









 
Total Discover Card Volume

$33,830

$32,971

$33,211
Discover Card Sales Volume

$31,672

$30,374

$30,871
Rewards Rate

1.18%

1.07%

1.67%









 

NETWORK VOLUME










PULSE Network

$35,902

$36,267

$41,788
Network Partners

3,274

3,206

2,263

Diners Club International 4



6,760

6,560

6,933
Total Payment Services

45,936

46,033

50,984
Discover Network - Proprietary

32,910

31,408

32,005
Total

$78,846

$77,441

$82,989
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