Net Income Included One-Time Charges of $189 Million Resulting from
Actions Taken by the Company in Connection with the Tax Cuts and Jobs Act
RIVERWOODS, Ill.--(BUSINESS WIRE)--
Discover Financial Services (NYSE: DFS) today reported net income of
$387 million or $0.99 per diluted share for the fourth quarter of 2017,
as compared to $563 million or $1.40 per diluted share for the fourth
quarter of 2016. The company’s return on equity for the fourth quarter
of 2017 was 14%. Net income included non-recurring charges of $189
million resulting from actions taken by the company in connection with
the Tax Cuts and Jobs Act ("Tax Act"). These charges had the effect of
reducing diluted earnings per share by $0.52.
Fourth Quarter Highlights
-
Total loans grew $7.0 billion (9%) from the prior year to $84.2
billion.
-
Credit card loans grew $5.8 billion (9%) to $67.3 billion, on Discover
card sales volume of $35.3 billion.
-
Total net charge-off rate excluding PCI loans increased 53 basis
points from the prior year to 2.92% and the total 30+ day delinquency
rate excluding PCI loans increased 23 basis points from the prior year
to 2.20%.
-
Consumer deposits grew $3.4 billion (9%) from the prior year to $39.4
billion.
-
Payment Services transaction dollar volume was $54.0 billion, up 17%
from the prior year.
-
Income tax expense includes a one-time adjustment of $179 million to
reflect the impact of the Tax Act.
“Our earnings in the fourth quarter and full year were driven by strong
loan and revenue growth across our businesses, the result of continued
execution of our strategy,” said David Nelms, chairman and CEO of
Discover. “As we move forward in 2018, this strong momentum, enhanced by
the favorable economic environment, should position us well for
sustained growth, strong ROE and continued return of excess capital to
shareholders. While the new tax law impacted the current quarter, I am
excited about the opportunity it provides to further invest in growth,
our people and our communities."
Segment Results:
Direct Banking
Direct Banking pretax income of $870 million in the quarter rose by $2
million from the prior year as increased revenue was largely offset by
higher provision for loan losses and operating expenses.
Total loans ended the quarter at $84.2 billion, up 9% compared to the
prior year. Credit card loans ended the quarter at $67.3 billion, up 9%
from the prior year. Personal loans increased $893 million (14%) from
the prior year. Private student loans increased $183 million (2%)
year-over-year, and grew $683 million (11%) excluding purchased student
loans.
Net interest income increased $228 million (12%) from the prior year,
driven by loan growth and a higher net interest margin. Net interest
margin was 10.28%, up 21 basis points from the prior year. Card yield
was 12.79%, an increase of 17 basis points from the prior year because
of increases in the prime rate, partially offset by higher interest
charge-offs and a change in portfolio mix. Interest expense as a percent
of total loans increased 16 basis points from the prior year, as higher
market rates were partially offset by tighter credit spreads on
refinanced long-term debt.
Other income increased $22 million (5%) from the prior year, driven by
higher discount and interchange revenue.
The delinquency rate for credit card loans over 30 days past due was
2.28%, up 24 basis points from the prior year and 14 basis points from
the prior quarter. The credit card net charge-off rate for the fourth
quarter was 3.03%, up 56 basis points from the prior year and 23 basis
points from the prior quarter. The student loan net charge-off rate
excluding purchased credit-impaired ("PCI") loans was 1.34%, down 8
basis points from the prior year. The personal loans net charge-off rate
of 3.62% increased by 92 basis points from the prior year. Net
charge-off rates were generally higher because of supply-driven credit
normalization and the seasoning of loan growth from the last few years.
Provision for loan losses of $678 million increased $99 million from the
prior year due to higher net charge-offs, partially offset by a smaller
reserve build. The reserve build for the fourth quarter of 2017 was $94
million, compared to a reserve build of $144 million in the fourth
quarter of 2016.
Expenses increased $149 million from the prior year as a result of
higher employee compensation, marketing and professional fees. Employee
compensation increased as a result of higher staffing levels and higher
average salaries. In addition, employee compensation includes a $16
million charge associated with a one-time bonus granted to eligible
employees following passage of the new tax legislation. Marketing
expenses increased as a result of higher acquisition costs and brand
advertising relative to the fourth quarter of 2016. The increase in
professional fees is primarily due to investments in technology and
analytic capabilities.
Payment Services
Payment Services pretax income was $29 million in the quarter, up $14
million from the prior year, primarily driven by lower operating
expenses as well as higher transaction processing and interchange
revenue.
Payment Services transaction dollar volume was $54.0 billion, up 17%
versus the prior year. PULSE transaction dollar volume was up 19%
year-over-year. Diners Club volume increased 14% year-over-year driven
by continued strength of newer franchise relationships.
Share Repurchases
During the fourth quarter of 2017, the company repurchased approximately
8.1 million shares of common stock for $555 million. Shares of common
stock outstanding declined by 2.2% 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 24, 2018, 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 retail 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 tax reform, 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, 2016, and
"Management's Discussion & Analysis of Financial Condition and Results
of Operations" in the company's Quarterly Report on Form 10-Q for the
quarters ended September 30, 2017, June 30, 2017, and March 31, 2017,
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
|
|
|
|
December
|
|
|
September
|
|
|
December
|
|
|
|
31, 2017
|
|
|
30, 2017
|
|
|
31, 2016
|
EARNINGS SUMMARY
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
$2,556
|
|
|
$2,476
|
|
|
$2,258
|
Interest Expense
|
|
|
436
|
|
|
426
|
|
|
366
|
Net Interest Income
|
|
|
2,120
|
|
|
2,050
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
Discount/Interchange Revenue
|
|
|
717
|
|
|
675
|
|
|
665
|
Rewards Cost
|
|
|
434
|
|
|
417
|
|
|
411
|
Discount and Interchange Revenue, net
|
|
|
283
|
|
|
258
|
|
|
254
|
Protection Products Revenue
|
|
|
54
|
|
|
55
|
|
|
59
|
Loan Fee Income
|
|
|
96
|
|
|
95
|
|
|
93
|
Transaction Processing Revenue
|
|
|
43
|
|
|
43
|
|
|
40
|
Other Income
|
|
|
18
|
|
|
24
|
|
|
20
|
Total Other Income
|
|
|
494
|
|
|
475
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
Revenue Net of Interest Expense
|
|
|
2,614
|
|
|
2,525
|
|
|
2,358
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
|
|
|
679
|
|
|
674
|
|
|
578
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits
|
|
|
411
|
|
|
371
|
|
|
352
|
Marketing and Business Development
|
|
|
213
|
|
|
203
|
|
|
176
|
Information Processing & Communications
|
|
|
80
|
|
|
78
|
|
|
81
|
Professional Fees
|
|
|
189
|
|
|
163
|
|
|
152
|
Premises and Equipment
|
|
|
26
|
|
|
25
|
|
|
23
|
Other Expense
|
|
|
117
|
|
|
108
|
|
|
113
|
Total Other Expense
|
|
|
1,036
|
|
|
948
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
899
|
|
|
903
|
|
|
883
|
Tax Expense
|
|
|
512
|
|
|
301
|
|
|
320
|
Net Income
|
|
|
$387
|
|
|
$602
|
|
|
$563
|
|
|
|
|
|
|
|
|
|
|
Net Income Allocated to Common Stockholders
|
|
|
$359
|
|
|
$589
|
|
|
$550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE STATISTICS
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
$0.99
|
|
|
$1.59
|
|
|
$1.40
|
Diluted EPS
|
|
|
$0.99
|
|
|
$1.59
|
|
|
$1.40
|
Common Stock Price (period end)
|
|
|
$76.92
|
|
|
$64.48
|
|
|
$72.09
|
Book Value per share
|
|
|
$30.43
|
|
|
$30.56
|
|
|
$29.13
|
|
|
|
|
|
|
|
|
|
|
SEGMENT- INCOME BEFORE INCOME TAXES
|
|
|
|
|
|
|
|
|
|
Direct Banking
|
|
|
$870
|
|
|
$867
|
|
|
$868
|
Payment Services
|
|
|
29
|
|
|
36
|
|
|
15
|
Total
|
|
|
$899
|
|
|
$903
|
|
|
$883
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET SUMMARY
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
$100,087
|
|
|
$97,608
|
|
|
$92,308
|
Total Liabilities
|
|
|
89,195
|
|
|
86,421
|
|
|
80,985
|
Total Equity
|
|
|
10,892
|
|
|
11,187
|
|
|
11,323
|
Total Liabilities and Stockholders' Equity
|
|
|
$100,087
|
|
|
$97,608
|
|
|
$92,308
|
|
|
|
|
|
|
|
|
|
|
TOTAL LOAN RECEIVABLES
|
|
|
|
|
|
|
|
|
|
Ending Loans 1, 2
|
|
|
$84,248
|
|
|
$80,443
|
|
|
$77,254
|
Average Loans 1, 2
|
|
|
$81,802
|
|
|
$79,189
|
|
|
$74,775
|
|
|
|
|
|
|
|
|
|
|
Interest Yield
|
|
|
12.14%
|
|
|
12.15%
|
|
|
11.88%
|
Gross Principal Charge-off Rate
|
|
|
3.45%
|
|
|
3.26%
|
|
|
2.91%
|
Gross Principal Charge-off Rate excluding PCI Loans 3
|
|
|
3.54%
|
|
|
3.35%
|
|
|
3.02%
|
Net Principal Charge-off Rate
|
|
|
2.85%
|
|
|
2.63%
|
|
|
2.31%
|
Net Principal Charge-off Rate excluding PCI Loans 3
|
|
|
2.92%
|
|
|
2.71%
|
|
|
2.39%
|
Delinquency Rate (over 30 days) excluding PCI Loans 3
|
|
|
2.20%
|
|
|
2.05%
|
|
|
1.97%
|
Delinquency Rate (over 90 days) excluding PCI Loans 3
|
|
|
0.99%
|
|
|
0.91%
|
|
|
0.87%
|
Gross Principal Charge-off Dollars
|
|
|
$711
|
|
|
$651
|
|
|
$548
|
Net Principal Charge-off Dollars
|
|
|
$583
|
|
|
$527
|
|
|
$435
|
Net Interest and Fee Charge-off Dollars
|
|
|
$119
|
|
|
$107
|
|
|
$94
|
Loans Delinquent Over 30 Days 3
|
|
|
$1,806
|
|
|
$1,605
|
|
|
$1,469
|
Loans Delinquent Over 90 Days 3
|
|
|
$815
|
|
|
$709
|
|
|
$652
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Loss (period end)
|
|
|
$2,621
|
|
|
$2,531
|
|
|
$2,167
|
Reserve Change Build/ (Release) 4
|
|
|
$96
|
|
|
$147
|
|
|
$143
|
Reserve Rate
|
|
|
3.11%
|
|
|
3.15%
|
|
|
2.80%
|
Reserve Rate excluding PCI Loans 3
|
|
|
3.15%
|
|
|
3.20%
|
|
|
2.86%
|
|
|
|
|
|
|
|
|
|
|
CREDIT CARD LOANS
|
|
|
|
|
|
|
|
|
|
Ending Loans
|
|
|
$67,291
|
|
|
$63,475
|
|
|
$61,522
|
Average Loans
|
|
|
$64,791
|
|
|
$62,647
|
|
|
$59,121
|
|
|
|
|
|
|
|
|
|
|
Interest Yield
|
|
|
12.79%
|
|
|
12.83%
|
|
|
12.62%
|
Gross Principal Charge-off Rate
|
|
|
3.73%
|
|
|
3.53%
|
|
|
3.19%
|
Net Principal Charge-off Rate
|
|
|
3.03%
|
|
|
2.80%
|
|
|
2.47%
|
Delinquency Rate (over 30 days)
|
|
|
2.28%
|
|
|
2.14%
|
|
|
2.04%
|
Delinquency Rate (over 90 days)
|
|
|
1.12%
|
|
|
1.02%
|
|
|
0.97%
|
Gross Principal Charge-off Dollars
|
|
|
$612
|
|
|
$555
|
|
|
$474
|
Net Principal Charge-off Dollars
|
|
|
$496
|
|
|
$439
|
|
|
$369
|
Loans Delinquent Over 30 Days
|
|
|
$1,532
|
|
|
$1,359
|
|
|
$1,252
|
Loans Delinquent Over 90 Days
|
|
|
$751
|
|
|
$646
|
|
|
$597
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Loss (period end)
|
|
|
$2,147
|
|
|
$2,091
|
|
|
$1,790
|
Reserve Change Build/ (Release)
|
|
|
$56
|
|
|
$111
|
|
|
$129
|
Reserve Rate
|
|
|
3.19%
|
|
|
3.29%
|
|
|
2.91%
|
|
|
|
|
|
|
|
|
|
|
Total Discover Card Volume
|
|
|
$38,574
|
|
|
$35,581
|
|
|
$35,440
|
Discover Card Sales Volume
|
|
|
$35,339
|
|
|
$32,161
|
|
|
$32,486
|
Rewards Rate
|
|
|
1.23%
|
|
|
1.30%
|
|
|
1.26%
|
|
|
|
|
|
|
|
|
|
|
NETWORK VOLUME
|
|
|
|
|
|
|
|
|
|
PULSE Network
|
|
|
$42,386
|
|
|
$39,828
|
|
|
$35,554
|
Network Partners
|
|
|
3,280
|
|
|
3,811
|
|
|
3,235
|
Diners Club International 5
|
|
|
8,373
|
|
|
7,989
|
|
|
7,334
|
Total Payment Services
|
|
|
54,039
|
|
|
51,628
|
|
|
46,123
|
Discover Network - Proprietary
|
|
|
36,267
|
|
|
33,576
|
|
|
34,029
|
Total
|
|
|
$90,306
|
|
|
$85,204
|
|
|
$80,152
|
1 Total Loans includes Home Equity 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 Allowance for loan loss includes the net change in
reserves on PCI pools having no remaining non-accretable
difference which does not impact the reserve change
build/(release) in provision for loan losses.
|
|
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).
|
|
View source version on businesswire.com: http://www.businesswire.com/news/home/20180124006230/en/
Source: Discover Financial Services