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Discover Financial Services Reports First Quarter Net Income of $726 Million or $2.15 Per Diluted Share

April 25, 2019

RIVERWOODS, Ill.--(BUSINESS WIRE)-- Discover Financial Services (NYSE: DFS):

 
First Quarter Results
    2019   2018   YOY Change
Total loans, end of period (in billions)   $88.7   $82.7   7%
Total revenue net of interest expense (in millions)   $2,763   $2,575   7%
Total net charge-off rate   3.25%   3.09%   16 bps
Net income (in millions)   $726   $666   9%
Diluted EPS   $2.15   $1.82   18%
     

Discover Financial Services (NYSE: DFS) today reported net income of $726 million or $2.15 per diluted share for the first quarter of 2019, as compared to $666 million or $1.82 per diluted share for the first quarter of 2018. The company’s return on equity for the first quarter of 2019 was 26%.

“Once again, this quarter showed the power of the Discover business model to deliver outstanding shareholder returns. Our solid execution on growth initiatives, effective credit risk management and operating efficiency drove strong profitability," said Roger Hochschild, CEO and president of Discover. "The Discover brand and our reputation for outstanding service continue to resonate with our customers and drive competitive differentiation."

Segment Results:

Direct Banking

Direct Banking pretax income of $879 million increased by $68 million from the prior year driven by higher net interest income, partially offset by an increase in the provision for loan losses and higher operating expenses.

Total loans ended the quarter at $88.7 billion, up 7% compared to the prior year. Credit card loans ended the quarter at $70.8 billion, up 8% from the prior year. Personal loans increased $121 million, or 2%, from the prior year. Private student loans increased $230 million, or 2%, year-over-year, and grew $655 million, or 9%, excluding purchased student loans.

Net interest income increased $205 million, or 10%, from the prior year, driven by loan growth and net interest margin expansion. Net interest margin was 10.46%, up 23 basis points versus the prior year. Card yield was 13.42%, an increase of 57 basis points from the prior year as a result of increases in the prime rate, partially offset by a change in portfolio mix and higher interest charge-offs. Interest expense as a percent of total loans increased 59 basis points from the prior year, primarily as a result of higher market rates.

Other income decreased $22 million, or 6%, from the prior year, driven by higher promotional rewards cost.

The 30+ day delinquency rate for credit card loans was 2.45%, up 12 basis points from the prior year and 2 basis points from the prior quarter. The credit card net charge-off rate was 3.50%, up 18 basis points from the prior year and 27 basis points from the prior quarter. The student loan net charge-off rate, excluding PCI loans, was 0.79%, down 38 basis points from the prior year. The personal loans net charge-off rate of 4.53% increased by 50 basis points from the prior year. Net charge-off rates were generally higher because of the seasoning of recent years' loan growth and supply-driven credit normalization.

Provision for loan losses of $809 million increased $58 million from the prior year due to higher net charge-offs, partially offset by a lower reserve build. The reserve build for the first quarter of 2019 was $94 million, compared to a reserve build of $116 million in the first quarter of 2018.

Expenses increased $57 million from the prior year primarily as a result of higher employee compensation and information processing expenses. Employee compensation increased as a result of higher average salaries. Information processing increased due to ongoing investments in infrastructure and analytic capabilities.

Payment Services

Payment Services pretax income was $51 million in the quarter, up $6 million from the prior year, due to higher revenue driven by transaction volume growth.

Payment Services transaction dollar volume was $61.0 billion, up 9% versus the prior year. PULSE transaction dollar volume was up 9% year-over-year, which reflects the impact of new issuers on the network as well as strong growth from existing issuers. Network Partners volume increased by 24% from the prior year driven by AribaPay.

Share Repurchases

During the first quarter of 2019, the company repurchased approximately 7.2 million shares of common stock for $487 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 first quarter results on Thursday, April 25, 2019, at 5:00 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 Global Network, comprised of 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 around the world. 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, 2018, 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
March 31,   December 31,   March 31,
2019 2018 2018

EARNINGS SUMMARY

Interest Income $2,937 $2,907 $2,569
Interest Expense 632 605 469
Net Interest Income 2,305 2,302 2,100
 
Discount/Interchange Revenue 677 752 646
Rewards Cost 446 475 392
Discount and Interchange Revenue, net 231 277 254
Protection Products Revenue 49 50 53
Loan Fee Income 104 108 96
Transaction Processing Revenue 46 46 43
Other Income 28 24 29
Total Other Income 458 505 475
 
Revenue Net of Interest Expense 2,763 2,807 2,575
 
Provision for Loan Losses 809 800 751
 
Employee Compensation and Benefits 425 414 405
Marketing and Business Development 195 230 185
Information Processing & Communications 99 93 82
Professional Fees 167 190 155
Premises and Equipment 28 26 26
Other Expense 110 157 115
Total Other Expense 1,024 1,110 968
     
Income Before Income Taxes 930 897 856
Tax Expense 204 210 190
Net Income $726 $687 $666
 
Net Income Allocated to Common Stockholders $705 $681 $646
 
 

PER SHARE STATISTICS

Basic EPS $2.15 $2.04 $1.82
Diluted EPS $2.15 $2.03 $1.82
Common Stock Price (period end) $71.16 $58.98 $71.93
Book Value per share $34.60 $33.58 $30.93
 

SEGMENT- INCOME BEFORE INCOME TAXES

Direct Banking $879 $874 $811
Payment Services 51 23 45
Total $930 $897 $856
 

BALANCE SHEET SUMMARY

Total Assets $110,720 $109,553 $101,967
Total Liabilities 99,461 98,423 91,096
Total Equity 11,259 11,130 10,871
Total Liabilities and Stockholders' Equity $110,720 $109,553 $101,967
 

TOTAL LOAN RECEIVABLES

Ending Loans 1, 2 $88,743 $90,512 $82,744
Average Loans 1, 2 $89,353 $88,207 $83,254
 
Interest Yield 12.79% 12.59% 12.21%
Gross Principal Charge-off Rate 4.02% 3.77% 3.74%
Gross Principal Charge-off Rate excluding PCI Loans 3 4.10% 3.85% 3.84%
Net Principal Charge-off Rate 3.25% 3.08% 3.09%
Net Principal Charge-off Rate excluding PCI Loans 3 3.31% 3.14% 3.17%
Delinquency Rate (30 or more days) excluding PCI Loans 3 2.28% 2.31% 2.23%
Delinquency Rate (90 or more days) excluding PCI Loans 3 1.10% 1.08% 1.06%
Gross Principal Charge-off Dollars $887 $839 $769
Net Principal Charge-off Dollars $715 $686 $635
Net Interest and Fee Charge-off Dollars $158 $142 $136
Loans Delinquent 30 or more days 3 $1,988 $2,049 $1,800
Loans Delinquent 90 or more days 3 $959 $961 $855
 
Allowance for Loan Loss (period end) $3,134 $3,041 $2,736
Reserve Change Build/(Release) 4 $94 $114 $116
Reserve Rate 3.53% 3.36% 3.31%
Reserve Rate excluding PCI Loans 3 3.57% 3.39% 3.35%
 

CREDIT CARD LOANS

Ending Loans $70,789 $72,876 $65,577
Average Loans $71,363 $70,563 $65,983
 
Interest Yield 13.42% 13.20% 12.85%
Gross Principal Charge-off Rate 4.40% 4.01% 4.08%
Net Principal Charge-off Rate 3.50% 3.23% 3.32%
Delinquency Rate (30 or more days) 2.45% 2.43% 2.33%
Delinquency Rate (90 or more days) 1.26% 1.22% 1.18%
Gross Principal Charge-off Dollars $774 $713 $663
Net Principal Charge-off Dollars $616 $575 $540
Loans Delinquent 30 or more days $1,731 $1,772 $1,529
Loans Delinquent 90 or more days $891 $887 $777
 
Allowance for Loan Loss (period end) $2,622 $2,528 $2,252
Reserve Change Build/(Release) $94 $104 $105
Reserve Rate 3.70% 3.47% 3.43%
 
Total Discover Card Volume $36,386 $40,655 $34,327
Discover Card Sales Volume $32,899 $37,208 $30,850
Rewards Rate 1.35% 1.28% 1.27%
 

NETWORK VOLUME

PULSE Network $47,106 $47,082 $43,158
Network Partners 5,663 4,680 4,553
Diners Club International 5 8,278 8,700 8,390
Total Payment Services 61,047 60,462 56,101
Discover Network - Proprietary 34,051 38,502 32,382
Total $95,098 $98,964 $88,483
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).

Investors:
Craig Streem, 224-405-5923
craigstreem@discover.com

Media:
Jon Drummond, 224-405-1888
jondrummond@discover.com

Source: Discover Financial Services