RIVERWOODS, Ill.--(BUSINESS WIRE)--
Discover Financial Services (NYSE: DFS):
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Fourth Quarter Results
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2018
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2017
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YOY Change
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Total loans EOP (in billions)
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$90.5
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$84.2
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7%
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Total revenue net of interest expense (in millions)
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$2,807
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$2,614
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7%
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Total net charge-off rate
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3.08%
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2.85%
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23 bps
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Net income (in millions)
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$687
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$387
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78%
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Diluted EPS
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$2.03
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$0.99
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105%
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Discover Financial Services (NYSE: DFS) today reported net income of
$687 million or $2.03 per diluted share for the fourth quarter of 2018,
as compared to $387 million or $0.99 per diluted share for the fourth
quarter of 2017. The company’s return on equity for the fourth quarter
of 2018 was 25%. Net income in the fourth quarter of 2017 included
non-recurring charges of $189 million resulting from actions taken by
the company in connection with the Tax Cuts and Jobs Act. These charges
had the effect of reducing diluted earnings per share by $0.52 in 2017.
Commenting on the company's results, Roger Hochschild, CEO and president
of Discover, said, “Our disciplined focus on delivering profitable
growth continued to drive solid operating performance and strong returns
in the fourth quarter. For the full year, our results were characterized
by robust returns even as credit normalization continued, and our
ongoing investments in technology and global merchant acceptance will
enhance customer experience, scale, and overall performance. We believe
these initiatives will set us up for continued growth and
industry-leading returns going forward."
Segment Results:
Direct Banking
Direct Banking pretax income of $874 million increased by $4 million
from the prior year driven by higher net interest income, largely offset
by an increase in the provision for loan losses and higher operating
expenses.
Total loans ended the quarter at $90.5 billion, up 7% compared to the
prior year. Credit card loans ended the quarter at $72.9 billion, up 8%
from the prior year. Personal loans increased $80 million, or 1%, from
the prior year. Private student loans increased $205 million, or 2%,
year-over-year, and grew $652 million, or 9%, excluding purchased
student loans.
Net interest income increased $181 million, or 9%, from the prior year,
driven by loan growth and net interest margin expansion. Net interest
margin was 10.35%, up 7 basis points versus the prior year. Card yield
was 13.20%, an increase of 41 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 61 basis points from the prior year,
primarily as a result of higher market rates.
Other income increased $9 million, or 2%, from the prior year, driven by
higher discount and interchange revenue.
The 30+ day delinquency rate for credit card loans was 2.43%, up 15
basis points from the prior year and 11 basis points from the prior
quarter. The credit card net charge-off rate was 3.23%, up 20 basis
points from the prior year and 9 basis points from the prior quarter.
The student loan net charge-off rate, excluding PCI loans, was 1.05%,
down 29 basis points from the prior year. The personal loans net
charge-off rate of 4.49% increased by 87 basis points from the prior
year. Net charge-off rates were generally higher because of
supply-driven credit normalization and the seasoning of recent years'
loan growth.
Provision for loan losses of $800 million increased $122 million from
the prior year due to higher net charge-offs and a higher reserve build.
The reserve build for the fourth quarter of 2018 was $120 million,
compared to a reserve build of $94 million in the fourth quarter of 2017.
Expenses increased $64 million from the prior year due to incremental
investments to enhance global merchant acceptance, marketing expenses
and information processing. Marketing expenses increased as a result of
higher investment in brand and digital marketing. Information processing
increased due to investments in infrastructure and analytic capabilities.
Payment Services
Payment Services pretax income was $23 million in the quarter, down $6
million from the prior year, driven by higher expense investment to
support business growth and infrastructure, partially offset by higher
revenue driven by transaction volume growth.
Payment Services transaction dollar volume was $60.5 billion, up 12%
versus the prior year. PULSE transaction dollar volume was up 11%
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 43% from the prior year driven by AribaPay.
Share Repurchases
During the fourth quarter of 2018, the company repurchased approximately
6.7 million shares of common stock for $466 million. Shares of common
stock outstanding declined by 2.1% from the prior quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its fourth quarter
results on Thursday, January 24, 2019, 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 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 in 190
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, 2017, 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 March 31, 2018, June 30, 2018, and September 30, 2018,
which are filed with the SEC and available at the SEC's internet site (http://www.sec.gov).
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DISCOVER FINANCIAL SERVICES
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(unaudited, in millions, except per share statistics)
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Quarter Ended
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December
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September
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December 31,
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31, 2018
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30, 2018
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2017
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EARNINGS SUMMARY
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Interest Income
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$2,907
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$2,781
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$2,556
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Interest Expense
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605
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558
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436
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Net Interest Income
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2,302
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2,223
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2,120
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Discount/Interchange Revenue
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752
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753
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717
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Rewards Cost
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475
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473
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434
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Discount and Interchange Revenue, net
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277
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280
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283
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Protection Products Revenue
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50
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51
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54
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Loan Fee Income
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108
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103
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96
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Transaction Processing Revenue
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46
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47
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43
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Other Income
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24
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20
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18
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Total Other Income
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505
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501
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494
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Revenue Net of Interest Expense
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2,807
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2,724
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2,614
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Provision for Loan Losses
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800
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742
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679
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Employee Compensation and Benefits
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414
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408
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411
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Marketing and Business Development
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230
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218
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213
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Information Processing & Communications
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93
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89
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80
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Professional Fees
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190
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166
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189
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Premises and Equipment
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26
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26
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26
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Other Expense
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157
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108
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117
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Total Other Expense
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1,110
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1,015
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1,036
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Income Before Income Taxes
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897
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967
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899
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Tax Expense
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210
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247
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512
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Net Income
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$687
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$720
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$387
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Net Income Allocated to Common Stockholders
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$681
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$699
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$359
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PER SHARE STATISTICS
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Basic EPS
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$2.04
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$2.05
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$0.99
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Diluted EPS
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$2.03
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$2.05
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$0.99
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Common Stock Price (period end)
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$58.98
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$76.45
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$76.92
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Book Value per share
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$33.58
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$32.60
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$30.43
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SEGMENT-INCOME BEFORE INCOME TAXES
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Direct Banking
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$874
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$923
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$870
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Payment Services
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23
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44
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29
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Total
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$897
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$967
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$899
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BALANCE SHEET SUMMARY
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Total Assets
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$109,553
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$105,842
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$100,087
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Total Liabilities
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98,423
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94,826
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89,195
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Total Equity
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11,130
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11,016
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10,892
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Total Liabilities and Stockholders' Equity
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$109,553
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$105,842
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$100,087
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TOTAL LOAN RECEIVABLES
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Ending Loans 1, 2 |
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$90,512
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$86,894
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$84,248
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Average Loans 1, 2 |
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$88,207
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$85,855
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$81,802
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Interest Yield
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12.59%
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12.45%
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12.14%
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Gross Principal Charge-off Rate
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3.77%
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3.63%
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3.45%
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Gross Principal Charge-off Rate excluding PCI Loans 3 |
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3.85%
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3.71%
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3.54%
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Net Principal Charge-off Rate
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3.08%
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2.97%
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2.85%
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Net Principal Charge-off Rate excluding PCI Loans 3 |
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3.14%
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3.03%
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2.92%
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Delinquency Rate (30 or more days) excluding PCI Loans 3 |
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2.31%
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2.22%
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2.20%
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Delinquency Rate (90 or more days) excluding PCI Loans 3 |
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1.08%
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1.00%
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0.99%
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Gross Principal Charge-off Dollars
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$839
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$785
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$711
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Net Principal Charge-off Dollars
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$686
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$642
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$583
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Net Interest and Fee Charge-off Dollars
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$142
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$135
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$119
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Loans Delinquent 30 or more days 3 |
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$2,049
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$1,894
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$1,806
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Loans Delinquent 90 or more days 3 |
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$961
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$854
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$815
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Allowance for Loan Loss (period end)
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$3,041
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$2,927
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$2,621
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Reserve Change Build/(Release) 4 |
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$114
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$100
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$96
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Reserve Rate
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3.36%
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3.37%
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3.11%
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Reserve Rate excluding PCI Loans 3 |
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3.39%
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3.41%
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3.15%
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CREDIT CARD LOANS
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Ending Loans
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$72,876
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$69,253
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$67,291
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Average Loans
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$70,563
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$68,613
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$64,791
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Interest Yield
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13.20%
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13.06%
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12.79%
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Gross Principal Charge-off Rate
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4.01%
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3.90%
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3.73%
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Net Principal Charge-off Rate
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3.23%
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3.14%
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3.03%
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Delinquency Rate (30 or more days)
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2.43%
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2.32%
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2.28%
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Delinquency Rate (90 or more days)
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1.22%
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1.12%
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1.12%
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Gross Principal Charge-off Dollars
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$713
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$674
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$612
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Net Principal Charge-off Dollars
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$575
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$543
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$496
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Loans Delinquent 30 or more days
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$1,772
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$1,608
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$1,532
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Loans Delinquent 90 or more days
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$887
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$777
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$751
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Allowance for Loan Loss (period end)
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$2,528
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$2,424
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$2,147
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Reserve Change Build/(Release)
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$104
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$90
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$56
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Reserve Rate
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3.47%
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3.50%
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3.19%
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Total Discover Card Volume
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$40,655
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$39,414
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$38,574
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Discover Card Sales Volume
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$37,208
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$35,896
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$35,339
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Rewards Rate
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1.28%
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1.31%
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1.23%
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NETWORK VOLUME
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PULSE Network
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$47,082
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$45,244
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$42,386
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Network Partners
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4,680
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5,113
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3,280
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Diners Club International 5 |
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8,700
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8,370
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8,373
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Total Payment Services
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60,462
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58,727
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54,039
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Discover Network - Proprietary
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38,502
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36,642
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36,267
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Total
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$98,964
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$95,369
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$90,306
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1 Total Loans includes Home Equity and other loans.
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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.
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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.
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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.
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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.
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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).
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View source version on businesswire.com:
https://www.businesswire.com/news/home/20190124005804/en/
Investors:
Craig Streem, 224-405-5923
craigstreem@discover.com
Media:
Jon
Drummond, 224-405-1888
jondrummond@discover.com
Source: Discover Financial Services