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TheStreet Open House

Discover Financial Services Reports Fourth Quarter Net Income Of $551 Million Or $1.07 Per Diluted Share

Net interest margin was 9.44%, up 34 basis points from the prior year. The increase in net interest margin from the prior year reflects decreased funding costs partially offset by lower total yield. Credit card yield was 12.16%, a decrease of 20 basis points from the prior year. The decline in credit card yield from the prior year reflects an increase in promotional rate balances and a decline in higher rate balances, partially offset by lower interest charge-offs. Interest expense as a percent of total loans decreased 49 basis points from the prior year as the company continued to take advantage of available low rate funding.

Net interest income increased $134 million, or 11%, from the prior year, benefiting from loan growth and lower interest expense, which was partially offset by a decline in total yield.

The delinquency rate for credit card loans over 30 days past due was 1.86%, an improvement of 53 basis points from the prior year, and a seasonal increase of 5 basis points from the prior quarter. The credit card net charge-off rate improved to 2.29% for the fourth quarter of 2012, down 95 basis points from the prior year, and 14 basis points from the prior quarter.

Net principal charge-offs were $87 million lower than the prior year as a result of the continued decline in delinquencies and bankruptcies. Provision for loan losses of $338 million increased $19 million, or 6%, from the prior year, driven by an increase in loan loss reserves partially offset by the decline in charge-offs. The reserve build for the fourth quarter of 2012 was $38 million reflecting reserve additions due to loan growth. The fourth quarter of 2011 included a reserve release of $68 million.

Other income increased $50 million, or 11%, from the prior year primarily due to revenue from Discover Home Loans, which was launched in June 2012 after acquiring Home Loan Center assets from Tree.com, higher interchange revenue as a result of increased sales and a $26 million gain on sale of a minority investment. Increases in other income were partially offset by higher customer rewards.

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