Discover Financial Services Reports First Quarter Net Income Of $631 Million Or $1.31 Per Diluted Share

Discover Financial Services (NYSE: DFS) today reported net income of $631 million or $1.31 per diluted share for the first quarter of 2014, as compared to $673 million or $1.33 per diluted share for the first quarter of 2013. The company's return on equity for the first quarter of 2014 was 23%.

First Quarter Highlights
  • Revenue net of interest expense was up $86 million, or 4%, from the prior year to $2.1 billion.
  • Total loans grew $3.5 billion, or 6%, from the prior year to $63.9 billion.
  • Credit card loans grew $2.2 billion, or 5%, to $50.9 billion and Discover card sales volume increased 3% from the prior year.
  • Net charge-off rate for credit card loans decreased 4 basis points from the prior year to 2.32% and the delinquency rate for loans over 30 days past due decreased 5 basis points to 1.72%.
  • Payment Services pretax income was down $19 million from the prior year to $28 million. Transaction dollar volume for the segment was $50.8 billion, up 4% from the prior year.

"Our results this quarter reflect a solid start for 2014 as we delivered strong card loan growth that was near the top of our targeted range while maintaining excellent credit performance and continuing to grow other lending products as well,” said David Nelms, chairman and CEO of Discover. “Additionally, we are increasing our return of capital to shareholders through the recently announced dividend actions and the continuation of share buybacks following our inaugural CCAR stress test.”

Segment Results:

Direct Banking

Direct Banking pretax income of $994 million in the quarter was down $39 million, or 4%, from the prior year.

Total loans ended the quarter at $63.8 billion, up 6% compared to the prior year. Credit card loans ended the quarter at $50.9 billion, up 5% from the prior year. Personal loans increased $915 million, or 27%, from the prior year and private student loans increased $385 million, or 5%, from the prior year. Excluding purchased student loans, private student loans grew $900 million, or 26%, from the prior year.

Revenue net of interest expense increased $94 million, up 5% from the prior year due to loan growth and net interest margin expansion.

Net interest income increased $153 million, or 11%, from the prior year, benefiting from loan growth, lower interest expense and higher loan yield. Net interest margin was 9.88%, up 49 basis points from the prior year. The increase in net interest margin reflects decreased funding costs and higher loan yield. Credit card yield was 12.14%, an increase of 20 basis points from the prior year. The increase in credit card yield reflects a modestly higher portion of customers revolving balances and lower interest charge-offs. Interest expense as a percent of total loans decreased 28 basis points from the prior year as the company continued to take advantage of available low rate funding.

Other income decreased $59 million, or 12%, from the prior year due to lower direct mortgage related income and higher rewards costs. The increase in rewards was primarily related to a decrease in the rewards forfeiture rate as well as higher standard and promotional rewards.

The delinquency rate for credit card loans over 30 days past due was 1.72%, an improvement of 5 basis points from the prior year and flat compared to the prior quarter. Credit card net charge-off rate for the first quarter was 2.32%, down 4 basis points from the prior year and up 23 basis points from the prior quarter. The student loan net charge-off rate excluding PCI loans was 1.31%, up 49 basis points from the prior year due to a larger portion of the portfolio entering repayment. The personal loans net charge-off rate of 2.07% decreased by 23 basis points from the prior year due primarily to strong growth.

Provision for loan losses of $270 million increased $111 million from the prior year primarily due to a smaller reserve release. The reserve release for the first quarter of 2014 was $59 million. The first quarter of 2013 included a reserve release of $154 million.

Expenses increased $22 million, or 3%, from the prior year primarily due to increased headcount, higher information processing expense and higher other expense, partially offset by lower professional fees.

Payment Services

Payment Services pretax income was $28 million in the quarter, down $19 million from the prior year. Revenue decreased $8 million from the prior year primarily due to lower transaction processing margins at PULSE. Expenses increased $9 million from the prior year primarily due to ongoing Diners Club costs in Europe.

Payment Services dollar volume was $50.8 billion for the first quarter of 2014, up 4% from the prior year. PULSE transaction dollar volume was up 5% year-over-year.

Share Repurchases

During the first quarter of 2014, the company repurchased approximately 5.5 million shares of common stock for $305 million. Shares of common stock outstanding declined by 1% from the prior quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its first quarter results on Tuesday, April 22, 2014, 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 home loans, private student loans, personal loans, home equity loans, checking and savings accounts, certificates of deposit and money market accounts 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 full card acceptance across its networks and maintain relationships with network participants; the company's ability to sustain and grow its private student loan portfolio and mortgage loan products; losses as a result of mortgage loan repurchase and indemnification obligations to secondary market purchasers; the company's ability to manage its credit risk, market risk, liquidity risk, operational risk, legal and compliance 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 increase or sustain Discover card usage or attract new customers; the company's ability to maintain relationships with current 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; difficulty obtaining regulatory approval for, financing, closing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; 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, 2013, 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
Mar 31, 2014     Dec 31, 2013     Mar 31, 2013

EARNINGS SUMMARY
Interest Income $1,833 $1,842 $1,708
Interest Expense 270   273   298  
Net Interest Income 1,563 1,569 1,410
 
Discount/Interchange Revenue 519 574 492
Rewards Cost 265   295   229  
Discount and Interchange Revenue, net 254 279 263
Protection Products Revenue 83 84 88
Loan Fee Income 83 85 81
Transaction Processing Revenue 44 46 53
Other Income 51   66   97  
Total Other Income 515   560   582  
 
Revenue Net of Interest Expense 2,078 2,129 1,992
 
Provision for Loan Losses 272 354 159
 
Employee Compensation and Benefits 307 297 290
Marketing and Business Development 169 189 169
Information Processing & Communications 84 89 78
Professional Fees 99 108 104
Premises and Equipment 23 22 19
Other Expense 102   133   93  
Total Other Expense 784 838 753
     
Income Before Income Taxes 1,022 937 1,080
Tax Expense 391   335   407  
Net Income $631   $602   $673  
 
Net Income Allocated to Common Stockholders $618   $588   $659  
 
 

PER SHARE STATISTICS
Basic EPS $1.31 $1.24 $1.33
Diluted EPS $1.31 $1.23 $1.33
Common Stock Price (period end) $58.19 $55.95 $44.84
Book Value per share $23.53 $22.89 $20.90
 

SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking $994 $911 $1,033
Payment Services 28   26   47  
Total $1,022   $937   $1,080  
 

BALANCE SHEET SUMMARY
Total Assets $79,584   $79,340   $76,139  
Total Liabilities 68,563 68,531 65,840
Total Equity 11,021   10,809   10,299  
Total Liabilities and Stockholders' Equity $79,584   $79,340   $76,139  
 

TOTAL LOAN RECEIVABLES
Ending Loans 1, 2 $63,852 $65,771 $60,384
Average Loans 1, 2 $64,227 $63,443 $60,903
 
Interest Yield 11.44 % 11.38 % 11.22 %
Gross Principal Charge-off Rate 2.82 % 2.63 % 3.00 %
Gross Principal Charge-off Rate excluding PCI Loans 3 3.01 % 2.82 % 3.24 %
Net Principal Charge-off Rate 2.08 % 1.90 % 2.08 %
Net Principal Charge-off Rate excluding PCI Loans 3 2.22 % 2.03 % 2.25 %
Delinquency Rate (over 30 days) excluding PCI Loans 3 1.65 % 1.64 % 1.68 %
Delinquency Rate (over 90 days) excluding PCI Loans 3 0.80 % 0.77 % 0.84 %
Gross Principal Charge-off Dollars $447 $421 $449
Net Principal Charge-off Dollars $329 $304 $313
Net Interest and Fee Charge-off Dollars $89 $82 $93
Loans Delinquent Over 30 Days 3 $985 $1,010 $940
Loans Delinquent Over 90 Days 3 $478 $475 $469
 
Allowance for Loan Loss (period end) $1,591 $1,648 $1,634
Change in Loan Loss Reserves ($57 ) $50 ($154 )
Reserve Rate 2.49 % 2.51 % 2.71 %
Reserve Rate Excluding PCI Loans 3 2.61 % 2.63 % 2.93 %
 

CREDIT CARD LOANS
Ending Loans $50,879 $53,150 $48,655
Average Loans $51,347 $50,957 $49,267
 
Interest Yield 12.14 % 12.08 % 11.94 %
Gross Principal Charge-off Rate 3.22 % 2.98 % 3.48 %
Net Principal Charge-off Rate 2.32 % 2.09 % 2.36 %
Delinquency Rate (over 30 days) 1.72 % 1.72 % 1.77 %
Delinquency Rate (over 90 days) 0.87 % 0.84 % 0.91 %
Gross Principal Charge-off Dollars $408 $384 $422
Net Principal Charge-off Dollars $294 $269 $287
Loans Delinquent Over 30 Days $876 $912 $862
Loans Delinquent Over 90 Days $442 $447 $442
 
Allowance for Loan Loss (period end) $1,342 $1,406 $1,453
Change in Loan Loss Reserves ($64 ) $13 ($160 )
Reserve Rate 2.64 % 2.65 % 2.99 %
 
Total Discover Card Volume $28,077 $31,755 $26,880
Discover Card Sales Volume $25,697 $29,530 $24,864
 

NETWORK VOLUME
PULSE Network $41,927 $40,368 $39,919
Network Partners 2,381 2,613 2,246
Diners Club International 4 6,527   6,826   6,644  
Total Payment Services 50,835 49,807 48,809
Discover Network - Proprietary 26,547   30,622   25,738  
Total $77,382   $80,429   $74,547  
 
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).

Copyright Business Wire 2010

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