Discover Financial Services Reports Second Quarter Net Income Of $546 Million Or $1.40 Per Diluted Share

Discover Financial Services (NYSE: DFS) today reported net income of $546 million or $1.40 per diluted share for the second quarter of 2017, as compared to $616 million or $1.47 per diluted share for the second quarter of 2016. The company's return on equity for the second quarter of 2017 was 19%.

Second Quarter Highlights
  • Total loans grew $6.1 billion (8%) from the prior year to $78.0 billion.
  • Credit card loans grew $4.6 billion (8%) to $61.8 billion and Discover card sales volume increased 5% from the prior year.
  • Total net charge-off rate excluding PCI loans increased 52 basis points from the prior year to 2.79% and the total delinquency rate over 30 days past due excluding PCI loans increased 33 basis points from the prior year to 1.93%.
  • Consumer deposits grew $3.6 billion (11%) from the prior year to $37.7 billion.
  • Payment Services transaction dollar volume was $50.1 billion, up 12% from the prior year.

"We delivered profitable loan growth, strong revenue growth and positive operating leverage, which helped to offset normalizing credit costs," said David Nelms, chairman and CEO of Discover. "Our new capital plan includes higher dividends and planned share repurchases, and we expect to continue to deliver a leading yield to our shareholders."

Segment Results:

Direct Banking

Direct Banking pretax income of $831 million in the quarter declined $37 million (4%) from the prior year as higher provision for loan losses more than offset higher net interest income.

Total loans ended the quarter at $78.0 billion, up 8% compared to the prior year. Credit card loans ended the quarter at $61.8 billion, up 8% from the prior year. Personal loans increased $1.2 billion (22%) from the prior year. Private student loans increased $191 million (2%) year-over-year, and grew $703 million (12%) excluding purchased student loans.

Net interest income increased $187 million (11%) from the prior year, driven by loan growth and a higher net interest margin. Net interest margin was 10.11%, up 16 basis points from the prior year. Card yield was 12.66%, an increase of 24 basis points from the prior year because of increases in the prime rate, partially offset by higher interest charge-offs. Interest expense as a percent of total loans increased 16 basis points from the prior year, primarily because of higher market rates and a change in funding mix.

Other income increased $12 million (3%) from the prior year, driven by higher discount and interchange revenue.

The delinquency rate for credit card loans over 30 days past due was 2.00%, up 37 basis points from the prior year and down 6 basis points from the prior quarter. The credit card net charge-off rate for the second quarter was 2.94%, up 55 basis points from the prior year and 10 basis points from the prior quarter. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 1.15%, up 5 basis points from the prior year. The personal loans net charge-off rate of 3.18% increased by 80 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 $639 million increased $228 million from the prior year primarily because of higher net charge-offs. The reserve build for the second quarter of 2017 was $119 million, compared to a reserve build of $27 million in the second quarter of 2016.

Expenses increased $8 million from the prior year as higher employee compensation was partially offset by a decline in information processing, mainly due to infrastructure efficiencies. Employee compensation increased mostly because of higher staffing levels, as well as higher average salaries.

Payment Services

Payment Services pretax income was $36 million in the quarter, up $6 million from the prior year, primarily driven by higher transaction processing revenue and lower operating expense.

Payment Services transaction dollar volume was $50.1 billion, up 12% versus the prior year. PULSE transaction dollar volume was up 15% year-over-year. Diners Club International volume increased 8% from the prior year, driven by growth across all regions.

Share Repurchases

During the second quarter of 2017, the company repurchased approximately 7.2 million shares of common stock for $450 million. Shares of common stock outstanding declined by 1.9% from the prior quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its fourth quarter results on Wednesday, July 26, 2017, 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 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 quarter ended 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
June 30,     March 31,     June 30,
2017 2017 2016

EARNINGS SUMMARY
Interest Income $2,338 $2,278 $2,090
Interest Expense 400 386 339
Net Interest Income 1,938 1,892 1,751
 
Discount/Interchange Revenue 666 596 636
Rewards Cost 388 363 371
Discount and Interchange Revenue, net 278 233 265
Protection Products Revenue 56 58 59
Loan Fee Income 83 89 79
Transaction Processing Revenue 42 39 39
Other Income 22 28 23
Total Other Income 481 447 465
 
Revenue Net of Interest Expense 2,419 2,339 2,216
 
Provision for Loan Losses 640 586 412
 
Employee Compensation and Benefits 367 363 340
Marketing and Business Development 192 168 198
Information Processing & Communications 77 80 89
Professional Fees 156 147 150
Premises and Equipment 23 25 23
Other Expense 97 102 106
Total Other Expense 912 885 906
     
Income Before Income Taxes 867 868 898
Tax Expense 321 304 282
Net Income $546 $564 $616
 
Net Income Allocated to Common Stockholders $532 $551 $602
 
 

PER SHARE STATISTICS
Basic EPS $1.41 $1.43 $1.47
Diluted EPS $1.40 $1.43 $1.47
Common Stock Price (period end) $62.19 $68.39 $53.59
Book Value per share $30.01 $29.46 $28.03
 

SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking $831 $824 $868
Payment Services 36 44 30
Total $867 $868 $898
 

BALANCE SHEET SUMMARY
Total Assets $93,757 $94,795 $87,511
Total Liabilities 82,498 83,530 76,114
Total Equity 11,259 11,265 11,397
Total Liabilities and Stockholders' Equity $93,757 $94,795 $87,511
 

TOTAL LOAN RECEIVABLES
Ending Loans 1, 2 $77,997 $75,853 $71,924
Average Loans 1, 2 $76,854 $76,185 $70,810
 
Interest Yield 11.98% 11.94% 11.72%
Gross Principal Charge-off Rate 3.36% 3.25% 2.87%
Gross Principal Charge-off Rate excluding PCI Loans 3 3.47% 3.37% 2.99%
Net Principal Charge-off Rate 2.71% 2.60% 2.18%
Net Principal Charge-off Rate excluding PCI Loans 3 2.79% 2.69% 2.27%
Delinquency Rate (over 30 days) excluding PCI Loans 3 1.93% 1.97% 1.60%
Delinquency Rate (over 90 days) excluding PCI Loans 3 0.88% 0.92% 0.71%
Gross Principal Charge-off Dollars $645 $611 $505
Net Principal Charge-off Dollars $520 $489 $384
Net Interest and Fee Charge-off Dollars $110 $106 $84
Loans Delinquent Over 30 Days 3 $1,457 $1,445 $1,104
Loans Delinquent Over 90 Days 3 $667 $675 $491
 
Allowance for Loan Loss (period end) $2,384 $2,264 $1,949
Change in Loan Loss Reserves $120 $97 $28
Reserve Rate 3.06% 2.98% 2.71%
Reserve Rate excluding PCI Loans 3 3.11% 3.04% 2.77%
 

CREDIT CARD LOANS
Ending Loans $61,797 $59,757 $57,219
Average Loans $60,700 $60,122 $56,124
 
Interest Yield 12.66% 12.65% 12.42%
Gross Principal Charge-off Rate 3.71% 3.61% 3.21%
Net Principal Charge-off Rate 2.94% 2.84% 2.39%
Delinquency Rate (over 30 days) 2.00% 2.06% 1.63%
Delinquency Rate (over 90 days) 0.98% 1.03% 0.78%
Gross Principal Charge-off Dollars $561 $535 $448
Net Principal Charge-off Dollars $445 $422 $334
Loans Delinquent Over 30 Days $1,237 $1,233 $933
Loans Delinquent Over 90 Days $603 $616 $444
 
Allowance for Loan Loss (period end) $1,980 $1,892 $1,603
Change in Loan Loss Reserves $88 $102 $13
Reserve Rate 3.21% 3.17% 2.80%
 
Total Discover Card Volume $35,297 $32,406 $33,409
Discover Card Sales Volume $32,172 $29,134 $30,702
Rewards Rate 1.20% 1.25% 1.21%
 

NETWORK VOLUME
PULSE Network $38,848 $36,066 $33,856
Network Partners 3,461 3,661 3,713
Diners Club International 4 7,800 7,382 7,198
Total Payment Services 50,109 47,109 44,767
Discover Network - Proprietary 33,342 29,859 31,780
Total $83,451 $76,968 $76,547
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 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).

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