Discover Financial Services (NYSE: DFS) today reported net
income of $616 million or $1.47 per diluted share for the second
quarter of 2016, as compared to $599 million or $1.33 per diluted
share for the second quarter of 2015. Net income included a
non-recurring tax benefit of $44 million which contributed $0.11 to
diluted earnings per share.
Second Quarter Highlights
- Total loans grew $2.9 billion, or 4%,
from the prior year to $71.9 billion.
- Credit card loans grew $2.3 billion, or
4%, to $57.2 billion and Discover card sales volume increased 2%
from the prior year.
- Total net charge-off rate excluding PCI
loans increased 11 basis points from the prior year to 2.27% and
the total delinquency rate over 30 days past due excluding PCI
loans increased 11 basis points from the prior year to 1.60%.
- Direct to consumer and affinity
deposits grew $4.6 billion, or 16%, from the prior year to $34.1
billion.
- Payment Services transaction dollar
volume for the segment was $44.8 billion, down 6% from the prior
year.
- Income tax expense includes a one-time
benefit of $44 million related to the resolution of certain tax
matters.
“During the second quarter, we achieved loan growth within our
target range and delivered strong profitability,” said David Nelms,
chairman and CEO of Discover. “We also announced plans to increase
our dividend and share repurchases, which we expect will result in
one of the highest total yields among CCAR banks over the next four
quarters.”
Segment Results:
Direct Banking
Direct Banking pretax income of $868 million in the quarter
decreased $46 million from the prior year as higher net interest
income and lower operating expenses were offset by higher provision
for loan losses and lower other income.
Total loans ended the quarter at $71.9 billion, up 4% compared
to the prior year. Credit card loans ended the quarter at $57.2
billion, up 4% from the prior year. Personal loans increased $525
million, or 10%, from the prior year. Relative to the prior year,
private student loans increased $205 million, or 2%, and grew $752
million, or 15%, excluding purchased student loans.
Net interest income increased $115 million, or 7%, from the
prior year, driven by loan growth and higher net interest margin.
Net interest margin was 9.95%, up 32 basis points from the prior
year. Card yield was 12.42%, an increase of 38 basis points from
the prior year due to portfolio mix and the prime rate increase.
Interest expense as a percent of total loans increased 9 basis
points from the prior year primarily due to higher market rates and
funding mix.
Other income decreased $72 million, or 15%, from the prior year
driven primarily by increased promotional rewards and the lack of
mortgage origination revenue, as the prior year included $28
million in income related to the now discontinued mortgage
operation. In addition, protection products revenue was lower by $9
million.
The delinquency rate for credit card loans over 30 days past due
was 1.63%, up 8 basis points from the prior year and down 5 basis
points from the prior quarter. Credit card net charge-off rate for
the second quarter was 2.39%, up 11 basis points from the prior
year and 5 basis points from the prior quarter. The personal loans
net charge-off rate of 2.38% increased by 28 basis points from the
prior year. The student loan net charge-off rate excluding
purchased credit-impaired ("PCI") loans was 1.10%, up 8 basis
points from the prior year.
Provision for loan losses of $411 million increased $105 million
from the prior year primarily due to a reserve build. The reserve
build for the second quarter of 2016 was $27 million, driven
primarily by loan growth, while the second quarter of 2015 included
a $41 million reserve release.
Expenses decreased $16 million, or 2%, from the prior year
mostly driven by the closure of the mortgage origination business,
partially offset by higher regulatory and compliance costs. The
prior year included $62 million in expenses related to the mortgage
origination business that was subsequently closed. Employee
compensation increased mostly due to higher staffing levels driven
in part by regulatory and compliance activities as well as higher
salaries. Professional fees were slightly lower than the prior
year, primarily due to a $7 million decrease in look back related
anti-money laundering remediation expenses to $12 million.
Payment Services
Payment Services pretax income was $30 million in the quarter,
up $2 million from the prior year as lower revenues were more than
offset by expense reductions.
Payment Services transaction dollar volume was $44.8 billion,
down 6% from the prior year. PULSE transaction dollar volume was
down 9% year-over-year due to the loss of volume from a large debit
issuer. Diners Club International volume was up $0.4 billion, or
6%, from the prior year driven by growth in Asia.
Share Repurchases
During the second quarter of 2016, the company repurchased
approximately 7.8 million shares of common stock for $425 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 second
quarter results on Tuesday, July 19, 2016, 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 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 (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, 2015 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in
the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2016, 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
Jun 30,
Mar 31,
Jun 30,
2016 2016 2015
EARNINGS
SUMMARY
Interest Income $2,090 $2,084 $1,947 Interest Expense 339 334 311
Net Interest Income 1,751 1,750 1,636 Discount/Interchange
Revenue 636 565 612 Rewards Cost 371 292 314 Discount and
Interchange Revenue, net 265 273 298 Protection Products Revenue 59
61 68 Loan Fee Income 79 80 80 Transaction Processing Revenue 39 36
40 Other Income 23 24 53 Total Other Income 465 474 539
Revenue Net of Interest Expense 2,216 2,224 2,175 Provision
for Loan Losses 412 424 306 Employee Compensation and
Benefits 340 345 326 Marketing and Business Development 198 162 199
Information Processing & Communications 89 88 90 Professional
Fees 150 160 153 Premises and Equipment 23 24 23 Other Expense 106
107 136 Total Other Expense 906 886 927 Income
Before Income Taxes 898 914 942 Tax Expense 282 339 343 Net Income
$616 $575 $599 Net Income Allocated to Common Stockholders
$602 $562 $586
PER SHARE
STATISTICS
Basic EPS $1.47 $1.35 $1.33 Diluted EPS $1.47 $1.35 $1.33 Common
Stock Price (period end) $53.59 $50.92 $57.62 Book Value per share
$28.03 $27.32 $25.75
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $868 $882 $914 Payment Services 30 32 28 Total $898
$914 $942
BALANCE SHEET
SUMMARY
Total Assets $87,511 $88,093 $84,773 Total Liabilities 76,114
76,777 73,510 Total Equity 11,397 11,316 11,263 Total Liabilities
and Stockholders' Equity $87,511 $88,093 $84,773
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2 $71,924 $70,320 $69,028 Average Loans 1, 2
$70,810 $70,837 $68,100 Interest Yield 11.72% 11.69% 11.35%
Gross Principal Charge-off Rate 2.87% 2.80% 2.76% Gross Principal
Charge-off Rate excluding PCI Loans 3 2.99% 2.92% 2.91% Net
Principal Charge-off Rate 2.18% 2.11% 2.05% Net Principal
Charge-off Rate excluding PCI Loans 3 2.27% 2.21% 2.16% Delinquency
Rate (over 30 days) excluding PCI Loans 3 1.60% 1.64% 1.49%
Delinquency Rate (over 90 days) excluding PCI Loans 3 0.71% 0.79%
0.69% Gross Principal Charge-off Dollars $505 $493 $469 Net
Principal Charge-off Dollars $384 $372 $347 Net Interest and Fee
Charge-off Dollars $84 $86 $87 Loans Delinquent Over 30 Days 3
$1,104
$1,105 $980 Loans Delinquent Over 90 Days 3
$491
$531 $450 Allowance for Loan Loss (period end) $1,949 $1,921
$1,735 Change in Loan Loss Reserves $28 $52 ($41) Reserve Rate
2.71% 2.73% 2.51%
Reserve Rate excluding PCI Loans 3
2.77% 2.80% 2.60%
CREDIT CARD
LOANS
Ending Loans $57,219 $55,620 $54,949 Average Loans $56,124 $56,124
$53,987 Interest Yield 12.42% 12.42% 12.04% Gross Principal
Charge-off Rate 3.21% 3.15% 3.14% Net Principal Charge-off Rate
2.39% 2.34% 2.28% Delinquency Rate (over 30 days) 1.63% 1.68% 1.55%
Delinquency Rate (over 90 days) 0.78% 0.86% 0.75% Gross Principal
Charge-off Dollars $448 $439 $423 Net Principal Charge-off Dollars
$334 $326 $307 Loans Delinquent Over 30 Days $933 $934 $850 Loans
Delinquent Over 90 Days $444 $480 $414 Allowance for Loan
Loss (period end) $1,603 $1,590 $1,441 Change in Loan Loss Reserves
$13 $36 ($51) Reserve Rate 2.80% 2.86% 2.62% Total Discover
Card Volume $33,409 $30,004 $32,299 Discover Card Sales Volume
$30,702 $27,552 $30,017 Rewards Rate 1.21% 1.06% 1.05%
NETWORK
VOLUME
PULSE Network $33,856 $34,680 $37,162 Network Partners 3,713 3,572
3,536 Diners Club International 4 7,198 6,738 6,773 Total Payment
Services 44,767 44,990 47,471 Discover Network - Proprietary 31,780
28,576 31,084 Total $76,547 $73,566 $78,555 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).
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160719006509/en/
Discover Financial ServicesInvestors:Bill Franklin,
224-405-1902williamfranklin@discover.comorMedia:Jon
Drummond, 224-405-1888jondrummond@discover.com
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