Discover Financial Services (NYSE: DFS) today reported net
income of $564 million or $1.43 per diluted share for the first
quarter of 2017, as compared to $575 million or $1.35 per diluted
share for the first quarter of 2016. The company’s return on equity
for the first quarter of 2017 was 20%.
First Quarter Highlights
- Total loans grew $5.5 billion (8%) from
the prior year to $75.9 billion.
- Credit card loans grew $4.1 billion
(7%) to $59.8 billion and Discover card sales volume increased 6%
from the prior year.
- Total net charge-off rate excluding PCI
loans increased 48 basis points from the prior year to 2.69% and
the total delinquency rate over 30 days past due excluding PCI
loans increased 33 basis points from the prior year to 1.97%.
- Consumer deposits grew $4.3 billion
(13%) from the prior year to $37.1 billion.
- Payment Services transaction dollar
volume was $47.1 billion, up 5% from the prior year.
"We achieved strong sales and loan growth as consumers responded
well to our strategic initiatives, which were augmented by higher
industry growth," said David Nelms, chairman and CEO of Discover.
"The credit environment remains favorable relative to historical
norms. The increase in provisions is the anticipated result of
recent loan growth seasoning."
Segment Results:
Direct Banking
Direct Banking pretax income of $824 million in the quarter
declined $58 million (7%) from the prior year as higher provision
for loan losses and lower other income more than offset higher net
interest income.
Total loans ended the quarter at $75.8 billion, up 8% compared
to the prior year. Credit card loans ended the quarter at $59.8
billion, up 7% from the prior year. Personal loans increased $1.1
billion (20%) from the prior year. Private student loans increased
$224 million (3%) year-over-year, and grew $740 million (12%)
excluding purchased student loans.
Net interest income increased $142 million (8%) from the prior
year, driven by loan growth and a higher net interest margin. Net
interest margin was 10.07%, up 13 basis points from the prior year.
Card yield was 12.65%, an increase of 23 basis points from the
prior year because of increases in the prime rate and a change in
portfolio mix. Interest expense as a percent of total loans
increased 15 basis points from the prior year, primarily because of
higher market rates and a change in funding mix.
Other income decreased $31 million (8%) from the prior year,
driven by higher promotional rewards.
The delinquency rate for credit card loans over 30 days past due
was 2.06%, up 38 basis points from the prior year and 2 basis
points from the prior quarter. The credit card net charge-off rate
for the first quarter was 2.84%, up 50 basis points from the prior
year and 37 basis points from the prior quarter. The student loan
net charge-off rate excluding purchased credit-impaired ("PCI")
loans was 0.83%, down 2 basis points from the prior year. The
personal loans net charge-off rate of 3.16% increased by 71 basis
points from the prior year. Net charge-off rates were generally
higher because of anticipated seasoning of recent loan growth in
both new accounts and line increases for select established
customers.
Provision for loan losses of $594 million increased $171 million
from the prior year primarily because of higher net charge-offs.
The reserve build for the first quarter of 2017 was $107 million,
compared to a reserve build of $51 million in the first quarter of
2016.
Expenses decreased $2 million from the prior year. Professional
fees were lower than the prior year, primarily because of the
completion of the look back related anti-money laundering
remediation activities in the second quarter of 2016; the first
quarter of 2016 included $30 million of expenses related to these
look back activities. Higher employee compensation and marketing
spend offset part of the professional fees expense savings.
Employee compensation increased mostly because of higher staffing
levels, driven in part by regulatory and compliance activities, as
well as higher average salaries.
Payment Services
Payment Services pretax income was $44 million in the quarter,
up $12 million from the prior year, primarily driven by a reserve
release related to a Diners Club International licensee.
Payment Services transaction dollar volume was $47.1 billion, up
5% versus the prior year. PULSE transaction dollar volume was up 4%
year-over-year. Diners Club International volume increased 10% from
the prior year, driven by growth across all regions.
Share Repurchases
During the first quarter of 2017, the company repurchased
approximately 7.4 million shares of common stock for $520 million.
Shares of common stock outstanding declined by 1.6% from the prior
quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its fourth
quarter results on Tuesday, April 25, 2017, at 5:00 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, 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 March 31, December 31,
March 31, 2017 2016 2016
EARNINGS
SUMMARY
Interest Income $2,278 $2,258 $2,084 Interest Expense 386 366 334
Net Interest Income 1,892 1,892 1,750 Discount/Interchange
Revenue 596 665 565 Rewards Cost 363 411 292 Discount and
Interchange Revenue, net 233 254 273 Protection Products Revenue 58
59 61 Loan Fee Income 89 93 80 Transaction Processing Revenue 39 40
36 Other Income 28 20 24 Total Other Income 447 466 474
Revenue Net of Interest Expense 2,339 2,358 2,224 Provision
for Loan Losses 586 578 424 Employee Compensation and
Benefits 363 352 345 Marketing and Business Development 168 176 162
Information Processing & Communications 80 81 88 Professional
Fees 147 152 160 Premises and Equipment 25 23 24 Other Expense 102
113 107 Total Other Expense 885 897 886 Income
Before Income Taxes 868 883 914 Tax Expense 304 320 339 Net Income
$564 $563 $575 Net Income Allocated to Common Stockholders
$551 $550 $562
PER SHARE
STATISTICS
Basic EPS $1.43 $1.40 $1.35 Diluted EPS $1.43 $1.40 $1.35 Common
Stock Price (period end) $68.39 $72.09 $50.92 Book Value per share
$29.46 $29.13 $27.32
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $824 $868 $882 Payment Services 44 15 32 Total $868
$883 $914
BALANCE SHEET
SUMMARY
Total Assets $94,795 $92,308 $88,093 Total Liabilities 83,530
80,985 76,777 Total Equity 11,265 11,323 11,316 Total Liabilities
and Stockholders' Equity $94,795 $92,308 $88,093
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2 $75,853 $77,254 $70,320 Average Loans 1, 2
$76,185 $74,775 $70,837 Interest Yield 11.94% 11.88% 11.69%
Gross Principal Charge-off Rate 3.25% 2.91% 2.80% Gross Principal
Charge-off Rate excluding PCI Loans 3 3.37% 3.02% 2.92% Net
Principal Charge-off Rate 2.60% 2.31% 2.11% Net Principal
Charge-off Rate excluding PCI Loans 3 2.69% 2.39% 2.21% Delinquency
Rate (over 30 days) excluding PCI Loans 3 1.97% 1.97% 1.64%
Delinquency Rate (over 90 days) excluding PCI Loans 3 0.92% 0.87%
0.79% Gross Principal Charge-off Dollars $611 $548 $493 Net
Principal Charge-off Dollars $489 $435 $372 Net Interest and Fee
Charge-off Dollars $106 $94 $86 Loans Delinquent Over 30 Days 3
$1,445 $1,469 $1,105 Loans Delinquent Over 90 Days 3 $675 $652 $531
Allowance for Loan Loss (period end) $2,264 $2,167 $1,921
Change in Loan Loss Reserves $97 $143 $52 Reserve Rate 2.98% 2.80%
2.73% Reserve Rate excluding PCI Loans 3 3.04% 2.86% 2.80%
CREDIT CARD
LOANS
Ending Loans $59,757 $61,522 $55,620 Average Loans $60,122 $59,121
$56,124 Interest Yield 12.65% 12.62% 12.42% Gross Principal
Charge-off Rate 3.61% 3.19% 3.15% Net Principal Charge-off Rate
2.84% 2.47% 2.34% Delinquency Rate (over 30 days) 2.06% 2.04% 1.68%
Delinquency Rate (over 90 days) 1.03% 0.97% 0.86% Gross Principal
Charge-off Dollars $535 $474 $439 Net Principal Charge-off Dollars
$422 $369 $326 Loans Delinquent Over 30 Days $1,233 $1,252 $933
Loans Delinquent Over 90 Days $616 $597 $480 Allowance for
Loan Loss (period end) $1,892 $1,790 $1,590 Change in Loan Loss
Reserves $102 $129 $36 Reserve Rate 3.17% 2.91% 2.86% Total
Discover Card Volume $32,406 $35,440 $30,004 Discover Card Sales
Volume $29,134 $32,486 $27,552 Rewards Rate 1.25% 1.26% 1.06%
NETWORK
VOLUME
PULSE Network $36,066 $35,554 $34,680 Network Partners 3,661 3,235
3,572 Diners Club International 4 7,382 7,334 6,738 Total Payment
Services 47,109 46,123 44,990 Discover Network - Proprietary 29,859
34,029 28,576 Total $76,968 $80,152 $73,566 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).
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170425006847/en/
Discover Financial ServicesInvestors:Tim Schmidt,
224-405-4996timothyschmidt@discover.comorMedia:Jon Drummond,
224-405-1888jondrummond@discover.com
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